THE ESTATE SETTLEMENT PROCESS

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1 THE ESTATE SETTLEMENT PROCESS Please review this information carefully. The success of the probate depends on you. Settlement of an estate involves the process necessary to transfer asset ownership from the deceased person to the parties entitled to receive them, according to the decedent s will and/or trust(s) or, if no such documents exist, then according to state laws of intestacy. SUMMARY OF DUTIES OF PERSONAL REPRESENTATIVE The basic duties of the Personal Representative, working with the estate s attorney, the decedent s family and other interested parties, are to: 1. Locate the decedent s original will, if one exists, and codicils, if any; 2. Work with the attorney to start a probate proceeding in District Court of the county where the decedent resided and obtain court appointment as Personal Representative; 3. Identify and value the decedent s assets and prepare Inventory for beneficiaries and filing with the court; 4. Collect, protect, preserve and invest the assets; 5. Keep accurate records and prepare accountings for the beneficiaries and filing with the court; 6. Coordinate with the attorney or an accountant the preparation and filing of tax returns, including final individual income taxes, estate taxes and estate income taxes; 7. Oversee the sale of real estate and personal property; 8. Identify and give notice to creditors, settle claims and pay debts of the decedent and those of his or her estate; 9. Prepare a plan of distribution and then re-title, re-register and transfer the remaining assets to the proper parties; 10. Prepare a Final Account and close the estate.

2 The nature and scope of these duties will vary according to the size and complexity of each estate and the procedure needed to accomplish them. The duties are discussed in greater detail below. SPECIFIC DUTIES OF PERSONAL REPRESENTATIVE 1. Identify and Value Assets The Personal Representative is required to identify all assets of the decedent. Review the decedent s records to identify assets. Do not sell or transfer any assets that were specifically decreed in the will to a designated individual. 1. Checking Accounts/Estate Checking Accounts The Personal Representative should determine if there are any accounts in joint tenancy or any accounts in trust for or payable on death to a designated beneficiary. Any such accounts are generally not considered probate assets. Any such accounts should be discussed with the estate s attorney. The Personal Representative should close all the decedent s checking accounts and create one estate checking account at a bank convenient to the Personal Representative. The estate checking account should be titled Estate of [name of decedent] and use the tax identification number assigned to the estate. 2. Receipts/Deposits All money received on behalf of the estate, such as dividends, interest, refunds, insurance proceeds, sale of assets, etc., should be deposited in the estate checking account. Every deposit should be recorded on the checking account ledger by listing each individual check being deposited. Likewise, all allowable expenses or claims incurred by the decedent or the estate will be paid with estate checks. 3. Savings Accounts/Investments The Personal Representative should review the decedent s existing savings accounts and savings certificates as to interest, due date, etc. Accounts with yields which are significantly higher than the current market interest rates may be temporarily retained

3 until the funds are needed to pay bills or make distributions to the beneficiaries. Any savings accounts or savings certificates that are cashed in should be deposited into the estate checking account. If the Personal Representative wishes to reinvest the funds, an estate check should then be written to the institution in which the funds will be reinvested. This will preserve a record of the transactions.investing Estate Assets As a person in a fiduciary relationship to the other heirs and devisees under the will, the Personal Representative is responsible for investing the funds of the estate. All accounts must be in the name of the estate. If the estate will have significant cash for an extended period, we recommend keeping the funds in short-term savings certificates or money market savings accounts or buying short-term Treasury bills. FDIC insurance will insure total accounts in a bank for an existing entity up to a total of $250,000. Any sums in excess of $250,000 are not covered by insurance. e. Sale and Distribution of Assets The Personal Representative should discuss with the estate s attorney when amounts can be distributed, what assets can and need to be sold and what is the best and most efficient way to sell assets. All sale proceeds likewise should be deposited into the checking account before reinvestment. The Personal Representative is required to account for all assets owned individually by the decedent. All heirs receiving items from the estate should sign a receipt, and all assets sold must be reflected in the estate accounting. f. Reimbursement for Expenses If the Personal Representative pays for any estate expenses, an estate check should be used. If the Personal Representative uses a personal check, a receipt should be requested. Then the estate can reimburse the Personal Representative with an estate check. The Personal Representative should itemize those expenses for which reimbursement is being made and attach a copy of any invoices or receipts. g. Mail Mail for the decedent should be forwarded to the Personal Representative s home. h. Social Security Any social security checks received after the date of death should be returned pursuant to the instructions from the Social Security Administration. Likewise, if

