SO YOU’RE AN EXECUTOR OR TRUSTEE: NOW WHAT?

At some point you may be asked to serve as the executor of the estate of a deceased family member or friend. (In some states an executor is called a “personal representative,” but the terms mean the same thing.)

If the decedent maintained a revocable living trust during their lifetime, you may also have been appointed to act as successor trustee in order to wind up the trust after their death.

As much as you may be willing to help, do you know what administering an estate or trust will entail?  Are these roles essentially honorific, so that you will have a title but not much actual work to do?  Are there any downsides to being an executor or trustee, e.g., can you become personally liable for the decedent’s debts if their own assets can’t cover them?  And not least importantly, what do executors and trustees get paid, and will you be expected to waive your commission if the decedent was a family member or friend?

To answer these and related questions, this article will describe the steps involved in settling a typical decedent’s estate and revocable living trust.  The laws of Pennsylvania will be referenced, but the content will be generally applicable to the practice prevailing in every state. 

And please be aware that the following material is not legal advice. Specific issues that may arise in a particular estate or trust should be discussed with your attorney.

CONTENTS

Start by Understanding the Terms of the Will

■ Follow the Steps in Estate Administration

■ Recognize What Is — And Is Not — “Probate” Property

■ Paying the Decedent’s Debts, Income Taxes, and Estate Administration Expenses

■ Terminating a Decedent’s Lifetime Trust

■ Paying the Inheritance and Estate Taxes

■ Closing the Estate and Trust

START BY UNDERSTANDING THE TERMS OF THE WILL

The Will can be best described as the “master plan” of the estate administration process. It will direct the executor to:

✔ Pay the decedent’s funeral and burial expenses, estate administration expenses, and all taxes that are payable at or by reason of the decedent’s death.  (Debts of the decedent are usually not mentioned, since if they are enforceable at the time of death state law will require that they be paid, so no direction is needed in the Will.)

✔ Carry out the decedent’s bequests of their tangible personal property, such as jewelry, personal effects, and household goods, by delivering them to the named beneficiaries.  Prior to delivery, arrangements will likely be necessary for the items’ safe-keeping and storage.  

✔ Pay any specific gifts of cash to the individuals named in the Will.

✔ Fulfill any charitable bequests. 

✔ Distribute the balance of the assets (called the “residuary estate”) either outright or in trust to the named beneficiaries or to members of a class determined as of the decedent’s death (e.g., “those of my nieces and nephews who survive me”).

Be sure to review with your attorney the meaning of the Will’s terms and conditions.  For example, what if a named beneficiary predeceased the testator but left children who have survived?   Does the bequest pass to the children, or did it lapse?

NOTE:  If the decedent died without a valid will, a personal representative will still be necessary to settle the estate. The only difference will be that the beneficiaries of the decedent’s probate property will be determined by the intestacy laws of their domicile state rather than by the terms of a will.  State law will also dictate who will be eligible to serve as personal representative.

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FOLLOW THE STEPS IN ESTATE ADMINISTRATION

Send a Notice of Estate Administration to all the parties entitled to it under state law.

●   Consult with your attorney as to the parties who are entitled to such notice.

Conduct a thorough search to uncover all the decedent’s property and debts.

●  The search should include the decedent’s residence, office, and safe deposit box.

●  Check the decedent’s mail for several weeks.

Close out the decedent’s bank accounts, and open up a new bank account in the name of the estate.

● The executor(s) should be the only signator(s) on the account.

Obtain a Tax Identification Number (a/k/a “EIN”) for the estate from the IRS, since the estate itself becomes a taxpayer from the date of the decedent’s death.

Make sure the decedent’s real estate and tangible personal property are adequately insured and protected.

Determine if there is any real estate or tangible personal property located in other states.

● In such event, ancillary administration in such states may be necessary in order to transfer title to the asset.

Examine all business interests in which the decedent was actively involved.

● Review any existing agreements among shareholders or partners calling for the mandatory or permissive sale of the business interest to the surviving business owners.

Manage the decedent’s digital assets and digital accounts as necessary to preserve their value and protect the decedent’s privacy.

