Corporate Law Estate Planning Litigation Team Real Estate

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What Every Executor/Successor/Trustee Ought To Know

• What To Expect
• How To Prepare
• Getting Professional Help

Introduction
Don’t Be Intimidated by "Probate"
Preliminary Matters
Know How to Locate the Will
Estate Planning Binder
First Days and Weeks After Death
See That Funeral Arrangements Are Made
Locate and Read the Will
Obtain Guardian for Minor Children
Petition for Appointment as P.R.
Notify the Internal Revenue Service
Identify and Evaluate the Assets
Locate the Assets
Preserve the Assets
Classify and Value the Assets
Pay Claims, Expenses, and Taxes
Establish and Estate Checking Account
Decide When and Which Bills to Pay
Liquidate Assets as Needed
Compute, File and Pay Taxes
Distribute the Remaining Assets
Nonprobate Assets
Personal Effects and Motor Vehicles
Probate Assets
A Final Word

INTRODUCTION

A good friend or a member of your family is having a will drawn up and asks you whether you would be willing to act as the executor. You feel honored by this request, and you give your consent. Or, perhaps someone close to you has passed away, and the time has come to assume your executorial function. You may be wondering exactly what the extent of your obligations will be, how much time your duties may demand, and where to go for help in fulfilling this important role.

This booklet is intended to give you an overview of the estate administration process, focusing on the executor’s responsibilities to gather estate information, pay debts, expenses, and taxes, and distribute the assets of the estate in accordance with the wishes of the deceased. It is not intended as a do-it-yourself manual or as a substitute for local legal or tax advice, but it may give you some idea of the duties that you can perform on your own, and it can help you to be an informed client.

It may be that the decedent created a revocable living trust during his/her lifetime and named you as the successor trustee. Many of the responsibilities described below, as those of the executor will, in fact, be the responsibilities of the successor trustee. We will counsel you accordingly as we assist you in the process.

Don’t Be Intimidated by "Probate"

Many people think that estates may be required to "go through probate", but they may not know what this process entails, and as a result may be intimidated by the idea of becoming involved in it. In Illinois, "probate" refers to the series of legal procedures that attempt to see that the debts, taxes and expenses of its deceased residents will be paid and that the remaining assets will be distributed to the rightful heirs or beneficiaries.

For over a decade, Illinois has allowed independent administration of a decedent’s estate. If our office has written the decedent’s will, the will makes reference to this option. Independent administration means that the administrative procedures will not be overseen by a particular court in the county in which the decedent lived, usually known as the "probate court".

The description of the probate process included in this article is intended to give you a general idea of what you are likely to encounter, although you should keep in mind that the specific procedures vary from county to county. As the executor, you have the right to hire experts to help you undergo probate and complete your other duties, and you are entitled to charge reasonable fees to the estate. The size and complexity of the estate, as well as your own level of expertise in handling financial and tax matters, will determine the extent to which you will need the assistance. Besides reimbursement for your out-of-pocket expenses, you will probably be entitled to receive a fee for your own services as executor. Illinois provides for a reasonable fee. Of course, you may choose to waive this fee is you so desire.

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PRELIMINARY MATTERS

Once you learn that you are named executor in a living person’s will, it may be a good idea to make a tactful attempt to gather some general information about the will writer (known as the testator).

Although most people are understandably concerned that their private affairs, including the contents of their will, remain private, there is a certain amount of information that an executor should have. Because the testator’s trust in you has been shown by the fact that you were chosen to perform this important role, you probably can comfortably ask certain limited questions.

Know How to Locate the Will

Although some testators may voluntarily share information with you regarding their wishes for disposition of their property, is is not necessary for you to know the particular property or percentage of the estate that will be passed to the beneficiaries. However, you should know the location of the original copy of the will and have some idea of how to retrieve it when the proper time comes. The testator may tell you that it is stored in a safety deposit box (and tell you the name of the bank or savings institution, and possibly the location of the key stamped with the box number), or that it is among his or her personal papers at home. In addition to the location of the will, it is wise to know the whereabouts of close family members who are the likely beneficiaries under the will. If you are a member of the family yourself, you probably already have the information you need. Otherwise, you might ask the testator for names, addresses, and phone numbers of close family and friends.

