Category Archives: Articles
When is probate the better way to settle an Estate?
By Attorney Truman Scarborough
By avoiding the Probate Court process, trusts generally shorten the time of settling an estate. However, there are risks using a trust when the successor trustee does not have the time, has a cavalier attitude, or lacks business savvy. A financial institution could be named to serve as trustee. But, if the estate is small, a financial institution may not be willing to serve or the fee could be prohibitive. An option is to have the Probate Court supervise the administration of the estate.
With a living trust, the successor trustee has immediate control of assets and settles the trust without court supervision. On the other hand, when the property is titled just in the decedent’s name without any beneficiaries, probate will be required. A will by itself does not transfer property to the heirs. Probate is needed to access and finally distribute the assets to the heirs.
The word “Probate” essentially means “to prove.” In this process, the Probate Court must be shown that everything is proceeding in accordance with Florida Probate Statutes and Rules. To understand why there are advantages in having the court involved in settling an estate, we should look at the issue from both the beneficiaries’ and the administrator’s perspectives.
Why probate may be helpful from the beneficiaries’ perspective: With a trust, except initial notification of beneficiaries and annual accountings, the trustee is under few time restraints. On the other hand, the Probate Code sets forth a number of timelines for administering an estate and requires that the beneficiaries be provided with information throughout the administration of the estate. For example, the Personal Representative (executor) must file an inventory of the assets with the court and mail a copy to the beneficiaries within 60 days of appointment. If an estate is not closed in one year, the Personal Representative must explain the reason why to the court. This keeps the process going. Since the probate court automatically enforces these requirements, no action is generally required by a beneficiary.
If something is wrong in probate, all a beneficiary has to do is file an objection with the court. But with a trust, if something is wrong or nothing is happening, the beneficiary will have to initiate a legal action. The services of an attorney would be needed to file the lawsuit which could be quite expensive.
Why probate may be helpful from the administrator’s perspective: A trustee is a fiduciary whose responsibilities are set forth in Florida Statutes. He/she is liable for damages resulting from a failure to fulfill these duties. This liability can extend for years after the trustee has made final distribution. In a hostile environment, a trustee should obtain approvals of a final accounting before making final distribution. If a beneficiary refuses to cooperate, it will delay the closing of the estate and distribution to other beneficiaries. The trustee can send a notice to beneficiaries that if they wish to object they must file a lawsuit within six months. In contrast, closure is simple and direct with probate. Beneficiaries are given 30 days to object to the Petition for Discharge and proposed distribution. If no objections are filed, the court enters an Order of Discharge releasing the Personal Representative from further liability.
For further information on your estate planning options, you may be interested in Attorney Truman Scarborough’s Booklet on Estate Planning in Florida. It is available without charge or obligation by calling (321) 267 – 4770. His office is located at 239 Harrison Street, Titusville, Florida.
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When should a Beneficiary’s inheritance be held in trust?
By Attorney Truman Scarborough
When children have problems like substance abuse or just cannot handle money responsibly, it may not be wise to distribute their inheritance directly to them. For their protection, the gift can be distributed to a sub-trust within the revocable living trust or to a testamentary trust in the will. These trusts normally come into being and are funded after the person who is making the gift has passed away.
If a child has creditor or marital problems his/her inheritance can be placed in trust to protect it in case there is a lawsuit or divorce. When the child can reach an asset, generally the child’s creditors can as well. The trust can contain provisions preventing a creditor from reaching the trust assets. For maximum protection from creditors, the trustee should be given complete discretion on when and how much is distributed to the beneficiary.
If a disabled child is receiving Supplemental Security Income (SSI) and inherits money, the government can claim a right to reimbursement and disqualify the child from future SSI and Medicaid benefits. However, the child’s inheritance can be placed in a “Special Needs Trust” where the child can utilize trust funds without the loss of SSI. Since benefits will be lost if the rules for distribution are violated, care must be taken in selecting the trustee.