4 the decedent had the funds automatically deposed into a bank account, Social Security should be notified so the deposits can be stopped. Generally, the funeral home will notify Social Security directly and this will be accomplished automatically. Be aware that social security benefits are paid for the entire month. If the decedent dies before the end of the month in which benefits are received the entire amount will be withdrawn, if deposited automatically, or will need to be returned, if deposited manually. 2) Protection and Maintenance of Assets All assets should be properly maintained to preserve their value. The Personal Representative should determine whether the property is insured, keep insurance premiums current, and examine insurance policies to make sure they provide adequate coverage. This includes insurance on any automobiles. In no event should the decedent s automobiles be driven without adequate insurance coverage. If the estate owns a house, the Personal Representative should arrange to have someone do normal yard work and snow shoveling to preserve value and to reduce the risk of vandalism. While it is important that normal maintenance of the property be continued, the Personal Representative should make no major expenditures to increase the value of the property. 3) Claims and Expenses Creditors who are only entitled to published notice have four months from the date of the court administrator s notice which is subsequently published to present claims against the estate. Creditors who are known or identified are entitled to a specific notice, rather than the published notice. Those creditors have four months from the date of mailing of a specific notice to them to make their claims. If a specific notice is not mailed to a known or identified creditor, that creditor has one year from the date of the decedent s death to file a claim. Creditors are notified that they are required to present claims in two ways. First, notice is published in the local legal newspaper. The probate court will arrange for publication, and the newspaper will send their publication bill to this office. Secondly, the Personal Representative is required to mail notice to all known creditors. However, notice will not be mailed to creditors whose bills the Personal Representative intends to pay. The Personal Representative must review the decedent s records and provide the estate s attorney with a list of creditors whose bills may be objectionable so that the required notice can be mailed. 4) Payment of Expenses Certain expenses and claims have priority. If it appears that the estate will not have sufficient funds to pay all of the expenses and claims, the Personal Representative should consult with the estate s attorney before payment of any bills to discuss the priorities. If the estate has sufficient assets, the bills may be paid as they come in. Please note that if the

5 estate were to become insolvent and the Personal Representative has paid bills that do not have priority, the Personal Representative could be personally liable for any expenses improperly paid. 5) Inventory and Appraisement Within six months of appointment, the Personal Representative must prepare an Inventory listing the date-of-death value of all assets owned individually by the decedent. The original Inventory will be filed with the probate court and copies will be mailed to interested parties (those whose share of the estate is affected by the value of the assets). 6) Final Account The Final Account lists all assets received during estate administration and all expenses paid. If the Personal Representative has followed the directions specified above, most, if not all, information required for the Final Account will be in the checking account register, current investments statements and the closing statement for the sale of real estate, if applicable. The Personal Representative will sign the Final Account and a copy will be sent to all residuary beneficiaries for their approval. In contentious cases, no distributions will be made to any heir or devisee until the Final Account has been approved by either the heirs or the probate court. A Personal Representative could incur personal liability for distributions made prior to the approval of the Final Account. In other cases, the Final Account may be waived. 7) Personal Representative s Fees The probate court will allow a Personal Representative to charge a reasonable fee for services performed in administering the estate. Any Personal Representative fee is taxable income to the Personal Representative in the year it is received. Not all Personal Representatives elect to take a fee. The fees are not mandatory and may be waived. If the Personal Representative is a beneficiary, it may not make sense to decrease the Personal Representative s nontaxable distribution by a Personal Representative s fee that would be subject to taxation. If a fee is to be charged, the Personal Representative should keep a list of the work done and the time spent. There should be no charge for time spent when other heirs are helping, unless they are also being paid. The Personal Representative fee will be based on a reasonable hourly amount. Documentation for mileage and other out-of-pocket expenses should also be kept. 8) Tax Considerations a. Decedent s Final Income Tax Return

