As a beneficiary of an estate, it’s in your interest to keep on top of what’s happening during a court probate or trust administration. Assets may come to you as a beneficiary either through a probate or outside of a probate.
Probate is the court process by which a deceased person’s debts and taxes are paid, and assets are transferred to appropriate beneficiaries. Wills usually go through probate, as do estates of persons who pass away without a will. Many times it takes over a year to complete the probate process.
You can also receive assets outside of a probate through beneficiary designations (such as life insurance, annuities, IRAs, 401(k)s and other retirement plans), assets from a living trust, or from a joint tenancy title of an asset. Distributions of assets outside of probate may take weeks or a few months.
Receiving an inheritance can greatly affect your financial future. Here are five actions for you to take.
1. OBTAIN COPIES OF THE ESTATE DOCUMENTS
As a beneficiary, you will want to get copies of the following documents as soon as possible from the estate or trust attorney:
Will and all codicils (amendments)
Trust and all amendments
Beneficiary designations (bank or brokerage accounts, life insurance and/or retirement plans) naming you, and associated statements showing the value and types of assets included
Inventory of all assets, with estimated values
Your state law normally determines if and when you’re entitled to see these documents. Some documents may be available right away since they are public records (such as the will and codicils), while others may have a waiting period before they’re given to you.
When you contact the estate or trust attorney for your copies of these documents, also ask for a timeline and a summary of the steps they will follow to administer the estate or trust. This will give you some idea of what is happening, and if the proceedings drag on, you can contact the attorney to see what’s the problem.
2. HIRE YOUR OWN COUNSEL
Depending on how much you will be inheriting, you may want to consult with an attorney experienced in probate and related matters. Ask first how the attorney charges for services (usually it’s on an hourly basis, ranging from $100 to $450 per hour).
It may be worthwhile to meet with your attorney to get an overview of the administration process and your rights. You can then decide if you need continuing legal and tax assistance in obtaining and interpreting various documents you will encounter.
If there is a substantial sum involved, you should also consider meeting with a “fee-based” financial adviser to discuss how to best manage the funds before and after the distribution.
3. OBTAIN DOCUMENTS FILED IN PROBATE COURT
Probate court documents are public records. Here are two ways to receive copies of court documents:
1. Write the court clerk with the court case name, the case number, and a description of the desired documents that have been filed. Call the clerk first to find out the cost of getting the copies, as you will need to send a check before they are released.
Normally, you can request plain photocopies of documents or ones that are certified by the court clerk as exact duplicates. For most purposes, the plain photocopies are sufficient and cost a lot less than the certified copies. You may want certified copies of certain court orders (e.g., an order of distribution).
2. You may be able to avoid waiting for documents and get them free as they are filed in court. See if you can file a request for special notice or equivalent document putting on record your ongoing request that every probate court document be sent to you or to your attorney. This is a good way to stay in the loop throughout the estate proceeding.
4. REQUEST INFORMATION ON THE ADMINISTRATION OF LIVING TRUSTS
If the deceased had a living trust, it is not a public record, so there isn’t a comparable step for keeping tabs on its administration. Instead, periodically contact the trust attorney or trustee to find out the status of the trust. As a beneficiary, you are usually entitled to an accounting each year of the assets that came into the trust, the income, expenses, sales and purchases of assets during the year, and what’s on hand at the end of the year.
5. SECURE NEEDED TAX INFORMATION
Obtain copies of five essential tax documents that can help you understand the estate:
Deceased’s federal estate (death) tax return
Deceased’s state estate tax return
Appraisals (valuations) of the assets in the estate
Deceased’s final federal and state income tax returns.
Any income tax returns that must be filed for any estate that still retains income-earning assets as of the end of the year.
Under the law that was enacted in 2001, effective January 1, 2010, there is no longer an estate tax or a generation-skipping transfer tax. The tax rate on taxable gifts is now 35%.Additionally, there is no longer an increase in the decedent’s asset-cost-basis to date-of-death-asset-values. As a result, this could result in larger income taxes than under the 2009 estate taxes rules.
There is a general consensus among estate planning professionals that changes in the estate tax laws could be retroactive to January 1, 2010.
If Congress doesn’t take action in 2011, effective January 1, 2011 the estate tax and generation-skipping transfer tax will return at a 55% top tax rate and a $1 million estate tax exemption. This will result in a substantial increase over the 2009 rules, which had a top estate tax rate of 55% and a $3.5 million exemption. Check with your advisors for updated estate tax information.
The federal estate tax return is required to be filed within nine months of a death for an estate that’s over the federal tax-exempt amount of $3.5 million in 2009. If the values are under the tax exempt amounts no estate tax returns my be required.
A six-month extension can be obtained to file the return. The return lists all of the assets that can be taxed -– and their values -– in the deceased person’s estate (including IRAs, 401(k)s, other retirement plans and most life insurance). The calculation of estate tax is based on the values at the time of death.
Another value is sometimes shown on the estate tax return, called the alternate valuation date value. This is the value six months after the date of death. Sometimes assets (e.g., stocks or real estate) go down in value after the date of death. If the lower alternate valuation date value is used instead of the higher date of death value, then the estate is smaller and the estate tax due is reduced.
The values placed on the estate’s assets are important for several reasons:
They are used to calculate how much estate tax maybe due. If the estate’s value is over the exempt amount, estate tax will be due. Depending on how the will, living trust and state laws are structured, you may be paying part or all of the tax, even on assets that don’t go to you.
The value placed on the estate’s assets affects the starting point for you to calculate any gain or loss on the assets, if and when you sell them. For real estate, the value of the asset also affects how much depreciation you can take on your tax returns.
Estate and trust administration can get very complicated and is filled with many rules and traps; be sure that you are represented by knowledgeable trustworthy advisors.
CHECKLIST: WHEN YOU FIRST BECOME AWARE YOU’RE A BENEFICIARY OF AN ESTATE OR TRUST