When a person dies owning property in his or her own name or is
entitled to money or property, his or her estate must be probated. Probate is the legal process of proving a will
so assets can be collected and distributed to rightful beneficiaries and legitimate claims of the decedent can
be paid.
The person responsible for handling the affairs of a decedent is
his or her personal representative known as an "executor". The executor is appointed by the court having
jurisdiction over the estate. The person(s) named in the decedent's will are usually nominated as executor(s) by
the court. Every party interested in the estate must be notified that a person is petitioning the court to become
the executor. Since the position of the executor is so important and entitled to compensation, this is an area
that sometimes is subject to litigation.
If a person dies intestate (without a will), certain family members
can petition the court to become the personal representative, known as an "administrator". A surviving
spouse or adult child will usually be given preference, but there is no requirement that either party be given
the position.
Most states have statutory fees for executors. The fee is usually
based on a percentage of the probated assets (which can be different from the "gross estate" for tax
purposes). As an example, in New York State, the executor is entitled to a fee of about $34,000 on a $1 million
estate. This fee does not include any other expenses of the estate, such as legal fees, filing fees and inventory
fees.
If two people are named co-executors, certain states provide that
both individuals are entitled to full compensation. Once the executor is appointed, he or she must collect all
of the estate assets. Depending on the size and complexity of the estate, this process can be extremely time consuming
and difficult. The executor will have to examine all of the decedent's records, and question relatives and business
associates to determine the extent of property owned.
Some attorneys will advise executors to wait 12 months from the
date of appointment to calculate a final value of the estate. Their reasoning is that at the end of the year, institutions
will send tax information to an investor showing the amount of income to be reported on a tax return. Certificates
representing ownership of mutual funds, bonds and other financial products sometimes cannot be found. Year-end
statements help identify assets. However, some states may require an initial accounting within six months form
the date of appointment.
Once all of the estate assets are collected, the executor
is required to pay debts of the estate.
Ancillary Probate
If a decedent owned real estate in another state, the executor must
file ancillary probate. Each state only has jurisdiction over realty located in its jurisdiction. A New York court
cannot authorize the transfer of real property located in Florida. Thus, the executor has to petition the Florida
courts to transfer realty located in that jurisdiction even if the decedent was a New York resident.
The collection of estate assets is not always easy. If the decedent
was owed money at the time of death and the debtor fails to pay, the executor would have to file a lawsuit for
collection. Contracts, leases, mortgages and other similar arrangements would have to be reviewed. The executor
may be forced to hire professionals to operate businesses the decedent owned to preserve their value and collect
income or rents.
Once all of the estate assets are collected, the executor is required
to pay debts of the estate. Some states specify certain debts must be paid first. For example, funeral expenses,
taxes and judgments may have priority over general creditors.
The executor is required by law to locate creditors of the estate.
If creditors are unknown, the executor may have to publish a notice in a local newspaper informing the public about
the decedent's death and requesting creditors to file a claim.
Distribution of Assets
Once the executor is confident that debts of the estate have been
paid, the executor may begin making distributions of money and property to beneficiaries. Often, this requires
a careful reading of the will. If there is confusion with respect to a distribution, the executor may petition
the court for an interpretation of the will.
In large estates, administration becomes more complex. If estate
taxes are due, an executor may retain funds to guarantee enough money is available to pay all taxes. The IRS generally
has up to three years to question the value of property listed on the estate tax return.
Besides federal estate taxes, the executor may have to file a state
death tax return and federal, state and/or local income tax returns. The estate becomes a separate taxpayer and
may earn taxable income from assets transferred to estate accounts.
The executor must read the will carefully to determine how expenses
of the estate are paid. A decedent may have directed in his or her will that expenses are to be paid for a specific
part of the estate. If there is no such direction in the will, state law may require the executor to prorate the
expenses among the beneficiaries in relation to the amount they receive.
Once all of the assets are collected, expenses paid and distributions
made, the executor will prepare a final accounting with the court. This accounting will be a comprehensive report
of all transactions with respect to the estate.
The probate of assets is only one part of the estate process. If
there are minor children surviving the decedent, the court will appoint the legal guardian of the children. Guardians
may have to account to the court annually with respect to the children's finances.
Once you understand some of the complexities of probate, you realize
that estate administration may take time. Some advisors recommend that probate should be avoided at all costs.
However, others may be more concerned about estate supervision. They feel if all assets go through probate, the
executor will do a better job since he or she must account to the court for every dollar spent. Furthermore, just
because property did not go through probate does not always mean the estate can be settled faster. Taxes and creditors
still have to be paid.
At this time, we can't debate which method is better. It will depend
on your client's wishes and the complexity of the estate. However, it is recommended that surviving family members
have enough liquidity in accounts that can be reached outside of probate for daily expenses. This could prevent
immediate hardship.