Even when a grandchild is not initially named as a beneficiary, the grandchild may become a beneficiary if the grandchild’s parent dies. With a younger beneficiary, there are two reasons why a trust can be helpful. First, in Florida, anyone under eighteen years of age cannot enter into contracts. If not in a trust, funds will need to be managed by a court-appointed guardian or a custodian under the Uniform Transfer to Minors Account. Secondly, even when someone is over eighteen they may not have the maturity to handle the money.
Placing a grandchild’s inheritance in a trust does not prevent the grandchild from using the funds; it gives the grandparent the ability to specify how the funds are used. Distributions may be restricted to certain expenses, like education and health. There can be a single trust for all grandchildren under a certain age or separate trusts for each grandchild. With a single trust, one grandchild would be able to receive more funds than the others from the trust based on need.
Normally a trust provides that all the funds are distributed outright to a grandchild when he/she reaches a certain age. There are variations on ways the final distribution can be structured. For example, if the trustee believes that the grandchild is responsible, the trustee could be given the option to make complete distribution any time after the grandchild reaches 25 years of age. Once the beneficiary reaches age 30, the trustee could be required to make the complete distribution.
Selecting the trustee is very important. If family members are chosen, they should be responsible and caring. When an individual is named as trustee, alternate trustees should be named in case the initial trustee is unable to serve or continue to serve. Another option is to appoint a financial institution. Financial institutions set limitations on the minimal values for the trusts they are willing to administer. Sometimes they require that special provisions regarding their powers and liability be included in the trust.
For further information, you may be interested in Attorney Truman Scarborough’s Booklet on Estate Planning in Florida. It is available without charge or obligation by calling (321) 267-4770. Truman Scarborough’s office is located at 239 Harrison Street, in Titusville.
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Can specific bequests disrupt an estate plan?
By Attorney Truman Scarborough
A specific bequest can be a sum of money, the home, a car, shares of stock in a corporation, jewelry, etc. that is given to a particular individual. It allows an estate plan to better reflect personal desires on how specific property is distributed. Disputes over who receives particular items coveted by multiple beneficiaries can be avoided, providing for a more amicable settlement of an estate.
Specific bequests, however, can result in confusion. What if a particular car has been replaced with another vehicle? What if there is no XYZ stock because the company was acquired by another company? What if the bank where a savings account is located was acquired by another bank? What if the stock in XYZ Corporation split and there are now 200 shares rather than the original 100? Does the beneficiary get 100 or 200 shares of stock? What if the beneficiary received the $10,000 promised in the will or trust from the decedent before he/she passed away? Is the beneficiary entitled to an additional $10,000 from the decedent’s estate? While these kinds of issues are addressed in the Florida Statutes, discuss them with the attorney who is preparing your estate plan to be sure that they are handled the way you want.
There is also the problem on how specific bequests affect the overall estate plan. A common concern is what happens if there are not enough funds to pay all the intended bequests. Specific monetary bequests (like $10,000) are, as a rule, paid first leaving the residual beneficiaries to pay the expenses and divide what might remain. If the value of the whole estate significantly decreases in value, a specific dollar amount intended to be just a small portion of an estate could become quite large in comparison to the residual gifts. This could substantially alter an estate plan from what was desired. One way to address the problem is by defining larger gifts as a percentage of the total estate rather than giving a specific dollar amount. Defined as a percentage, it increases and decreases with the overall size of the estate. If there is a concern it may be too large, it could be capped at a dollar amount. For example, the plan could provide that a beneficiary will receive 10% of the estate, but not more than $100,000.
Non-monetary specific bequests can also create problems. For example, the value of the home at the time the estate plan is developed could constitute approximately one-third of the assets. Desiring an equal division of the assets among three children, the decedent could leave the home to one child and provide that the other two children split the remainder. If expenses from the last illness deplete the decedent’s funds or the values of the other assets shrink, the home could be the primary asset of any value. The two children who are to receive the residual estate would essentially be disinherited. To prevent this from occurring, the plan could provide that the estate is to be equally divided among the three children with the one child having an option to take the home as a portion of his/her share. However, under this scenario, the child would have to use his/her own funds or finance the purchase the home.
