No, this isn’t the “Handbook for the Recently Deceased” from the 1988 cult classic film, Beetlejuice; however, I will endeavor to make it just as entertaining. When discussing estate planning options, clients wish to know about the estate/trust administration ramifications in order to understand the mechanics of a particular type of plan. To that end, we will explore estate/trust administration fundamentals to increase your practical understanding of what happens when a plan is put into action as a result of a death.
Will the “Real” Estate Please Stand Up?
First, there are multiple types of “estates” that are often confused and/or incorrectly used interchangeably.
- For the Internal Revenue Service, your Gross Estate is everything you own, control or otherwise generally have beneficial use of (see Internal Revenue Code Sections 2031-2046).
- Your estate, otherwise known as your probate estate, is everything you own in your sole name at your death (not subject to joint ownership with right of survivorship or beneficiary designation to something other than to your estate).
- Your non-probate estate is everything you own at your death in joint ownership with right of survivorship with someone else and/or assets passing by beneficiary designation to anything other than your estate or trust.
- Your trust estate is anything owned by your trust at your death or beneficiary designated to your trust.
A Personal Representative by Any Other Name . . .
In the Virginia probate system, the fiduciary in charge of your estate is generically referred to as a Personal Representative; however, they have more specific names/designations that indicate information about the type of estate.
- Executor/Executrix is a Personal Representative that is nominated to serve in a Last Will and Testament.
- Administrator/Administratrix is a Personal Representative that is appointed by the Court to serve when there is no Last Will and Testament (“intestate estate”).
- Administrator/Administratrix, cta is a Personal Representative that is appointed to serve if there is a Last Will and Testament but said instrument is silent on the nomination of the Executor/rix or if someone other than the nominated Executor/rix is appointed by the Court.
- Conservator/Conservatrix is a Personal Representative that is appointed by a Court to safeguard assets, typically during some form of an estate contest that calls into question the actions of an Executor.
- If a trust is the operative document instead of a Last Will and Testament, then the fiduciary will be called a Trustee.
The first job of the fiduciary is to marshal and safeguard the assets of the type of estate over which they have charge. If this is a probate estate, then the Personal Representative needs to be granted his/her powers by the Circuit Court to act on behalf of the estate, which is evidenced in Letters of Administration (also known as Letters Testamentary). If it is a trust estate, then the Trustee uses a Certification of Trust to evidence their authority to act on behalf of the trust.
The fiduciary acquires the appropriate EIN(s) from the Internal Revenue Service for the estate(s) that he/she is handling, as the Social Security number of the deceased individual terminated with their death. This alerts the IRS to the estate(s)’ existence and the fact that at least an IRS Form 1041 will be forthcoming from the fiduciary, as well as a final IRS Form 1040 individual income tax return for the decedent.
Next the fiduciary values the assets and determines if there are any legally enforceable liabilities of the estate(s). Both parts of the process are extremely important. Determining the value of assets provides the starting point for the distributions that will eventually occur, as well as establishing any cost basis adjustments for federal capital gains tax purposes. Discharging the estate of its liabilities is sometimes a delicate and complicated process; if the fiduciary does it incorrectly, he or she may incur personal liability for the obligation.
Once these steps have been accomplished and the beneficiaries have been identified, the fiduciary begins the process of making distributions. First, any specific bequests are satisfied. Thereafter, the residuary balance is distributed. This process may practically happen over a period of time with multiple disbursements, depending on the size and nature of the estate(s) and its holdings. A fiduciary should be certain to obtain signed receipts from beneficiaries wherever possible to evidence the distributions made and received. If this is a trust estate, there may need to be additional work done to allow for subtrusts to emerge to receive distributions. If this is a probate estate and there are minor or incapacitated beneficiaries, there may need to be a corresponding guardianship initiated with the Court to complete the estate distributions.
Who Can Be a Fiduciary?
Once clients understand this general process, they next often ask if a family member (adult child, etc.) or friend can serve as their fiduciary. The answer is that they certainly can; however, let’s take a moment to examine the client’s motivation behind this potential choice.
Often, choosing a family member or friend as a fiduciary is done out of a misplaced belief that this will be a less expensive choice for the estate. Clients will routinely tell me that ‘so-and-so’ will act as a fiduciary without compensation because of their relationship to the client. That may be the case; however, in my many years of being an estate and trust attorney, I rarely see a family member or friend of a client act as a fiduciary for an estate without compensation. That’s because it is real work and real liability to be a fiduciary of an estate. If you have ever done it yourself, you can attest to the same. Any fiduciary will be required to spend time and energy dealing with your estate, and they will assume liability for their actions. As such, I counsel clients not to delude themselves into believing that their family members or friends will do this type of work for free. If they are acting as a Personal Representative of a probate estate, they can be compensated up to 5% of the estate value in many cases. If they are acting as a Trustee, most non-professional trustees charge 1% of the trust estate value to act in a fiduciary capacity.
With this understanding of the estate/trust administration process, many clients weigh using a professional as a fiduciary; as the professional will arguably charge the same amount as the family member or friend, and it relieves the family/friend of the responsibility and liability of settling the estate. In addition, using a professional has the added benefit of removing all of the internal politics and emotional baggage that may be present amongst the beneficiaries of the estate, causing the process to be less stressful for the beneficiaries and potentially more evenhanded.
You Are in Control
At JGB, our clients are in control of their choice of whom they place in charge of their estate/trust administration process. If a client chooses to name a family member or friend, JGB is ready and available to be engaged to assist that fiduciary as an expense to the estate. Alternatively, many of our clients have chosen to name their JGB attorney as their fiduciary to relieve their family members and/or friends from the burden of settling the estate. If you are interested in considering this option in your estate plan, do not hesitate to contact our office.