As the first half of 2020 comes to a close, we mark a dark milestone: over 135,000 COVID-19 deaths. Each death is a tragedy for the family and friends of those individuals. A less widely discussed outcome is that now more than 135,000 people, often family members of the deceased, find themselves stepping into the role of estate executor.
While acting as an executor is one way for a loved one to pay their respects, it presents a need for patience and diligence for those unaware of its requirements. To help ease the burden, we’ve outlined ten common steps for you.
For purposes of this article, we are assuming that the deceased died with a will—you can’t be an executor without a will naming you as such—and hopefully you knew ahead of time that you were selected. Many of the steps below still apply if the deceased did not have a will. State intestacy laws will determine who will take on the responsibilities of an executor (called an administrator or personal representative, depending on your state) and will dictate how the assets will be divided.
1. Locate the Will
This might seem like a no-brainer but, according to a recent study, 68% of adults do not have a will. And, if there is a will, it can be challenging to track down. If you do not have a copy already, start by checking typical locations in the home; a filing cabinet, fire safe or desk drawers can be a good place to start. If you don’t find a will, you may come across contact information for a bank, financial advisor, tax preparer or attorney to contact to help you track it down.
2. Locate the Assets
Similar to locating the will, finding the assets may not be as straight forward as you would think. Ideally, detailed balance sheets and cash flow statements were maintained, however handwritten notes or where the deceased stored their mail would be the next steps. If the deceased worked with a financial advisor he or she might have recorded an inventory, or their tax preparer could have a record of accounts that processed recent withdrawals or income. And then there are physical assets, collections and other items of value (whether monetary or sentimental) that are named in the will.
3. Work with the Estate Beneficiaries
As the executor, you may be in a position to communicate information and updates to the eventual beneficiaries of the estate, and you may also be a beneficiary yourself. What’s important here is thorough and documented communication. Sometimes the person who is left an account in a will is not the same person that is named as the beneficiary. This can happen when either the will, or the beneficiary designation is not checked and updated regularly. Because beneficiaries are often family members of the deceased dealing with the loss of a loved one, emotions can be close to the surface and conflicts can arise. Here, guidance from the estate attorney helping settle the estate is important, and delivering information to those who have a right to it promptly and clearly.
4. Identify Assets with No Beneficiary
All the considerations above presume there were named beneficiaries on all the assets making up the deceased’s estate. Life insurance policies and qualified investment accounts often do, however not always, and a communication with the custodian of these assets will be necessary after delivering them the death certificate. No matter how detailed your will is, there may be assets that are not specifically included—items like vehicles, savings bonds or stock certificates, valuables and other possessions. This introduces probate or possibly intestate process and its negative connotations.
5. Handling Individual Retirement Accounts (IRAs)
The deceased’s IRA or 401(k) may be their largest asset. These types of assets can have complicated distribution requirements and tax consequences when inherited. With tax-deferred accounts, the beneficiary will owe income taxes on any distributions from the account. There may be a requirement to verify that the deceased took out that year’s required minimum distribution. As executor, you can allow the beneficiary to work directly with the custodian on these accounts. And, given RMD rule changes for 2020 and changes imposed by the SECURE ACT, it may be best to defer to tax advisors both on the executor’s duties, and that of the beneficiary’s options.
6. Expect Tax-Related Questions
Generally, taxes must be filed for the deceased in the year of death. But the issue of taxes comes up more broadly from beneficiaries asking about estate tax and taxes on distributions. Unless you happen to also be their tax advisor, you should recommend that they talk to their tax advisor to understand the tax implications of their inheritance.
You may get questions about estate taxes. For an estate to be subject to federal estate tax, it needs to exceed $11.58 million for a single individual or $23.16 million for a married couple. But many states have their own estate or inheritance tax laws with much lower thresholds—$3 million in Minnesota and $5 million in Maryland, for example.
Other tax questions that may come up include how inherited IRA and annuity distributions are taxed, and capital gains taxes, including whether the asset in question received a step up in basis. Because tax issues get complicated quickly, you’ll want to consult your tax advisor and should recommend that beneficiaries do the same.
7. Stay Organized
The process of settling an estate can be long and, as an executor, your work could be scrutinized both during and after the estate settlement process. Set up a system to organize the paperwork that will start to pile up, and stick with that system. For example, you might create one binder for each beneficiary, with a tab for each asset. Or, you could organize each asset and liability into its own folder. Regardless of the approach you take, keeping notes from any discussions, copies of emails, records of when action was taken and any associated paperwork is a good idea.
8. Hire an Attorney
If reading this has you wondering if you’re up for the task, you’re not alone. You may decide you want an attorney to help you with the process. The question on whether to hire an attorney can focus on the cost, and whether you will be able to show the beneficiaries value for the added expense. One potential benefit of hiring an attorney is that the process may go more quickly when left to a knowledgeable professional. If you do hire an attorney, plan to document all the services and expertise the attorney provides.
9. Dealing with a Trust
Thus far the discussion has been interpreting the deceased’s will and asset statements. If an estate contains a trust, you will find yourself with another document to interpret. Generally speaking, the presence of a trust should help the asset organization process, however built in to that trust may be complex ongoing wishes of the deceased related to how the assets should be managed, such as for the benefit of another individual, or restricting certain investments. Reading this trust document will be vital should it exist.
10. Learn From the Process
Many people who have acted as an executor express a newfound motivation to organize their own financial plan and estate documents. Taking the time now to document your wishes, obtain needed legal documents and create an inventory of your financial assets and any advisors or professionals you work with can make the process easier for your loved ones later.
Further guidance is likely needed on all of these topics, so work with your financial advisor, tax professional and attorney to coordinate your duties as an executor. If you’re ready to organize your financial life, an advisor can help guide you through the process; contact an advisor today.
CFP®, CLU®, Series 7 Securities Registration,1 Series 66 Advisory Registration† Brian has almost 20 years of experience in the financial services industry, focusing on retirement planning, investments and insurance protection for individuals of all asset levels. He also has a special interest in assisting individuals who work in the public sector. A passionate educator, Brian enjoys sharing his in-depth knowledge through TV appearances, public speaking...Read More