For further information on how to prepare an estate plan, you may be interested in Attorney Truman Scarborough’s Booklet on Estate Planning in Florida. It is available without charge or obligation by calling (321) 267 – 4770. His office is located at 239 Harrison Street, Titusville, Florida.
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Should Health Care Documents be part of an Estate Plan?
By Attorney Truman Scarborough
In addition to documents dealing with property issues such as Wills, Trusts, and Powers of Attorney there are documents called “Advance Directives” that address potential health care issues. They help assure you will receive the medical care you desire and lessen the burden on the family. There are several different health care documents:
- Designation of Health Care Surrogate: This gives the person you select the authority to make medical decisions for you if later you become unable. The person you designate has the right to change doctors for you, move you to a different hospital, agree to medical procedures, etc. It also includes: 1) making anatomical gifts after you are gone and 2) withholding or withdrawing life-prolonging procedures, if you do not have a Living Will (see #3 below). If you do not appoint someone as your health care surrogate, Florida Statutes determine who will act as your ‘proxy’. However, this may not be the person you would want to make health care decisions.
Florida Statutes require the surrogate give instructions to medical providers just as he/she believes you would want. Only if it is unclear what you would desire under the circumstances, can your surrogate give directions that he/she believes are in your best interest. It is therefore important to discuss these issues with your surrogate so he/she will know how you feel. In addition, you should determine if your surrogate is emotionally able to make these decisions.
If you live part of the year in another state, you may want to have a Health Care Surrogate under the laws of that state as well. Health care providers in the other state may not readily accept a form which they have never seen before.
- The Federal HIPAA Form: Under the Health Insurance Portability and Accountability Act (HIPAA), health care providers are subject to civil and criminal penalties if they release medical information without your prior authorization. The persons you have given the authority to make medical decisions under Florida’s Health Care Surrogate Law will need a Federal HIPAA form to obtain medical information.
- The Living Will: It is your order (if you are later unable to give instructions) to withhold or withdraw life-prolonging medical procedures if in the future you: 1) are in a terminal condition, 2) have an end-stage condition, or 3) are in a persistent vegetative state with no chance of recovery. These determinations can only be made by your attending physician and another physician after separate examinations. In the Living Will you can specify which procedures you wish to have withheld, including nutrition and hydration. These options should be discussed with your doctor.
- The Do Not Resuscitate Order (DNR): Unlike the Living Will, which can be signed by a healthy individual; the DNR is signed by a doctor after he has determined the patient has a terminal condition, end-stage condition, or is in a persistent vegetative state. This is frequently used when a terminally ill patient is released from the hospital. With a DNR, Emergency Medical Responders (EMS) will withhold cardiopulmonary resuscitation when responding to an at-home patient suffering cardiac or respiratory arrest. It is printed on yellow paper and placed on the patient’s bed or refrigerator.
For further information on estate planning, you may be interested in Attorney Truman Scarborough’s Booklet on Estate Planning in Florida. It is available without charge or obligation by calling (321) 267 – 4770. His office is located at 239 Harrison Street, Titusville, Florida.
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Does it matter how you hold title to property?
By Attorney Truman Scarborough
This is the third in a series of articles on the different ways title to property can be held. In the first article, the various aspects of an individual holding title in just his/her name were discussed. In the next article, we looked at several ways property could be held with other people and some of the advantages and disadvantages.
The property does not have to be held in individual names. It can be placed in a corporation, a Limited Liability Corporation (LLC), a general partnership, different types of Limited Partnerships, and various kinds of trusts. Just like a natural person, these legal entities have the right to own property, enter into contracts, and sue in the courts. Many of these are created for business purposes. Some of these, like the Limited Liability Corporation (LLC), the Limited Partnership and Irrevocable Trust can offer special creditor protection. Others offer estate planning opportunities. For example, a Revocable Living Trust can be used to avoid probate.