Estate Planning Binder

One of your major duties as executor will be to locate and gather together the assets of the estate. Although you may have some idea of the general nature of the estate through your relationship with the testator, the best way for a testator to be sure that none of his or her assets are overlooked is to prepare a detailed summary of assets. If our office assisted the decedent, he may have organized this information in his Estate Planning Documentation Binder. The Binder should be kept in an accessible place so it can be updated on a regular basis, and its existence and location should be made known to the executor and perhaps to other close family members. It might include:

Names, Address and Phone Numbers of:

• Family and Friends
• Attorney
• Accountant
• Banker
• Stockbroker
• Insurance Agent
• Funeral Director
• Doctor
• Clergyman
• Employer/Business Associate(s)

Location of:

• Birth, Adoption, Baptismal Certificates
• Marriage Certificate
• Divorce Decree or Separation Agreement
• Will (Original Copy)
• Safety Deposit Box & Keys
• Bank Passbooks
• Brokerage Statements
• Income Tax Returns
• Gift Tax Returns
• Household Inventory
• Military Service Records
• Social Security Number and Cards
• Employment Records
• Diplomas, Educational Records
• Medical and Health Records
• Cemetery Site Deed
• Passport
• Citizenship Papers

Detailed Inventory of Assets and Liabilities:

• Bank Names, Addresses, Account Numbers
• Savings Bond Denominations, Numbers, Location
• Stock Names, Location of Certificates, Number of Shares, Purchase Price
• Corporate or Government Bonds, Location, Purchase Price
• Mutual Fund Names, Number of Shares, Purchase Prices
• Real Estate Descriptions, Dates of Purchase, Purchase Prices, Location of Deeds
• Pension/Profit Sharing Account Information
• Insurance Companies, Policy Numbers, Location of Policies, Face Value of Policies
• Motor Vehicle Descriptions; Location of Titles
• Valuable Personal Property (Jewelry, Art, Collections, etc.): Description, Location, Value
• Mortgage Amount; Name and Address of Creditor
• Other Loans: Amount; Name and Address of Creditor
• Credit Card Companies, Account Numbers

The Binder may also contain copies of funeral arrangements and instructions as to disposition of particular personal effects. If the testator does not have a Binder, and does not respond to your suggestion that he or she may want to create one, you will still need to get some idea of the testator’s record-keeping habits and the location of important documents.

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FIRST DAYS AND WEEKS AFTER DEATH

See That Funeral Arrangements Are Made

Funeral arrangements are generally made by the surviving spouse, children, or other family members rather than by the executor as such. The deceased person’s (decedent’s) wishes should be respected if they are known, but do not have to be carried out if they are unreasonable or financially burdensome. Obviously, such instructions cannot be binding. In making final arrangements, the question of anatomical gifts should be considered. Under the Uniform Anatomical Gift Act, organ donations or gifts of the entire body for medical research made by the decedent must be honored by the survivors. The gift should be made by means of an Organ Donor Card, otherwise it may be impossible to respect, since organ donations must take place within a few hours after death.

Although the executor does not necessarily make the funeral arrangements, he or she is responsible for keeping track of the expenses and paying the bills from the estate’s assets. Virtually any reasonable funeral expenses that were incurred within nine months of death are payable from the estate. If a relative or friend pays the funeral director, he or she will ordinarily be entitled to reimbursement from the estate. Deductible expenses are determined under state law, but generally include all costs for preparation, transport and burial of the body; costs of conducting memorial and burial services, including any traditional meal for family and friends; and cost of travel, meals, and lodging for the person who is in charge of making arrangements. Funeral expenses are given priority when an estate has limited assets, and under federal tax law and the laws of most states, they are paid before any other obligations, except expenses of administration, such as court costs, attorney fees, and executor fees. At the time funeral arrangements are being made, it is a good idea to order a number of certified copies of the death certificate from the funeral director. These certificates may also be obtained from the county health department. You will generally need a separate certified copy in order to effect a transfer of each piece of real estate, motor vehicle, stock certificate, bank account, etc.; to obtain insurance proceeds and death benefits; to gain access to safe deposit boxes; to complete tax returns; and for numerous other reasons. At least ten copies should be ordered.