✔ Obtain date-of-death values of all assets, both probate and non-probate.

✔ Maintain a complete list of all probate property (i.e., property that was owned in the decedent’s sole name), including their values.  (The distinction between probate and non-probate property is discussed below.)

● An Inventory of probate assets will have to be filed with the Register of Wills’ Office. Likewise, the gross estate for death tax purposes includes both probate property and non-probate property in which the decedent had an ownership interest.

✔ Record the sales price of all assets sold during the course of estate administration.

✔ Keep track of all income (e.g., interest, dividends, rents) received on estate assets.

The estate will be required to file income tax returns with the IRS and state revenue department for income received after the date of death.

✔  Provide all the above information to your attorney on a regular basis so that a Fiduciary Account can be maintained and regularly updated in the format required by the local Orphans’ Court.

● A Fiduciary Account detailing all the transactions that will have occurred during the estate administration process will have to be presented to the beneficiaries, and perhaps the Orphans’ Court, at the conclusion of the estate.

● It is far better to maintain the Account as you go, such as on a monthly basis, rather than to construct it from scratch at the end of the administration process.

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RECOGNIZE WHAT IS — AND IS NOT — “PROBATE” PROPERTY

You should become familiar with the distinction between probate property and non-probate property, because it is only probate property that passes under the Will and will be subject to the executor’s control.

Probate Property

includes all the property that is:

✔ Titled in the decedent’s sole name

✔ Titled in the names of the decedent and others, but without survivorship rights between them

✔ Contract-based benefits (e.g., life insurance or annuities) that are payable to the “estate”

Non-Probate Property

is any property that does not pass under the Will.  Examples:

✔ Tenancy by the Entireties (husband and wife) property

✔ Joint Tenancy with Right of Survivorship property

✔ Contract-based property payable to a designated beneficiary other than the “estate”

✔ Lifetime (a/k/a Inter Vivos) Trust assets that are not payable to the “estate”

✔ “ITF” “POD,” or “TOD” property

✔ Uniform Transfers to Minor’s Act (“PUTMA” and “PUGMA”) assets where the decedent was acting as custodian.

Review With Your Attorney:

Title on deeds, bank account signature cards, stock certificates, etc. to determine if they are probate or non-probate property.

✔ Beneficiary designations on contract-type assets, such as:

●  Life insurance policies

●  Annuities

●  Retirement accounts

TAX NOTE: As mentioned above, for purposes of the federal estate tax and state inheritance taxes, the distinction between probate and non-probate property is ignored. Generally, all property that the decedent owned or had a retained right to use at the time of death will be subject to death tax, whether or not it passes under the Will.

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■  PAYING THE DECEDENT’S DEBTS, INCOME TAXES, AND ESTATE ADMINISTRATION EXPENSES

Debts of Decedent

Advertise your appointment as personal representative) to provide notice to all creditors of the decedent.

✔ Determine if the estate is subject to a claim for reimbursement under the Medicaid estate recovery program.

● If so, give the required notice to the Department of Human Services at

Division of Third Party Liability
Pennsylvania Department of Human Services
Estate Recovery Program
P.O. Box 8486, Harrisburg, PA 17105-8486

Review with your attorney the enforceability of any questionable claims asserted against the decedent.

✔ If the estate is insolvent, prioritize the payment of debts in accordance with the state statute.

Income Taxes

Satisfy the decedent’s personal income tax liability (filing and, if necessary, payment) for the year of death and any prior open years.

✔ Have fiduciary income tax returns prepared and filed for each fiscal year in which the estate remains open, to report all post-mortem income, deductions, and credits.

✔ Choose a tax-wise fiscal year for estate.

Estate Administration Expenses

Review with your attorney the anticipated costs and expenses of the estate.

Executor’s Commission

The executor will be entitled to reasonable compensation for their services. Review with your attorney applicable state law on how “reasonableness” is determined.

✔ When to take it?

NOTE:  The commission is both taxable to the executor as earned income and a deduction to the estate for death tax purposes.