When someone dies assets titled just in the decedent’s name without beneficiaries are frozen. A Power of Attorney is effective only while the creator is living. An order from the probate court is needed to access assets in the decedent’s name. Beneficiaries in probate do not normally receive their inheritance until the end of the probate process. If everything runs smoothly in formal administration, it takes approximately six months from the time pleadings are first filed with the court. With a Trust, the successor trustee you name has immediate control of your assets after you are gone. It is similar to a corporation, where if the president dies, his successor immediately has control. With a trust, no court authorization is required to pay bills and make a distribution to beneficiaries.
To avoid the probate process, the trust must come into existence while you are living. Therefore it is called an “inter-vivos” or “living trust”. Assets must be transferred into the trust. If I build a shed to keep my tools dry but forget to put in the clippers, the shed won’t protect them from the weather. In a like manner, if I fail to transfer assets into the trust that should be in the trust, they will have to go through probate.
Once established, the trust is simple to manage. Either you or you and your spouse, will be the initial trustees and beneficiaries. Similar to a corporation where you are the only shareholders and the only officers, you are responsible to no one else. You are free to buy, sell, gift, or anything you want with your property. The IRS does not see this as a separate taxable entity. You will continue to use your social security number and file a regular 1040 tax return.
In addition to avoiding probate, a trust simplifies matters if you become incapacitated. If a husband and wife are the initial co-trustees and one becomes incapacitated, the other continues as a sole trustee. If neither spouse is competent to act as trustee, the person you have designated steps in and manages the trust assets for your benefit, avoiding the need for a guardian. Guardianships should be avoided if possible. First, there is the unpleasant court process of establishing incapacity, and then every year thereafter the guardian must report to the court.
For further information, you may be interested in Attorney Truman Scarborough’s Booklet on Estate Planning in Florida. It is available without charge or obligation by calling (321) 267 – 4770. His office is located at 239 Harrison Street, Titusville, Florida.
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Are there limitations on what you can do in a Will?
By Attorney Truman Scarborough
Anything can be written in a Will, even provisions that are contrary to the law. The problems occur after you are gone when the Will is probated. Some of the legal limitations on Wills include:
1] A Will cannot distribute non-probate assets. If property is jointly owned with survivorship rights, regardless of what the Will states, it goes to the joint owner. Likewise, if there are designated beneficiaries on an account, the property will go to the beneficiaries.
2] A Will cannot alter a surviving spouse’s rights to inherit. Florida law gives the surviving spouse certain rights in property. A new marriage automatically voids an existing Will. The new spouse will receive as a minimum the amount provided for a spouse under Florida Statutes when there is no Will. This is called “Intestate Succession”. If there are children from a prior marriage, the surviving spouse receives one-half of the probate estate.
Even when the estate plan is created after the marriage (unless there is a nuptial agreement) the surviving spouse has the legal right to:
- a life estate or one-half interest in the home (if just titled in the deceased spouse’s name);
- up to $20,000 in household furniture, appliances and furnishings, plus two vehicles; and,
- 30% of the rest of the estate, including probate assets, joint accounts with survivorship, payment on death (POD) accounts, transfer on death (TOD) accounts, and property in Revocable Trusts
2] Although designated in the Will, a non-Floridian who isn’t a relative cannot be appointed as Personal Representative (executor) to administer the probate estate. On the other hand, there are no restrictions on who can be designated as successor trustee to settle a trust.
3] A Florida Will may not be able to transfer property in a foreign country. The reasons include: 1] There may be different requirements for a valid Will, 2] The foreign country’s laws may mandate that certain relatives inherit the property 3] The process of transferring property at death may be substantially different. A separate Will in the foreign country may be required.
4] A Will cannot leave property to a deceased person. A dead person cannot inherit property. When a beneficiary is dead, the gift he/she is to receive lapses (goes back into the pot) unless protected under Florida’s anti-lapse statutes. When a specific gift e.g. $10,000 lapses, it becomes part of the residual estate (what is left after distributing specific bequests). If the lapsed gift is part of the residual estate, it is divided among the remaining residual beneficiaries. If there are no living beneficiaries, the estate goes to those persons who would inherit under Florida Statures if there was no Will.
