Updated October 24, 2022
In my previous article, I discussed some of the initial steps a personal representative should take to begin the estate administration process, including qualifying as the personal representative of the estate, obtaining an EIN number and transferring the decedent’s assets into the estate. In today’s article, I am going to discuss other issues relating to the estate, including probate, required tax & local filings and the eventual closing of the estate. It is important to note that this article pertains to estates in Virginia, however, many states have similar rules that need to be followed as well.
Administering the Estate
Probate, which is the general process of gathering a decedent’s assets and distributing them to the decedent’s creditors and beneficiaries under court-supervision, contain a variety of steps that must be completed. Some of the steps, such as qualification, posting of a bond, obtaining an EIN and opening a bank account for the estate, were discussed in my previous article. However, the probate process contains many other steps. For any known creditors, it is important to mail a notice to inform them of the decedent’s death as well. In addition, the personal representative should also mail a notice to beneficiaries and heirs notifying them of the decedent’s death. It is important to keep proof of these mailings as well in the event that a creditor, beneficiary, or heir contests that they never received any notification. The estate may also be required to file a state or local accounting. Requirements for these filings vary based on state. In Virginia, for example, the personal representative is required to file an initial inventory of assets and subsequent annual estate accountings with the local Commissioner of Accounts until the estate is closed.
The personal representative should also determine the required filings necessary to administer the estate. If the decedent passed away in 2022 with an estate valued in excess of $12,060,000 ($12,920,000 for 2023), the estate will likely be required to file a Form 706, “United States Estate (and Generation-Skipping Transfer) Tax Return”. Estate tax is based on the fair market value of all assets held by the decedent at the decedent’s date of death (or six months after the decedent’s date of death if the estate elects the alternative valuation date) multiplied by the applicable tax rate. The value of the assets also includes any taxable gifts the decedent made during their lifetime. For tax year 2021 and 2022, the tax rate is 40%. While most estates do not typically meet this requirement, it may be advisable to file the Form 706 regardless, especially if the decedent still has a surviving spouse who could possibly be required to file a Form 706 in the future. Under these circumstances and by filing the Form 706 even though not required, the personal representative can transfer the decedent’s unused estate tax exemption to help offset the surviving spouse’s future estate tax liability. This process, known as “portability”, has the potential to offset or eliminate the spouse’s future estate tax liability. The personal representative should also consider if the decedent’s state of residence or any state in which he/she owned property has any estate tax filing requirements. While most states do not, some states do have an estate tax filing requirement. In addition, a few states also have a separate “inheritance tax” that the estate will have to consider.
Income Taxation of the Estate
In addition, the estate will normally be required to file a Form 1041, “U.S. Income Tax Return for Estates and Trusts”. The personal representative would also be required to file a final Form 1040 for the decedent, which would include any income from the beginning of the year until the Decedent’s date of death. Many states also have a separate estate income tax return.
Closing the Estate
After all of the decedent and estate debts and taxes have been satisfied, the personal representative is then responsible for distributing all remaining estate assets in accordance with the decedent’s will or Virginia law if no will exists. It is advised that the personal representative consult with their legal counsel prior to distributing the assets to the beneficiaries, as the personal representative can be held personally liable for certain debts and taxes. In order for the closing of an estate to occur, a final accounting showing that all estate assets have been distributed to beneficiaries in accordance with the written will or Virginia law if no will exists and a statement by the executor that all taxes have been paid must be filed and approved by the Commissioner of Accounts. Once approved, the estate will be allowed to be closed.
The administration of an estate is always different, each presenting its own unique issues and challenges. It is often not known what these issues are until the actual administration of the estate occurs. However, a well-prepared personal representative can more easily respond to issues as they arise and ensure the administration of the estate runs as smooth as possible. At YHB, our Private Client Services team can assist you with this difficult process and ensure the administration of the estate goes as seamless as possible. Contact us with any questions.