Waiving the Executor’s Commission

Any decision to waive the commission out of deference to the beneficiaries should be deferred until the end of the estate’s administration, when the executor will be able to appreciate the amount of time that they had to devote to the estate and the difficulty of the problems that they encountered.

By the same token, if the executor is also the beneficiary of the estate, it may be beneficial for income tax purposes to waive the commission.

Attorney’s Fees

Understand the various methods that are accepted for computing a reasonable legal fee.

✔ Agree with your attorney on the method that you are both comfortable with.

Once agreed upon, the basis for computing the fee should be set forth in the engagement letter that you sign with the attorney.

Miscellaneous Expenses

Appraisal fees for valuing certain estate assets

✔ Probate and inventory filing fees

✔ Costs of packing, storing, and shipping items of tangible personal property

✔ Repairs and improvements to the decedent’s home, if necessary in preparation of sale

✔ Costs of maintaining the home pending sale

✔ Real estate and other sales’ commissions payable to brokers and dealers upon the sale of real estate, securities, and other estate assets.

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TERMINATING A DECEDENT’S LIFETIME TRUST

Holding assets in a revocable trust during lifetime has become an increasingly popular estate planning technique. At the death of the trust’s creator, some basic questions will arise.  For instance:

Does the Trust End At the Decedent’s Death?

If the decedent was the owner of a revocable lifetime trust, the estate attorney should analyze the trust document to discern the decedent’s intent as to whether the trust is to terminate in its entirety at the owner’s death, or if the trust is to continue for the benefit of one or more additional beneficiaries.

Who Are the Successor Trustees?

It is  important to review the decedent’s directions, as contained in the trust document, regarding who should be the successor trustee, if the decedent was acting as sole trustee at the time of death.  If no successor is named, or if the named successor is unable or unwilling to serve, the court may have to appoint the successor trustee.

Will the Trust Be Liable for Any of the Decedent’s Debts, Expenses, or Taxes?  

Payment of the decedent’s funeral expenses, debts, and taxes are the primary responsibility of their probate estate.  However, if the probate assets are insufficient to pay all such items, creditors may then be able to reach the assets of the revocable lifetime trust.

Consulting with your attorney regarding the extent of the trust’s liability in this case is essential.

Does the Trustee Have A Duty to Notify Interested Parties?

The trustee will be required to notify certain parties of the trust’s termination.  Discuss with your attorney how this duty should be discharged.

Advertising the trust’s existence in approved newspapers may also be necessary. Discuss with your attorney whether this step applies to your case.

How Long Must the Trust Remain Open? 

The trust owner’s Will may direct that all the remaining probate assets are to be transferred to the trustee of the revocable lifetime trust for addition to the trust property for ultimate distribution to the trust beneficiaries. The trustee thus may need to keep the trust open until the estate administration process has been completed.

How Should the Trustee Work with the Executor of the Estate? 

A successor trustee taking over after the trust owner’s death will be responsible only for those assets — if any — that were titled in the trust’s name at the owner’s death.

The trustee will need to coordinate with the personal representative (a/k/a executor or administrator) of the probate estate to ensure that the owner’s assets are correctly classified as belonging to either the estate or the trust.

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PAYING THE INHERITANCE AND ESTATE TAXES

NOTE:  Not every state imposes an inheritance or transfer tax on the estates of decedents who were domiciled in the state. However, if the decedent owned real estate or tangible personal property (e.g., autos, boats, and jewelry) in another state that does impose an inheritance tax regardless of the owner’s domicile, a tax may be due to that state. Check with your attorney on this issue.

Pennsylvania Inheritance Tax

The Pennsylvania inheritance tax is assessed on the transfer of taxable property to the probate and non-probate beneficiaries (except the surviving spouse) of a decedent who was domiciled in Pennsylvania.  As mentioned above, it is also imposes a tax on real estate and tangible personalty that is located in Pennsylvania, even if the decedent was domiciled in another state.

The inheritance tax is imposed at different rates, depending on the relationship between each beneficiary and the decedent. There is a zero percent (0%) tax rate on:

●  Transfers to the surviving spouse.