Florida’s Probate Code has an anti-lapse provision. This provides that a gift will not lapse if the deceased beneficiary is a descendant of a grandparent of the person who created the will. The inheritance will go to the deceased beneficiary’s lineal descendants (children, then grandchildren).
5] A Will cannot penalize someone for challenging it. Some people want to include a provision that if a beneficiary challenges the Will he/she loses everything he/she was to receive. This is called a “terrorem clause” because it is intended to terrorize the person not to challenge the will. Terrorem clauses are not enforceable under Florida law.
For further information, you may be interested in Attorney Truman Scarborough’s Booklet on Estate Planning in Florida. It is available without charge or obligation by calling (321) 267-4770. Truman Scarborough’s office is located at 239 Harrison Street, in Titusville.
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Can adding children’s names to property create problems?
By Attorney Truman Scarborough
Last month we looked at issues that should be considered before making outright gifts to children. Problems can also be encountered when children are made co-owners of property with the parent. In this article, we will look at these issues.
Parents add children’s names to accounts for various reasons. It may be so the child can access the account to pay the parent’s bills. Frequently, parents add their children’s names on accounts or deeds to avoid probate. The reason is when someone dies with assets titled just in his/her name without beneficiaries the asset is frozen. Probate is required to access the assets. No one can sign the deceased person’s name on checks, deeds, etc. A Power of Attorney does not help since it is effective only while the creator is living. It is similar to an employer – employee relationship. If an employer goes out of business there are no employees.
The Personal Representative (executor) cannot access the assets until he/she is appointed by the court. Throughout the process of collecting assets, paying bills and finally making distribution to the beneficiaries, the Probate Court must be shown that everything is proceeding as required by Florida Statutes and Probate Rules. The word probate essentially means “to prove.” When everything runs smoothly, formal probate takes around six months from the time pleadings are first filed with the court. There are attorney fees and court costs with probate. For an estate between $100,000 and $1,000,000, Florida Statutes suggest in formal administration a reasonable fee for the Personal Representative (executor) and the attorney would be 3% of the gross assets.
This leads many people to ask: “Can probate be avoided by adding children’s names to property?” Yes, jointly owned property with survivorship rights goes to the survivor. Unfortunately, this simple solution can create other problems: First, with joint bank accounts, the child has the ability to use the funds as he desires. Second, with real estate, there is a loss of control. Any further transfer will require the child’s signature on the deed. For example, a widow could add one of several children’s names on the deed to her home. But if later the mother wanted the home to go to all of her children, sell, or mortgage the property the child could refuse to sign. Third, the property will be exposed to the child’s creditors when held jointly with the child. Fourth, only one-half of the property will receive a “stepped-up basis.” In determining the capital gain on appreciated property, the basis (the original purchase) is subtracted from the sales price. When property is inherited at death, the date of death value becomes the basis. This reduces the capital gains tax when the property is sold. Fifth, adding a child’s name on the title to the home may delay the parent’s receiving Medicaid benefits. Sixth, with the home the parent may lose some of his/her homestead property tax exemption. Seventh, if the child dies first, the property will again be part of the parent’s probate estate.
With some types of assets, a Payment on Death (POD) or Transfer on Death (TOD) accounts may be used to avoid probate and not encounter these problems. Another option is the Revocable Living Trust which can be used with all types of assets and provides for incapacity.
For further information on estate planning, you may be interested in Attorney Truman Scarborough’s Booklet on Estate Planning in Florida. It is available without charge or obligation by calling (321) 267 – 4770. His office is located at 239 Harrison Street, Titusville, Florida.
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What role do relationships play in estate planning?
By Attorney Truman Scarborough
Estate planning evolves around two subjects: assets and relationships. Generally, it is the relationships that present the greatest challenges. While it is important to have our financial affairs in order, life presents demands beyond “balancing the checkbook”. An estate plan must respond to many complex relationships that may be in conflict with each other.
