The estate administration process includes the probate of an estate and the filing of tax returns for the decedent and his or her estate and/or trust. We have listed the basis concepts and responsibilities with which you should become familiar if you have been named as the Personal Representative of an estate or the Trustee of a trust.
Fiduciary Responsibility
The Basic Premise
Much of what is done in the implementation of estate planning and probate administration falls under the umbrella of what is known as fiduciary responsibility. In the simplest of terms, the fiduciary obligation of a person acting as a Personal Representative or Trustee requires that he function and conduct himself to maximize the benefit for the beneficiaries of the estate or trust. The concept of fiduciary is founded in ideals of integrity, reliance, honesty, trust, and fair-dealing. The conduct of the fiduciary is measured in hindsight, and therefore it demands a high level of planning, research and fidelity.
If you accept a fiduciary appointment as Personal Representative and/or Trustee for the benefit of others, you will own the bare legal title to the decedent’s various assets. The beneficial title – that is, the right to have utilization of the property – is vested in the beneficiaries for whom you are acting. The services rendered by the fiduciary must be based on the highest degree of integrity and fidelity. Failure to follow those standards may result in not only a loss to the beneficiaries of the trust or estate, but may also result in significant liability to the Personal Representative or Trustee. Fiduciary responsibility is the highest of all obligations imposed on an individual in the law.
The measure of the fiduciary responsibility of a Personal Representative or Trustee should is judged by the following standards:
1. Adequate capability and time to perform the services required.
2. Proper guidance from legal and accounting counsel on an on-going basis.
3. Careful preparation and implementation of legal documents.
4. Maintenance of quality records and regular reporting.
5. Ready access to information and disclosure of relevant documents and information to the beneficiaries on a regular basis.
6. Preparation and filing of all reports, whether to institutions or government tax agencies.
If you are unable to complete any of these tasks, you must seriously consider whether to agree to act as the Personal Representative or Trustee.
The Probate Estate
A probate estate is opened if the descendent dies with assets titled in his or her sole, individual name. For example, assets transferred by the descendent prior to death to the decedent’s revocable living trust are not subject to probate.
Generally, a probate estate is opened in the county where the decedent resided at death. Probate can proceed, informally, formally or supervised by the Court. (If the probate assets are worth less the $15,000, the probate is a one-step process that requires no further involvement of the Court)/ The first documents filed in the county probate court list the type of administration, and the legal heirs and beneficiaries under the will (if there is one). The fiduciary is referred to as the Personal Representative. The County Probate Court will issue LETTERS OF AUTHORITY which have been certified with the Court’s seal and will allow the Personal Representative to act on behalf of the deceased.
In both formal and informal probate, estate administration proceeds as expeditiously as possible without judicial involvement unless and/or until an interested person invokes the court’s power to rule on the matter. Informal probate is the simplest, fastest and least expensive method of probating an estate. In supervised probate, the probate court is involved much more extensively. For example, in a supervised estate, an annual accounting must be approved by the court. Furthermore, the supervised Personal Representative has much less flexibility and power than an independent Personal Representative.
A probate estate must remain open a minimum of four months. If payment of Federal or State Estate Taxes is involved (see discussion below), a typical probate estate remains open from one to three years. However, in most probate estates, there is very little activity after the first year. The majority of the tasks include notifying the creditors, paying debts and final expenses, and transferring assets from the deceased’s name to the probate estate and later to the beneficiaries under the will. If there are no Federal and State Estate Taxes due, most estates, barring the unforeseen, can be closed within a year after they are opened.
As previously noted, the Personal Representative has obligation to conduct the business of the decedent in his or her place. These duties include notifying the various creditors, including the institutions which have issued credit cards, loans, rental agreements, etc. to the deceased. The current claim statute requires that the Personal Representative formally send a notice to each of the deceased’s known and possibly potential creditors (i.e. any person or company that the deceased may owe or have owed money to at the time of his or her death). The law requires that you review the deceased’s papers to discover who these creditors may be. These creditors have four months, after the date of the publication of notice, to file claims against the estate. The Personal Representative may also be involved in selling the deceased’s home, getting appraisals for household goods and collections, disposing of the deceased’s clothing, etc.
The Probate Court requires that an Inventory of the deceased’s assets be prepared and submitted to the Court for review. This inventory must list all of the assets that were in the deceased individual’s name, valued at the date of death. It does not include assets that were joint with another, such as a spouse or child, assets in the name of a Trust, or assets with a beneficiary designation (such as life insurance policies or retirement accounts). The Inventory is due 91 days after the probate estate has been opened, or from the date on the Letters of Authority. If the Personal Representative needs additional time to gather information regarding the deceased assets, a preliminary inventory can be presented to the Court and amended at a later date. The Probate Court will require that an inventory fee, based on the value of the inventory, be paid before the estate is closed.
Distribution of Assets
After all the probate estate assets have been collected and retitled in the name of the deceased’s estate and all the taxes which have been determined to be due have been paid, the probate estate is ready to be distributed according to the terms of the Will (or state law, if there was no Will). Closing statements and receipts from the beneficiaries will be required by the county probate court before the fiduciary will be discharged and the probate estate closed. If there was a “pour-over Will” (a Will which assigns all the assets to the trust), the Trustee will give the receipt from the trust to the Personal Representative to file with the court. Otherwise, the final orders issued by the court will enable the assets to be retitled in the beneficiary or devisee’s name. The probate process is now completed.
