When you are tasked with settling someone else’s estate, you are in for a world of paperwork and bureaucracy. It should not be this way after death, and you should not have to handle such mundane tasks while you are grieving, but it is a matter of legalities.
When you know the steps to follow, the process of settling someone’s estate because much less overwhelming. To settle an estate means that you protect your loved one’s property, pay any debts or taxes that are left behind, and distribute your loved one’s assets as dictated by the Last Will and Testament.
Please note that this article is only meant to be a general overview of the process. The laws in your state may vary. It is always recommended that you consult an estate attorney to be sure that you are complying with the laws of your state as you finalize your loved one’s estate.
There are a variety of tax issues that you will have to deal with. You will need to gather specific paperwork before you begin this process. A financial advisor or your attorney can tell you what you need and where you might locate it. If your loved one’s death was expected, he or she may have already begun to gather this paperwork for you.
Estate tax is the tax that is owed on all property owned by the decedent at their time of death. For the specific year, you will find that there is a federal estate tax exemption. This amount changes yearly so do not rely on past years’ information. For example, in 2012, the exemption was $5,120,000 and maxed out at 35%. Anyone whose estate was valued in excess of this amount owed federal estate taxes.
One of the best things that you can do financially is to have an appraisal of the property. This will provide accurate values. You may also be subject to a state estate tax, and an appraisal will come in useful. Many states have abolished the estate tax. Be sure to check with your state’s tax department to determine if you are responsible for this type of filing.
When a person dies, they are not exempt from filing an income tax return. You must do this for the person. The return will run from the beginning of the year up to the date of your loved one’s death. If the decedent was your spouse, you may file a joint return on behalf of the both of you.
You will be responsible for filing a fiduciary tax return for the rest of the year. This return begins with the date of your loved one’s death and ends on the last day of the year. You will include any income earned by the estate or trust. For example, if your loved one owned rental property or sold goods or services in subscription form, these would be considered income paid to the estate. A fiduciary return can be slightly confusing for anyone who has not filed one previously. Consult your estate attorney or an accountant for assistance.
Capital Gains Taxes
Capital gains taxes are appreciation based. For instance, if the decedent purchased stock that was valued at $100,000 and sold it during the year of their death for $200,000, there is a capital gain of $100,000. There is a 15% federal tax that that profit is subject to. There is also a capital gains tax in each individual state that you will be responsible for.
On the other hand, if the person holds onto those same stocks and the family immediately sells them for $200,000, there is no capital gains tax applied. It is only when that value appreciates between the time of your loved one’s death and the time of sale that you will be subject to a 15% tax.
Because laws and regulations can be difficult to follow for the lay person, it is always advisable to consult your attorney before you sell any property that you have inherited. Your attorney can tell you if you will be subject to a capital gains tax due to the sale.
It is typically not advisable to cancel most insurance policies immediately. Your situation may differ, however, and you should determine if it is in your best interest to cancel policies or maintain them.
Homeowners policies and renters insurance policies should be maintained as long as the property remains in the estate. This will protect the estate in the case of damage, loss or lawsuits. Many people are not aware that canceling the policy may actually be a violation of their fiduciary duties.
What you should do, whether or not you are canceling the policy is to make sure that you notify the insurance agency of your loved one’s death. Do this in writing. In your letter, ask that the estate be listed as a “named insured.” This gives you the same rights and responsibilities as your loved one had under the policy.
If you keep your loved one’s car, you will need to maintain insurance according to the laws of your state. If the car will not be used, or if you plan on selling it, contact the state DMV and register the vehicle as “planned non-operation.” This allows you to cancel the policy and save money for the estate.
If you decide to maintain the policy, ask the insurance agency if you will be given “permissive use.” This clause locks in the rate that the decedent had been paying prior to death.
There are many financial details that will need to be taken care of after your loved one has passed away. If you are named as the executor or administrator of the estate, this responsibility will fall on your shoulders. If, at any point, you are unsure of what steps to take, contact your family’s attorney or an estate attorney for legal advice.
Updated: October 2, 2014