People typically have only a vague idea of the steps necessary to settle an estate upon a person’s death. Often they have heard “horror stories” regarding the expense and time needed to complete an estate administration. While there are certainly instances where estate settlements have dragged on for years and have cost the estate hundreds of thousands of dollars in legal fees and other administration expenses, it does not have to be that way.
Estate settlement is largely dictated by the form of ownership of the assets possessed by a deceased person (the “Decedent”). Assets owned in the Decedent’s individual name are typically subject to the probate process, whether or not the Decedent has executed a will. But for many people, a significant portion of their assets are not owned in their individual name. Rather, assets may be owned jointly with another person, or the assets may pass to one or more persons who are the named beneficiaries designated to receive the assets at the Decedent’s death (for example, a bank account that includes an “in trust for” designation). All such assets will not pass as dictated in the Decedent’s will, but instead will pass to the surviving joint owner or the designated beneficiary outside of probate.
Assets held in a revocable or irrevocable living trust will be distributed as provided in the trust document, and will not be subject to the probate process. This result can be especially helpful when a person owns real estate in more than one state, or desires to disinherit children or other close relatives. If the trust is fully funded by the client during his or her lifetime, the probate process can be avoided and there will be no legal requirement to notify potentially litigious children or other relatives about the nature of the Decedent’s assets and dispositive wishes.
Whether a will or a trust has been used as the foundational estate planning tool, all estate administrations must follow certain procedural steps. These steps include income tax return filings, and possibly the need to file federal and state estate tax returns. Since a probate estate is a taxpaying entity, the executor of a probate estate will obtain a federal taxpayer identification number for the estate. Trustees of any trusts created by the Decedent will also need to obtain taxpayer identification numbers for those trusts. Whether the estate and/or trust(s) will owe federal or state income taxes depends upon the types of assets owned by the various entities, and the income produced.
Estates for New York Decedent’s owning assets of $1,000,000 or more – which amount includes the death benefits for any life insurance policies owned by the Decedent insuring his or her own life -- will need to file a New York State Estate Tax return, while estates for Decedents owning assets of $5,000,000 or more will need to file a Federal Estate Tax return as well. Whether any estate taxes are ultimately due depends upon many complex factors, especially whether the Decedent is survived by a spouse, and how the assets are to be distributed upon the Decedent’s death. Even in cases where no estate taxes are owed, the returns must be filed if the minimum asset threshold is reached.
One caveat: people have often been led to believe that if you have a living trust, the estate settlement requirements will not apply to your estate. While a fully-funded living trust will "avoid probate," all other estate administration requirements described above will apply. While living trusts can be exceptional planning tools, establishing one with the objective of avoiding post-death administration (and all associated expenses) is unrealistic. Ignoring the formalities of the estate administration process based on such misinformation can lead to trouble down the road, which may include the IRS or New York State assessing interests and penalties for the failure to timely file the requisite tax returns and pay the required amount of taxes.