Probate Estate Administration
When someone dies, their separate property constitutes the probate estate, which must be administered so that taxes and the claims of creditors can be paid, and the property distributed to beneficiaries. The probate estate consists of all property held in the decedent's name only and for which there is no contractual transference to beneficiaries—thus, it does not include property held in trusts and other nonprobate property, any property jointly held with a right of survivorship, or any property with a payment-on-death (POD) clause, such as IRAs and life insurance proceeds, unless the decedent directed that POD property be paid to his estate.
Any estate of considerable value or titled property must go through the probate process. However, small estates with only non-titled property can just be distributed to the beneficiaries (or whoever just takes it) without going through probate, but the claims of any creditors against the estate can persist longer than they would under probate or an interested person can go to probate court and challenge the distribution, thereby forcing probate of the estate. There is also a simplified probate procedure that is available in all states, but there is wide variation in the maximum value of an estate that can qualify for simplified probate. The are also many methods of non-probate transfers to transfer property outside of probate, including the use of will substitutes.
Since probate generally takes 1 to 2 years, someone must administer the estate in the meantime and carry out the orders of the probate court. Generally, this person is called the personal representative of the estate. If he is appointed by will, he is sometimes called the executor, which is the most common term for the personal representative of an estate. A court-appointed personal representative is sometimes called the administrator of the estate. If the personal representative is female, then she is sometimes referred to as the executrix and administratrix, respectively, but these terms have fallen out of favor, with executor or administrator denoting a personal representative of either sex, and the modern trend in law is to replace both with personal representative. (However, because it is a little less cumbersome—and more common—to use executor, especially in referring to co-executors, I'll continue using that term hereafter.)
The first task that an executor must perform is to discover and collect the assets of the estate and give an initial inventory list to the probate court. During the probate process, the executor must maintain the assets that are not used to pay expenses and the allowed claims of creditors. Then the executor must pay a family allowance, possibly a homestead allowance, and distribute any personal property that is exempt from creditors. The executor must also pay the claims of all creditors before distributing any property to beneficiaries. The debts and expenses of the estate are usually paid with liquid assets, but if that is not enough, then unencumbered assets of an estate are sold.
Priority of Expenses and Claims
There are 6 general classes of expenses that vary in priority of payment: funeral expenses, administration expenses, federal and state taxes, expenses of last illness, and other allowed claims of creditors. Funeral expenses, administration expenses, and taxes are given top priority in all states. There is more variation in state law concerning the priority of other debts. However, UPC §3-805 provides the following priority of claims:
- Funeral expenses are usually paid first and have top priority, especially since they are the first expenses to be paid, long before the probating of the will. However, funeral expenses must be reasonable in proportion to the value of the estate. Small estates may only have enough for funeral expenses.
- Sometimes, a surviving spouse will pay the funeral expenses out of her personal funds; however, if the estate is small, she should seek reimbursement from the estate, since, otherwise, money from the estate that would have paid the funeral expenses may go to the claims of other creditors, with little or nothing left for the beneficiaries.
- Some money can also be spent for a social gathering, as long as the amount is reasonable compared to the overall value of the estate.
- Real World Example from the will of Janis Joplin:
- "I direct my Executor to cause my remains to be cremated. If my executor shall so elect, he shall be authorized, at the expense of my estate, but not to exceed Two Thousand Five Hundred ($2,500.00) Dollars, to cause a gathering of my friends and acquaintances at a suitable location as a final gesture of appreciation and farewell to such friends and acquaintances."
- Real World Example from the will of Janis Joplin:
- Administration expenses includes:
- the executor's fee, which is paid to compensate the executor for managing the estate, although, oftentimes, the executor is a close family member who does not charge a fee;
- attorney fees for
- probating the will,
- providing advice on administering the estate, and
- defending against will challenges.
- Taxes. Federal taxes have priority over state taxes, and include unpaid income taxes owed on income earned before death, and estate and inheritance taxes.
- Unpaid expenses of the last medical treatment received by the decedent before death.
- Debts and taxes given priority under state law.
- All remaining creditors.
Claims of Creditors; Non-claim Statutes
All states have non-claim statutes, which limit the time creditors can file a claim against the estate; afterwards, their claims are barred forever. This is 1 advantage that probate has over trusts, where creditor claims are not limited by statute or the claim period is for a much longer time.