With most legal issues there is a logical analysis of factual information. But, the subjective nature of relationships makes estate planning more involved. Estate plans are developed from feelings and desires of the heart as well as rational thoughts of the mind. Other areas of law may focus on specific problems, but with estate planning, there is a holistic approach. A contract for the purchase of a home or a lawsuit addresses particular issues, but in estate planning, we are concerned with all the people, possessions, and values that define and bring meaning to our lives. Because each of us is unique in unseen ways, two apparently similar people may seek significantly different estate plans. Each plan is personal in its own special way.
In estate planning, the primary issue is: Who should inherit? When the first spouse dies, normally everything goes to the surviving spouse, unless there are children from prior marriages. When there are children the question will be: When both parents die, should the children be treated equally? What if the parents provided a less fortunate child with significant financial assistance over the years? Should that child receive a lesser share at the time of death to equalize the distributions? It may also seem appropriate that the less fortunate child be given a greater share at the time of death because his/her needs will continue in the future. What if one child is the parent’s primary care giver? Should the parent leave more to the child who has sacrificed to care for the parent? When should a child be completely excluded as a beneficiary? Perhaps the parents are estranged from a child or one child may not need the funds because he/she is extremely wealthy. When there are no children, there are a number of potential beneficiaries including organizations, friends, siblings, nieces and nephews.
When beneficiaries have problems like substance abuse or just cannot handle money responsibly, it may not be wise to directly distribute their inheritance to them. If a beneficiary has creditor or marital problems the inheritance could be lost in a lawsuit or divorce. For protection, should the gift be distributed to a special trust for the beneficiary? This trust can contain spendthrift provisions to prevent creditors from reaching the trust assets. Should the trustee be also given complete discretion on when and how much is distributed to the beneficiary for added protection?
The next major issue in estate planning is: Who should settle the estate? The child who has the time and is most capable would appear to be the logical choice. But, it can be more than a business matter. Could sibling conflicts make it difficult for a child to administer the estate? Is the solution to have a non-relative or a financial institution settle the estate? Alternatively, is there a need to name Co-Trustees or Co-Personal Representatives so a child would not feel excluded or so he/she can help the other child settle the estate?
For further information on estate planning, you may be interested in Attorney Truman Scarborough’s Booklet on Estate Planning in Florida. It is available without charge or obligation by calling (321) 267 – 4770. His office is located at 239 Harrison Street, Titusville, Florida.
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Why do some estates take longer to settle?
By Attorney Truman Scarborough
The length of time it takes to settle an estate depends on: 1] whether the decedent’s records are accessible and organized; 2] the competency and diligence of the administrator; 3] the overall complexity of the estate; 4] whether the estate has to be probated; 5] the type of assets (real estate having the potential of presenting more problems); 6] the nature and extent of creditor claims against the decedent; 7] any difficulties with the decedent’s taxes; 8] whether the heirs have their own financial, marital, or substance abuse problems; 9] whether there is underlying family hostility; and 10] whether someone decides to challenge the Will or Trust in the court.
There are many reasons to bring the administration of an estate to a conclusion as soon as possible. The obvious reasons are to let the beneficiaries enjoy their inheritances and limit expenses (which tend to go up proportionally with the time and work involved). An open estate also allows unforeseen events to complicate and delay settling the estate. Here are three examples:
1] An estate must remain open until all creditor claims are settled. If a car titled in the decedent’s name is in an accident, the estate cannot be closed before resolving the issue of liability.
2] Until the home is sold or transferred to the beneficiaries: it can be difficult to obtain homeowner’s insurance; it will lose the homestead tax exemption; and if unoccupied, it is more likely to be vandalized.
3] If a beneficiary dies before receiving his/her inheritance, a probate estate must be opened to receive the deceased beneficiary’s share. When a beneficiary survives the decedent, his/her interest is vested (locked in) and must be distributed to that individual. The problem is the law does not allow distribution to a deceased individual. Therefore, a probate estate must be opened for the deceased beneficiary to receive the gift. Having to probate the deceased beneficiary’s estate causes delays.