6 Federal and state income tax returns may have to be filed if the decedent s income for the year of death exceeds the filing requirements or if there has been withholding. Only income actually received before death is includable on the final income tax returns. b. Estate Income Tax Return Any income received after death is taxable to the estate, which becomes a separate tax-paying entity. The income is reported on federal and state fiduciary income tax returns. Taxable income includes any wages or other income earned before death but not received until after death, taxable IRA distributions received by the estate, interest, dividends and other income received by the estate. Expenses of administration are deductible expenses. c. Estate Taxes Federal estate taxes apply only to estates having a total value exceeding $5,430,000 (adjusted for inflation). Minnesota estate taxes apply to estates having a total value exceeding $1,400,000 if the date of death occurs in The Minnesota exemption will gradually increase to $2,000,000 by Estate taxes are based on the value of all the decedent s assets, including non-probate assets (i.e., joint tenancy, life insurance, annuities, retirement plans, etc.), subject to applicable deductions, including marital and charitable. When applicable, estate tax returns are due nine months from the date of death, and distribution of the estate may be prolonged until estate tax clearance is received from the IRS and any state for which a return is required. It is essential that you identify and value all assets in which the decedent had an interest to determine if estate taxes may be applicable and provide that information to the estate s attorney. d. Income on Joint Assets Another tax consideration is interest income on joint tenancy bank accounts. Interest income up to the date of death is taxable to the decedent. All surviving joint tenants should be notified that interest paid on joint accounts after death is taxable to the surviving joint tenant. The banks 1099 tax information forms will often have to be split between the joint tenant and the decedent.

7 e. Property Tax and Rent Credit Refunds Only a surviving spouse or dependent can receive these tax refunds. If there is no surviving spouse or dependent, the right to the credit lapses. f. Preparing the Tax Returns Tax returns may be prepared by the estate s attorney, an accountant, or other tax return preparer. The Personal Representative is ultimately responsible for ensuring that all required returns are properly prepared and timely filed. 9) Distribution and Closing of the Estate After the Final Account has been filed and estate tax clearance, if applicable, has been received assets can be distributed and the estate can be closed. The Personal Representative will write out distribution checks which will be sent with a receipt and letter of explanation to the heirs. Each heir will sign a receipt which will be filed with the probate court along with other documents necessary to close the estate. 10) Possible Hearing on Final Account In some circumstances, such as if a bond was required by the probate court or is required to distribute real estate, the estate will have to close formally. In those cases a hearing will be scheduled at which the Personal Representative will appear and give testimony. APPROXIMATE TIMETABLES The timetable will be substantially affected by whether or not the estate is required to file state or federal estate tax returns. If no estate tax returns are required, the estate can often be completed within the first nine months or one year. First Nine Months: Initiate probate proceedings and obtain court appointment as Personal Representative. Pay debts and claims. Collect, value, and inventory assets and prepare federal and state estate tax returns. Income tax return may also be prepared if due during this time. Decisions to sell or dispose of some of the assets are made to provide for liquidity for the payment of liabilities and debts and also to position the estate in a manner that will facilitate distributions to beneficiaries of the estate. Gifts or bequests of specified estate assets (like household furnishings, jewelry, artwork, specific sums of money) may be distributed to the designated recipients.

8 Second Nine Months: Await federal estate tax audit clearance, if an estate tax return was required. File fiduciary income tax returns and any income tax return outstanding for the decedent when due. Complete plans for the transfer and disposition of assets. Consider advance distributions of estate assets to beneficiaries or trusts for beneficiaries. Third Nine Months: In the event the Internal Revenue Service audits the estate tax return, resolve audit issues (this may take substantial additional time depending on the complexity of the audit and the legal issues involved). When a closing letter from the IRS is received, prepare a Final Account for the probate court together with a plan for dividing and distributing the remaining estate assets among the beneficiaries. Provide appropriate information to beneficiaries and obtain consents. Distribute assets according to plan and obtain receipts from beneficiaries. Close the probate court file(s).