The claim period is generally limited to the earlier of:
- 2 to 6 months after probate proceedings have commenced, or
- 1 to 5 years after the death of the decedent.
For instance, UPC §3-803 gives creditors 90 days after notice is given or 1 year after the decedent died, whichever is earlier.
The executor of the estate publishes a notice in the local county newspaper to alert creditors. For instance, UPC §3-801 requires that the notice include the personal representative's appointment and address and information for creditors of the estate that will allow them to present their claims, and that their claims must be presented within 3 months after the date of the first publication of the notice or be forever barred. However, the executor must send a specific notice to known creditors.
A creditor's claim may not be barred, however, if the creditor can successfully show that it did not receive notice from the executor. However, most states still bar the claims of creditors even without notice after a statutory period—usually 1 year—after the death of the decedent. (This makes sense, since a creditor would usually be notified through attempting to collect payment from the decedent within the statutory period.)
The executor is personally liable for the payment of all expenses and the claims of creditors. If the executor fails to pay legitimate claims and expenses, then he will have to do so out of his own pocket, unless he can show good cause for the delinquency. For this reason, executors will not distribute most of the property, except for the family allowance, to beneficiaries until right before the estate is closed.
If there are sufficient funds available, an executor will generally pay the legitimate claims of creditors. Sometimes, the executor or a beneficiary will pay a claim out of their own pocket, but they will usually be able to get reimbursement from the estate. However, if the claim was overpaid, then the reimbursement may be limited to the legitimate amount of the claim and if the claim should not have been paid, then there is no reimbursement. For an estate whose value is equal to or less than the claims of creditors, an executor will pay no claims until they are approved by the probate court.
Generally, funds to pay for expenses and claims comes first from the residuary estate, but if there is not sufficient value in the residue, then specific bequests may be used to supplement the payment of expenses. Real estate or other assets may have to be sold to pay these expenses, unless the beneficiaries of the assets pay out of their own pocket so that they can receive the asset and not incur the expenses of selling it, which would be subtracted from their resulting pecuniary gift.
Investing Estate Assets
Unless provided otherwise in the will, an executor has no duty to invest the funds of the estate, and, indeed, will not, since, if the investment loses value, he may be responsible for paying for the loss. However, the executor should invest cash in FDIC-insured savings accounts that pay interest while the estate is being probated, which could take several years.
Some states and some wills require that the executor invest the funds. Under these conditions, an executor will generally not be held liable for losses if the investments are in investment-grade securities. Many states also have a list of investments that executors can make without incurring liability for losses.
If the estate has some investments that could potentially lose value over the probate period, then the executor should ask the beneficiaries or the court for permission to sell the securities. If the investment is illiquid, then the executor has no duty to sell it, but should take any steps practicable to reduce losses.
Another potential liability for executors is when there is more than one appointed for an estate. If one of the executors invests the funds that incur losses, all of the executors for the estate may be liable for the losses.
Both the court and the beneficiaries of an estate will want to know what assets are contained in the estate, what expenses have to be paid and are being paid, and what will be left for the beneficiaries.
The executor must provide an initial inventory list that is presented to the probate court. If there is property held by a 3rd party, then either the executor will retrieve it or, if the 3rd party is unwilling to turn it over, she may be compelled to turn it over by the court.
An accounting of the estate can include the following:
- inventory list of assets,
- payments of the family or homestead allowance, and
- the payments of debts and taxes.
If there are co-executors, only 1 accounting is required, but each co-executor must list the property in their possession.
The executor must also file an annual accounting of the estate to the court or anytime the court requests an accounting. Generally, copies of the accounting must be sent to all beneficiaries and other parties with a legal interest in the estate with enough time before the accounting is sent to the court so that they can raise any objections. The court will not approve of an accounting unless such prior notices have been sent.
If a beneficiary, or other interested party, wishes to object to something in the accounting, then she must petition the court with a copy of the accounting, and the specific reason for the objection, including the item objected to and the reason for the objection; otherwise, the court is likely to dismiss the objection.