In addition to organizing records and selecting a competent administrator, one way to shorten the time to settle an estate is to avoid probate. When a person dies, no one is empowered to sign the decedent’s name and property just in the decedent’s name without beneficiaries is frozen. A Power of Attorney does not help, since it is effective only while the creator is living. It is similar to an employer – employee relationship. If an employer goes out of business there are no employees. A Will by itself does not transfer property but works through the probate process. Beneficiaries generally do not receive their inheritance until the end of the formal probate process, approximately six months from the time pleadings are first filed with the court.
The Revocable Trust is frequently used to avoid probate. With a Trust, the successor trustee has immediate control of the decedent’s assets. It is like a corporation, where if the president dies his successor immediately takes control. No court authorization is required.
Perhaps, one of the kindest gifts we can leave our heirs is allowing them to have a prompt smooth transfer of assets so they can move on with their lives. With proper planning, the burden on those we ask to settle our affairs can be reduced and beneficiaries can enjoy their inheritance without unnecessary delays.
For further information on your estate planning options you may be interested in Attorney Truman Scarborough’s Booklet on Estate Planning in Florida. It is available without charge or obligation by calling (321) 267 – 4770. His office is located at 239 Harrison Street, Titusville, Florida.
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Are there income tax issues in settling an estate?
By Attorney Truman Scarborough
When a person dies, the successor trustee of a trust and the personal representative (executor) of a probate estate have various responsibilities to the court, the beneficiaries, the creditors, and the Internal Revenue Service. What is required of a successor trustee and a personal representative can be substantially different. For example, a successor trustee should have no involvement with the courts, unlike the personal representative of a probate estate. The specific obligations to creditors and beneficiaries also vary depending on whether there is a trust or probate estate.
In an earlier article, we examined who is responsible for a decedent’s bills. With this discussion, we look at obligations to the Internal Revenue Service for income taxes. While a trustee’s and personal representative’s responsibilities to the courts, creditors, and beneficiaries vary considerably, their responsibilities for income tax are similar.
There is also a responsibility for estate taxes. However, since federal estate taxes only become an issue when an estate is over $5,450,000 in value, the following discussion is limited to income taxes, which apply to all estates regardless of value. There are other related tax topics that are beyond the scope of this article including: “stepped up basis” for appreciated assets; which type of beneficiaries bear the burden of paying the taxes; state estate/inheritance taxes; IRA distributions; and, income tax issues for the beneficiaries.
When someone passes away, a tax identification number (EIN) must be obtained from the IRS for the probate estate and/or trust. The EIN is like a social security number for artificial legal entities, such as corporations, irrevocable trusts, and probate estates. Financial institutions need this number to report income since they can no longer report income under the decedent’s social security number. With a revocable trust, while the creator is living, income is reported under the social security number. But when the creator of the trust dies, the trust becomes irrevocable and income must be reported using an EIN.
Annual income is reported on 1099s. For the portion of the year when the decedent was living, the 1099s will show the decedent’s social security number. Income earned after the decedent passed away is reported on 1099s using the EIN.
A 1041 fiduciary income tax return is filed for income received under the EIN. There is a substantially higher tax rate on a 1041 than on an individual 1040 return. To avoid the higher tax rate, income can be distributed to the beneficiaries. These distributions are shown on Schedule K-1s so the income tax can be paid by individual beneficiaries at the lower rate.
A personal representative and/or successor trustee is required to file these tax returns and can be personally liable to IRS for the decedent’s taxes. This may include taxes the decedent failed to pay in prior years. The accountant who is preparing the returns may suggest filing:
- IRS Form 56 (Notice Concerning Fiduciary Relationship): This is filed when the duties are first assumed and then again when the duties are completed.
- IRS Form 5495 (Request for Discharge from Personal Liability): IRS has three years to review returns to determine if additional taxes are due. When Form 5495 is filed, the review takes place in nine months at which time the personal representative and/or trustee will be released from further personal liability.
For further information, you may be interested in Attorney Truman Scarborough’s Booklet on Estate Planning in Florida. It is available without charge or obligation by calling (321) 267 – 4770. His office is located at 239 Harrison Street, Titusville, Florida.
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