Administering an Estate: The Executor's Responsibilities
By Lawrence Adler,
Estate administration is the process by which an individual acts on behalf of the decedent and takes care of the deceased’s interests. The individual in charge of administering a decedent’s estate is appointed in the decedent’s will and is called an executor (male) or executrix (female). An executor can also be a corporation such as a bank or a trust company. If the individual died without making a will, he or she is considered to have died intestate meaning local law will appoint an administrator and dictate how the decedent’s assets will be disposed of.
Administering an estate can be a very frustrating experience depending on the size of the estate, the legal process involved, the time it consumes and the many individuals that must be dealt with in discharging the wishes of the decedent. In order to make the administration of an estate run smoothly, an executor will often turn to skilled financial and legal professionals to be part of an estate administration team. These trusted advisors can include an attorney (preferably one who has experience in estate administration) a CPA and an appraiser.
Upon an individual’s death, the executor will need to secure and review the decedent’s last will and testament and submit the will to the probate court to prove its validity. The basic duties of an executor are to collect the decedent’s assets, pay the estate’s expenses, file the decedent’s final personal income tax return, file the estate’s income tax return(s), if necessary file the estate tax return, pay income and/or estate taxes if any, settle the estate’s debts, and distribute the remaining assets to the individuals mentioned in the decedent’s will. The will may also specify the decedent’s desire’s regarding funeral arrangements, cremation, organ donations etc.
When administering an estate the executor must be able to distinguish between the gross estate and taxable estate for federal estate tax purposes and the probate and non probate estate. The gross estate is an estate tax concept and consists of the fair market value of all property that an individual owned at the date of death. The taxable estate is an estate tax concept and is the gross estate reduced by deductions including estate administration expenses, debts of the decedent and assets qualifying for a marital and/or charitable deduction. The probate estate is property transferred by an individual under his/her will. The non probate estate is property transferred automatically at death by a beneficiary designation or by operation of law such as an Individual Retirement Account. The gross or taxable estate for federal estate tax purposes includes probate as well as non probate property.
One of the most important responsibilities of the executor is to marshal and value the decedent’s assets. It can be a time consuming process to ensure accurate reporting to the taxing authorities, the court and the beneficiaries. This is done by analyzing the decedent’s prior income tax returns, brokerage statements, life insurance policies, obtaining appraisals and interviewing family members etc.
Cash requirements. Soon after a decedent’s death the executor must determine if the estate has sufficient cash to cover present and future debts and expenses. This is important when the assets of the estate are not already liquid. Examples of such expenses are administration expenses, income taxes of the decedent, estate taxes, funeral expenses, specific cash bequests to individuals mentioned in the will and debt retirement.
Income tax returns. Upon an individual’s death, the estate becomes a separate taxable entity. The day the decedent dies is the last day of the individual’s tax year and the next day begins the tax year of the estate. Consequently, the executor is responsible for filing two potential income tax returns. The first, is the decedent’s final personal income tax return (Form 1040) in which federal and state income taxes might be owed on income earned up to the date of death. If a return is required, its due date is April 15 of the year following the year of death.
Second, in the case of the estate, Form 1041 is used to report income received by the decedent’s estate whether that income is accumulated and held for future distribution or distributed currently to the beneficiaries. The due date of the return is 3 € months after the close of the tax year. The executor has flexibility to elect a fiscal year to defer income taxes if it is more beneficial to the estate and its beneficiaries.
Estate tax return. The executor will have to file a federal estate tax return if the value of the decedent’s gross estate exceeds $3,500,000. The estate tax return is due nine months after the death of the decedent. When determining whether the estate meets the $3,500,000 threshold, the executor should include in the gross estate probate and non probate assets, valued at their fair market value. This may include obtaining appraisals for real estate and partnerships interests.
One of the many elections available to the executor is the alternate valuation date. The alternate valuation date is either the date six months after the date of death, or if property is sold within the six month period, the date of sale. The election can be made only if the fair market value of the property in the estate has declined in value between the date of death and six months later and the estate tax has decreased.
The next step of the administration of an estate is the executor must file an inventory with the probate court. The inventory should contain a list of the decedent’s probate and non probate assets which are valued at fair market value as of the decedent’s death. The inventory should be filed with the court by the later of the following dates: 1) The due date for filing Form 706 Federal Estate Tax Return (including extensions) or 2) If the estate is not required to file a Form 706, the due date for filing the New York State Estate Tax Return (including extensions) or 3) If the estate is not required to file a New York Estate Tax Return (including extensions), six months from the issuance of letters testamentary. As an alternative the executor can attach a summary schedule together with Form 706 Federal Estate Tax Return or the New York Estate Tax Return.
At this point, the end of the administration process is near. One of the final responsibilities of the executor is to distribute the assets of the estate to the beneficiaries based on the dispositive provisions of the decedent’s will. If a formal accounting is prepared it is submitted to the probate court. If it is approved by the court the final distributions are made to the beneficiaries, the executor is discharged of all personal liability and the estate is ready to close. If a formal accounting is not required, an informal accounting is sufficient to discharge the executor from personal liability. An informal accounting is a final accounting made out of court, submitted by the executor to the beneficiaries for their approval. Upon approval by the beneficiaries, the executor receives a receipt and release from the beneficiaries and is released from any further liability.
While the above addresses a number of important issues in administrating an estate, including marshalling and valuing the assets, making distributions of the property to the heirs, filing tax returns, and providing an accounting to the courts, the overall process is more complex and requires a lot of care and guidance to perform many of the administrative functions.
Lawrence Adler is a Tax Manager at Marcum. He can be reached at 212.981.3066 or via email at[email protected].