Creditors can also petition the court for an accounting of the estate. However, creditors of beneficiaries cannot compel an accounting unless they have attached the beneficiary's interest in the estate. If the interest is attached, then the executor must hold the property until the creditor's claim is resolved.
However, if creditors have been paid, then all interested parties may agree to a waiver of the accounting, to prevent its public disclosure, since everything filed at the probate court becomes a part of the public record. While waivers can keep estates private, there is a possibility that there could be challenges to the probate estate in the future, since it is not technically closed. Likewise, the executor never becomes discharged nor released from liability.
Closing the Estate
Before the estate can be closed, a notice of the final accounting must be sent to the beneficiaries and other interested parties, giving them enough time to possibly object to it. Afterwards, the executor presents a final accounting to the court, with a detailed list of the probate assets, expenses, and the property distribution to beneficiaries. If an estate is small, then the executor may present a first and final accounting to the court. If the final accounting shows a balance of zero—indicating that there are no other assets left in the estate after payments of all liabilities and distributions to beneficiaries—and the court approves and there are no dissents from interested parties, then the estate is closed and the executor is discharged, whence the executor has no more legal liability or duties as an executor.
Distribution to Beneficiaries
Generally, it takes 1 to 2 years for probate to be completed. The time can be greatly lengthened by will challenges or by lawsuits against the estate. During such time, the executor may delay distribution of the property until right before the final accounting has been sent to the beneficiaries and approved by the court, especially if there were pending challenges or lawsuits against the estate, since, if there are insufficient funds to pay all creditors of the estate, then the executor may be personally liable.
However, the executor may make partial distributions of property if there are sufficient funds in the estate to pay all creditors, but even if funds are not sufficient, the executor will have to pay a family or homestead allowance so that the family can live during the probate process, but since such claims are superior to the claims of most creditors, the executor will not have to worry about liability for their payment.
If the beneficiaries do not receive their distribution in a timely manner, then they may have to be paid interest. Sometimes, the time-to-distribution requirement is stipulated by state law or it may be stipulated in the will. The property does not have to be distributed by then, but then the estate must pay interest for any delay.
Beneficiaries of specific bequests will generally get the property bequeathed. If the bequeathed property is not in the estate, then, if the property was not adeemed, the executor must purchase the property to give to the beneficiary unless the beneficiary agrees to a cash payment.
However, real estate passes automatically to the beneficiaries upon the death of the owner, but the title to the real estate will not be clear until after the will has been probated, since there may be claims against the property for taxes, expenses, or the claims of other creditors. If real property is passed to more than 1 beneficiary, then they hold—unless the will specifies otherwise—as tenants-in-common.
Residuary beneficiaries probably will receive both cash and assets. If the assets cannot be easily divided among the beneficiaries, then the assets will be liquidated into cash unless the beneficiaries agree to some other distribution.
If the beneficiary owed any money to the estate, such as from a loan from the decedent, then the beneficiary's gift will be reduced by the amount of the debt.
Small Estate Settlement
If the value of a probate estate is small, then state law may allow a simplified form of probate that allows the executor to present an affidavit to the probate court with a list of the probate property, its distribution, and the payment of the estate's claims. The value that qualifies an estate to this expedited procedure varies, but it does not include nonprobate assets, assets held in joint accounts, or real property held as a joint tenancy or tenancy by the entirety.
However, small estate administration may be prevented if it is stipulated in the will that full probate is required, or if any interested party, including creditors, objects to the small estate administration; then, it would have to undergo full probate with its concomitant costs of time and money.
Filing Tax Forms
Generally, the IRS requires the personal representative to file various forms, most of which only have to be filed if there is a tax due. Some states also have specific filing requirements. The main IRS requirements are listed in Publication 559 (2010), Survivors, Executors, and Administrators.
- The Risk of Out-of-Pocket Health Care Expenditure at End of Life - According to this study, using data from the Health and Retirement Study for the years 1998-2006, out-of-pocket health care costs in the last year of life was estimated to be $11,618 on average, with the 90th percentile equal to $29,335, the 95th percentile $49,907, and the 99th equal to $94,310.
- Special Report - Net Worth - Plan Ahead and Save on Your Funeral - NYTimes.com
- Funeral Help Program - The consumer's Guide to Going in Style, Without Going Into Debt