●  Transfers from a child 21 years old or younger to or for the use of the child’s natural parent, adoptive parent, or stepparent.

●   Transfers passing to or for the use of a child age 21 years old or younger from the child’s natural parent, adoptive parent, or stepparent.

NOTE: This last provision is not effective for parents whose death occurred prior to January 1, 2020.

Review with your attorney the estate’s cash flow and whether it can take advantage of the prepayment discount option.

Spousal Sole Use Trust Election to Defer Tax 

If a trust is to be created after the decedent’s death for the sole lifetime use of the surviving spouse, the executor can elect either to have the value of the non-spousal remainder interest taxed at the decedent’s death or to have the value of the entire trust property taxed when the surviving spouse dies.

Federal Estate Tax

The federal estate tax is a tax imposed on the value of the decedent’s “taxable estate” (gross estate reduced by allowable deductions), offset by the applicable exemption amount in effect for the year of death. The gross estate will include the assets held in the decedent’s revocable lifetime trust.

The exemption applicable to a particular decedent will depend on the year of their death. Under current law, for deaths occurring in 2023 the exemption amount is $12,920,000.  However, for deaths occurring in 2026 and beyond the exemption is due to be reduced to $5,490,000.)

There is also a generation-skipping transfer tax, in addition to the estate tax, for gifts to beneficiaries more than one generation below the decedent.

Lifetime taxable gifts will affect the federal estate tax at death. The exemption amount otherwise available at death may have been partially or completely used up by the decedent’s lifetime taxable gifts. Be aware of the executor’s duties regarding unreported lifetime gifts.

Deductions for funeral and burial expenses, fiduciary commissions, attorney’s fees, and legal fees and other reasonable costs are allowed to reduce the taxable estate.

Be Careful With the Portability Rule at the First Spouse’s Death

If the decedent was survived by a spouse, a federal estate tax return for the first spouse to die might need to be filed even if no estate tax is due, in order to compute the first spouse’s unused exemption amount and to make the election to have the unused amount available to the surviving spouse at his or her subsequent death.

What Will Be the Source of Tax Payment?

Understand the sources of payment of the various death taxes.  This issue may become especially important if there are non-probate assets that are included in the taxable gross estate.

Will all death taxes be payable from the residue of the probate estate, or will the beneficiaries receiving non-probate assets be responsible for paying their pro rata share of the taxes?

Likewise, will charitable beneficiaries have their bequests of the residuary estate reduced by the death taxes paid on the residuary bequests passing to non-charitable beneficiaries?

Will residuary individual beneficiaries in different classes for Pennsylvania inheritance tax purposes have the tax on their bequests assessed before — or after — the creation of the separate shares?

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■ CLOSING THE ESTATE AND TRUST

Duty to Account to Beneficiaries

The executor of an estate and the trustee of a trust have a fundamental duty to account to the beneficiaries, as well as to any unpaid creditors. This duty is fulfilled by preparing and then submitting to such parties a Fiduciary Account.

Because the format of the Fiduciary Account must conform to applicable state rules, the Account will differ significantly in form from financial statements that are used for most business purposes.

Your lawyer should have the expertise — and the software — to prepare the Fiduciary Account in the acceptable format.

Options for Terminating Estate or Trust

Two options will be available to the personal representative or trustee for terminating the estate or trust once all the work has been completed.  The goal of both methods is to have the personal representative or trustee released and discharged from all further liability, in exchange for distributing the remaining assets to the beneficiaries.  These options are to either:

●  Obtain a Court Decree discharging the personal representative or trustee from further liability, following the Court’s review and approval of the Fiduciary Account that has been filed with the Court, or

●  Enter into a private Family Settlement Agreement with the beneficiaries, in which they all agree to release the personal representative or trustee from liability after having reviewed and approved the Fiduciary Account.

As is apparent, the Fiduciary Account is a requirement of either approach.

●  Discuss with your attorney the advantages and disadvantages of each option.

Final Advice: A Little Knowledge Can Create Lots of Problems

●  Use a competent attorney who specializes in estate and trust administration.

Again, your goal should be to Do Things Right the First Time!

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