What Happens When You Die Part 5

Welcome back. The wonderful world of taxes is everyone's favorite topic. When it comes to estates and estate administration, "taxes" can take on many different meanings. Let's explore a few.

Estate Taxes

In the system we currently operate under, estates are potentially subject to a federal estate tax. Since we live in Illinois, an estate also may be subject to a state estate tax. (Many states do not have a state estate tax, but we have to fund the Chicago machine.) Any individual who passes away owning total assets that are less than $11,180,000 is currently exempt from any federal estate tax. This amount has recently increased substantially, and will affect only a small percentage of estates. The State estate tax exemption amount in Illinois is $4,000,000. These taxes, if imposed, are extremely punitive. (It is worth noting that this is a tax on money you were already taxed on during your lifetimes. Call your Congressman and tell him how ridiculous this is.) 

These estate tax exemption amounts can, and do, change from time to time. Even over the last ten years, these amounts have varied drastically.

Income Taxes

When an individual dies, the Personal Representative is charged with filing income tax returns for the deceased's last year of life. Those tax returns would be filed, if necessary, just as they were filed when the decedent was living.

In addition to filing a personal income tax return, the Personal Representative is also well advised to file income tax returns for the estate each year. The estate is a separate, taxable entity, so any income earned on assets of the estate during the administration of the same will need to be accounted for. Typically, the income is passed through to the beneficiaries by this filing. 

Inherited Assets and Tax Basis

With the exception of the taxes outlined above, there is no "inheritance tax" on assets inherited by a beneficiary. I supposed the government decided taxing assets 2-3 times was sufficient. An added benefit to a beneficiary of an estate is that the beneficiary gets a step-up in tax basis for inherited assets to the value at the date of death. (If that doesn't make sense, keep reading.)

The step-up in basis can be very advantageous if a beneficiary ever decides to sell an asset that has appreciated over the course of the deceased's lifetime. This is probably best illustrated with an example:

Deceased owned 40 acres of farm ground that he inherited from his father in 1953. The Deceased's tax basis in that asset would have been the value of the asset in 1953, which we will estimate to be $20,000. So, had the Deceased sold the asset in 2018 for $400,000, it would have been sold with a large gain. The Deceased would have been taxed on the difference between the sale price and the tax basis, or $380,000. If the Deceased's only son inherited the farm ground in 2018, after his father passed away, the son's tax basis in the ground is now the 2018 value, or $400,000. So, if the son sold the ground for $400,000, he would have no gain on the sale, and therefore no tax.

Next time, we will discuss finalizing the estate and how distributions are typically made.

What Happens When You Die Part 4

In our last installment (Part 3), we discussed the attorney's role in the estate administration process.  As promised, we will now explore how the debts of a deceased individual get paid.

As we have previously discussed, the assets of the estate are the assets that the deceased owned in their name only. Those assets, prior to any distributions to beneficiaries, are available to pay the debts that the deceased incurred during their lifetime. 

When an estate is opened, the Personal Representative (with the help of the attorney) is required to publish a notice of the case in a newspaper of general circulation within the County. That notice is known as a Claim Notice, and is published once a week for three weeks.  The first date of publication starts what is known as the "claim period." The claim period runs for six months from the date of first publication. It is a notice to the world that the estate is open, and anyone who believes they are owed money by the deceased must file a claim within that timeframe.

That's all well and good, but should people who are owed money be scouring the legal notices of the local newspaper to make sure they don't miss out? Maybe. However, the requirements for debts that the Personal Representative knows the deceased had are handled a little differently. It is a requirement that the Personal Representative send a Claim Notice directly to those known creditors. The creditor then has the burden of making a claim against the estate within a certain time period if they want to try to get paid. 

In addition to debts that are owed, there are various other claims that might be made against the estate. These might include spousal awards, minor child awards, etc. These are somewhat specialized, and I am not going to get into too much detail here, but they are worth mentioning.

If a creditor fails to make a claim after the requisite claim period runs, the creditor is barred from ever making a claim against the estate. So, after the claim period runs, the Personal Representative then knows what, if any, debts need to first be paid. They can then pay those claims and distribute the remaining assets accordingly.

But what if there are not enough assets in the estate to pay all the debts? Good question—I'm glad you asked. If there are not enough assets in the estate to pay the claims, the estate is known as an "insolvent" estate. We then must turn to our state law to determine which class any claims fall in. The law assigns a priority to different claims based on their class. For example, funeral expenses, costs of administration, and attorneys fees are all Class 1 claims. So, these types of claims would get paid first before we moved to Class 2 claims.  If you reach a class of claims that there is not enough money to pay, those claims get paid out pro-rata based on the available funds. Anyone in a lower class would lose out. 

As you can see, it is extremely important for the Personal Representative to wait to distribute assets until the claim period has run, especially with an insolvent estate. If a Personal Representative were to distribute assets early and be unable to reclaim those assets to pay debts, the Personal Representative would then become personally responsible for the amounts previously distributed.  Obviously, this is not a good scenario.