The Trust Estate
If the decedent had a trust and assets were registered to the trust, the successor Trustees must re-register the assets in their name as successor Trustees and obtain a new Federal Identification Number. Court intervention is usually not necessary. Some institutions will require that a Certificate of Trust, or other additional documents signed by the successor Trustee, be submitted along with the re-registration request.
If there is a probate estate and the will “pours over” to the trust, the successor Trustee will eventually take title to the assets that are now in the probate estate.
The length of ongoing administration of the trust depends on terms of the trust. If the trust distributes income and principal to a beneficiary, and, at the death of the beneficiary distributes the remaining assets to others, the trust, of course, could continue for years.
The Trustee, during the administration of the Trust, follows the terms of the Trust instrument in connection with investments, distribution of assets, accounting, etc. You should become familiar with these terms. As the language in a Trust frequently not in “plain” English, you should call our office with any questions.
Keeping Beneficiaries Informed
As part of your fiduciary duty, you are required to keep the beneficiaries informed about the administration of the estate. The Trust will set forth the specific guidelines that you must follows. However, even if the trust is silent, the law requires that, within twenty-eight (28) days of the Settlor’s death, you must inform each beneficiary, in writing of:
a. The Trust’s existence;
b. The court where the trust is registered (if it is registered);
c. The trustee’s name and address;
d. The beneficiary’s right to receive a copy of the trust terms that describe or affect his interest; and
e. Relevant information about the trust property (i.e., a list of the assets you are managing, their location and value, etc.)
At least once a year, you must provide an accounting to each beneficiary. The accounting must include:
a. All significant transactions affecting the trust;
b. The value of the assets; and
c. All gains and losses during the accounting period.
Payment of Decedent’s Final Tax Liabilities
Whether or not a probate proceeding is commenced, the decedent’s final Federal, State and local tax liabilities must be paid. Those tax liabilities may include income, intangibles and single business taxes. These taxes will be paid by the Personal Representative if a probate proceeding is commenced. If a probate estate is not opened, then they will generally be paid by the Trustee of the decedent’s revocable living trust.
The filing date for decedent’s final returns are as follows:
1. The decedent’s final Federal, State and Local Income Tax Returns must be filed by the 15 th day of the fourth month after the end of the decedent’s tax year in which he or she died. This is usually April 15 of the calendar year after decedent’s death.
2. The decedent’s final Michigan Intangibles Tax Return must be filed by the 30 th day after the decedent’s tax year in which he or she died. This is usually April 30 of the calendar year after decedent died.
3. The decedent’s final Michigan Single Business Tax Return must be filed by the last day of the fourth month after the date of decedent’s death.
Payment of the Federal Estate Tax
Within nine months after the decedent’s death, the Federal Estate Tax Return must be filed, and any tax due paid. Generally, the Federal Estate Tax Return will not have to be filed if the decedent’s estate (which includes all assets regardless of how titled) is under $1,500,000.
When the Federal Estate Tax Return cannot be filed within 9 months of the date of death, then an extension must be obtained. However, an estimated tax payment will be required to be paid with the extension request.
The IRS will audit the Federal Estate Tax Return after it is filed. If the return is taxable, then a field audit may be done by IRS personnel from the Detroit Office. The audit may be perfunctory and may not require the involvement of the Personal Representative or Trustee. The IRS will issue a closing letter when the audit is completed. It generally takes six months to two years to receive the closing letter, whether or not there is an audit. However, if the IRS and the fiduciary do not agree, the process can take longer. The Federal Estate Tax closing letter is needed to close the probate estate.
Estate and/or Trust Tax
The Personal Representative (when there is a probate estate) and the Trustee of the decedent’s revocable living trust (if a trust agreement was executed) each have fiduciary tax reporting obligations. The Personal Representative and the Trustee each have the following tax reporting obligations:
1. The Federal and State Fiduciary Income Tax Returns must be filed by the 15 th day of the fourth month after the end of the estate’s of trust’s tax year.
2. The Fiduciary Michigan Intangibles Tax Return must be filed by the 30 th day after the end of the estate’s or trust’s tax year.
3. The Fiduciary Michigan Single Business Tax Return must be filed by the last day of the fourth month after the end of the estate’s or trust’s tax year.
Distribution of Assets
After all the probate estate assets have been collected and retitled in the name of the deceased’s estate, all the taxes which have been determined to be due have been paid, the probate estate is ready to be distributed according to the terms of the Will or state law, if there was not a Will. Closing statements and receipts from the beneficiaries will be required by the county probate court before the fiduciary will be discharged and the probate estate closed. If there was a “pour-over Will” (a Will which assigns all the assets to the trust), the Trustee will give the receipt from the trust to the Personal Representative to file with the court. Otherwise, the final orders issued by the court will enable the assets to be retitled in the beneficiary or devisee’s name. The probate process is now completed.