What Does A Personal Representative or A Trustee Have To Do In Order To Settle The Estate?
In the plans that we write, we want the Personal Representative (what used to be known as the Executor) to have almost nothing to do. We really want the Trustee to be the person who is in charge. Most of the clients that we work with have a very small (if any) probate estate. The Personal Representative’s role is really more of a safety net role – to handle the few assets that are owned by a deceased person in his/her name individually. There are basically five steps to settle someone’s estate, the first of which involves taking an inventory to decide whether the person had some form of ownership interest in an asset. We’re going to consider whether there is real estate, a stock and bond portfolio, a retirement account, banking assets, automobiles, or boats and whether each asset is individually, jointly owned, in trust, or through some other method of ownership.
The next step is to appraise all of the assets in order to find out what they were worth on the date of death. These appraisals become important for a number of reasons, including estate tax reporting purposes and for step-up in cost basis reasons. In addition to getting appraisals, we also have to retitle everything by removing the decedent’s name from the assets and updating the titles to reflect the new owner. With a trust, we will have to remove the decedent as the trustee, have the successor trustee accept the job, and then go to the banking institutions or investment houses to update the account ownership. If an asset is owned by the decedent individually, then we will take their name off of it and put it into the name of the probate estate where it may be used to pay the expenses of the probate estate, but ultimately it will be held for a minimum of one year in Massachusetts for a creditor claim period. At the end of that year, it can be distributed to the ultimate heirs. In the end, two sets of retitling will have occurred.
In addition to retitling the assets, we will need to file an income tax return for the year the decedent passed away. We may also have to probate estate income tax return for any income earned by the assets that passed through the will while the estate is being settled. If we use a trust, then the trust often becomes irrevocable at the death of the Donor (the trust maker), and as a result, there will be a separate income tax return for the trust.
Real estate, stocks, bonds, mutual funds, and other assets can be subject to capital gains tax, and all of these assets have what’s called a cost basis. A cost basis is the difference between the original purchase price of an asset and the eventual sales price, and it helps us determine the amount of capital gains tax owed. When someone dies, we’re able to change the basis from what they paid for the asset to its date of death value, which is why having items appraised is so important. The appraisals will allow us to change the cost basis and sell an asset with a very different capital gains tax consequence to the sale.
We also need to know the date of death value for estate taxes. The estate tax is due nine months after the date of death, but can usually be extended for an additional six months. As of 2019, the federal estate tax exemption is $11.4 million, and each year it gets adjusted a little bit for inflation. For most families, the federal estate tax return is not all that important; it’s the state estate tax that becomes more critical. As of 2019, six states have an Inheritance Tax, and fifteen states and the District of Columbia have an estate tax on the books, including Massachusetts where we practice. The estate tax exemption in Massachusetts is $1 million, which means that any resident of Massachusetts who has an estate that is valued at over $1 million will be subject to a tax. If married, that exemption can be doubled to $2 million (but only with proper planning), which means there is a way to pass more wealth if a person happens to be married.
As a rule of thumb, Massachusetts Estate Tax due at the death of a single person or at the death of a surviving spouse will be approximately ten percent (10%) of the amount over $1 million; this is a simplified way of estimating the tax, because in reality, it is a graduated tax. This graduated tax does go back to dollar number one, but there is a credit against some of that.
As previously mentioned, there is an $11.4 million U.S. Estate Tax Exemption, so most people don’t have a requirement to file. However, it’s a good idea for married people to file a Federal Estate Tax Return anyway, due to a concept called portability. Portability involves moving the unused exemption of the first spouse who dies to the surviving spouse. This is something that we very often recommend to families because the estate tax exemption has moved around an awful lot over the last 30 years; it started out at $600,000 in the mid-90s, then increased to $1 million, and over time eventually increased to $3.5 million, and then became $5 million, indexed for inflation, before being changed to $11.4 million, indexed for inflation. In essence, the exemption is a moving target. Under the current law which is set to expire in 2026, the exemption will be adjusted once again, probably to around six or seven million dollars. We often recommend that the unused exemption be moved over to the surviving spouse in case a future change in law reduces the exemption back down to $3.5 million or even as low as $1 million, as has been proposed.
For more information on Settling An Estate In the State Of MA, a free initial consultation is your next best step. Get the information and legal answers you are seeking by calling (508) 775-7800 today.
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