In our next installment (Part 5), we will discuss everyone's favorite topic: taxes.

What Happens When You Die Part 3

In the last installment (Part 2) we discussed the role of the Personal Representative in an estate administration. So, if there is a Personal Representative appointed for the estate, what does the Attorney do?

In practice, the attorney prepares documents for the Personal Representative. These may include Petitions, Affidavits, Notices, Accountings, Reports, Letters, etc. The laws of the State place many requirements on the Personal Representative, and the process of administering the estate must be followed. 

The attorney is available to guide the Personal Representative through the process of administering the estate of the deceased. As indicated in previous posts, the probate process is a procedure that is very foreign to most people. An experienced probate attorney can answer questions as the process moves forward and help the Personal Representative avoid potential pitfalls.  

As an example, a beneficiary may contact the Personal Representative and inquire about their distribution from the estate. The Personal Representative would be well advised not to distribute any funds from the estate until the claim period runs. (More to come on this later.)  

As with all cases, issues do arise, and the attorney is responsible for guiding the Personal Representative through the process. Sometimes the attorney can take on tasks that the Personal Representative may not be able to accomplish or has not been able to accomplish. For instance, some institutions or governmental agencies are very difficult to deal with. (The IRS immediately comes to mind.) It is sometimes much more expedient for the attorney to deal with these individuals than have the Personal Representative make multiple calls to resolve an issue.  

Many times, the attorney can attempt to mediate family disputes as an uninterested third party. This usually relieves the Personal Representative from having to deal with these types of issues in an already stressful time.  

The attorney's role in the process is varied, but it can be extremely helpful. I am somewhat biased, but the guidance and advice of an attorney throughout this process is indispensable. 

In Part 4 we will discuss how claims against the estate may arise, how they get satisfied, and their timing.    

What Happens When You Die Part 2

In Part 1 we outlined the road map for this blog series. Today we will focus on the role of the Executor/Administrator of the estate of the deceased.

A person's Last Will & Testament typically makes a nomination as to who the deceased wants to act as the Executor or Personal Representative of the Estate. Usually the document will make a backup designation for that position and waive certain statutory requirements for the Executor, such as waiving the posting of a bond, which is otherwise required to ensure the Executor does not misappropriate the funds.

When the deceased died without a Will, the Personal Representative of the Estate is known as an Administrator. The law dictates who will have preference to act as Administrator and the formalities that the Administrator must follow in order to act. Typically a spouse would have priority to act, and then the children of a deceased. Again, these default provisions may not be what the deceased would have wanted, but a Will is the only way to make nominations different from the State defaults.

Once a Personal Representative is appointed, they have several responsibilities. These responsibilities vary depending on the assets and debts of the deceased and who the beneficiaries will be. Some of these tasks include:

- Determining and notifying beneficiaries and creditors of the opening of the estate
- Notifying financial institutions of the death of the account owner
- Taking possession of real and personal property of the deceased
- Collecting any income due to the deceased
- Publishing a notice in a local newspaper
- Paying debts and taxes of the deceased
- Selling or transferring real estate and personal property
- Distributing all assets left after payment of debts and expenses

In Illinois, this process will take at least six months to finalize. However, a diligent Personal Representative can have the estate ready for distribution within that timeframe.

In the next installment, we will discuss the attorney's role in assisting the Personal Representative in the estate administration process.

What Happens When You Die Part 1

One of the certainties in this life is that we will one day die. What happens when we are gone depends greatly on what we did while we were alive. For the purposes of this post, I will leave the philosophical debates on the issue for another time and just focus on legalities.

When someone passes away, it puts into motion a series of events that attempt to finalize the affairs of the deceased on Earth. These include making notification to loved ones, funerals, burials, etc.—all that fun stuff that nobody wants to talk about but is inevitable for all of us.

One thing that seems like a mystery to those who do not have experience with it is the probate process, the legal process most commonly used to wind up and distribute the assets of the deceased. Through this series of posts, I hope to demystify this process.

Usually, when I meet with a loved one of a deceased, the first question I ask is whether or not the deceased had a Last Will and Testament. If so, the deceased is referred to as having died "testate." If not, the deceased died "intestate." When the decedent had a Will, I will read through the document to get some guidance on the course the probate process should take. When they do not, we must turn to the laws of the great State of Illinois. (I live and practice in Illinois, so this post is state specific.)

In the absence of a Will, the decedent has adopted the estate planning of the ever brilliant state lawmakers. The statutes give precedence to certain individuals to act as the Administrator of the Estate. They also dictate where the assets of the decedent should be distributed. At the risk of spoiling one of the overall takeaways of these posts, the default State rules usually are not desirable.

In the next installment, we will explore the role and difference between an Executor and an Administrator.