Locate and Read the Will

You have an obligation to locate and retrieve the original will. It is hoped that your prior communications with the decedent revealed its locations; if not, you should thoroughly check all logical places before you can conclude that no will exists. The individual in possession of a will is required under Illinois law to file the will with the probate court within 30 days of the decedent’s death. Once the will is filed, anyone including the executor, may obtain a certified copy from the county probate clerk upon payment of a fee. If the will was stored in a safety deposit box, you might be permitted to open the box if you have obtained the key and if you were a joint signatory on the box, or if another person who is a surviving joint tenant of the box accompanies you. However, you may have to file a petition with the probate court to open the box in order to search for the will if no signatory can be located. Another common place to find a will is among the decedent’s personal papers at home. Once the will is located, you may read it in the presence of close family members, or you may read it in privacy and send a photocopy or a summary of relevant provisions to the beneficiaries and to any legal heir who were passed over by the will. Under modern practice, there is no requirement for a ceremonial reading of the will. It is a good idea to first make several copies for ready reference.

Obtain Guardian for Minor Children

If there are minor children who are left orphaned by the decedent, a guardian must be appointed for them by the probate court as soon as possible, since minors cannot receive medical treatment or enroll in school without the consent of a parent or guardian. For this procedure you will need the assistance of one of our estate planning attorneys. Where both parents are deceased, the court will almost always respect the nomination of guardian(s) made in the will, if the nominee is able and willing to serve. However, if the decedent is a divorced parent, and the other natural parent is still living, custody will almost invariable be awarded to the surviving parent, regardless of the nomination made in the will of the first parent to die. An exception would occur where the surviving natural parent is shown to be unfit or declines to act. The court will also appoint a "guardian of the estate" to manage the assets until the child reaches the age of majority (i.e. 18 years of age). This conservator may be the same person as the guardian of the child’s person.

Petition for Appointment as P.R.

The executor must petition the probate court for appointment as the decedent’s Personal Representative (P.R.). You will probably need the assistance of one of our estate planning attorneys in petitioning to be appointed the decedent’s P.R., and to receive Letter Testamentary (also known as Letters of Authority or Letters of Office). These "Letters" are certified court orders proving that you have the legal power to "stand in the shoes" of the decedent and manage his or her affairs and assets. You will need copies of the Letters to show to persons holdingassets of the deceased, debtors, creditors, donees, and others so that they will comply with your requests.

Assuming independent administration is requested, the legal fees for the entire "probate" process will normally not exceed one thousand ($1,000.00) dollars. Obtaining such Letters will probably take at least 30 days. The procedures for initiating probate and obtaining Letters Testamentary generally involve filing a petition form with the court; publishing notice of death and notice of petition for appointment as P.R. in a local newspaper; mailing notices of death and of your appointment to heirs and beneficiaries. If the will did not specify otherwise, you will probably be required to post bond to protect interested parties against possible negligence, fraud, or embezzlement. The bonding premium is based on the total value of the probatable assets, and is an administration expense chargeable to the estate. Your estate planning attorney can help you to arrange this coverage.

Personal Representative’s Duty of Care

If all procedures have been properly completed and if no one contests the will, you will receive Letters Testamentary. You now have the legal authority and the responsibility to conduct the decedent’s business affairs as he or she would have done, had death not occurred. However, there are a few restrictions on your powers. You have a duty to use the care and skill that an ordinarily prudent person would use with respect to his or her own affairs. As executor, your basic function is to marshal assets, and to liquidate and distribute them as speedily as possible. The total period of administration, from time of death to final closing, typically ranges from six to 18 months, depending on whether full probate and/or a federal estate tax return is required. If you retain an asset beyond a reasonable time and the estate suffers a loss, you can be held liable. You also run a risk of liability if you retain cash too long without putting it in an interest-bearing account. Your power to make investments will be restricted under state law, although the will may provide you with greater powers. Furthermore, when choices and elections are to be made, you must not seek to maximize your own advantage at the expense of the estate as a whole, particularly if you are also a beneficiary. At a minimum, this means you may not buy an estate’s asset. If in doubt as to the propriety of a particular action, you should seek advice from our estate planning department.

You will also be responsible for filing and paying applicable federal and state taxes on a timely basis. You will be held personally liable for failure to fulfill these duties, under both federal and state law. There are also numerous criminal penalties that can be imposed on an executor for willful and deliberate violation of the tax laws.

Notify the Internal Revenue Service

Upon assuming the role of executor, a decedent’s representative should notify the IRS of his or her capacity in acting for the estate on Form 56, Notice Concerning Fiduciary Relationship. Filing this form is not mandatory, but is is suggested if you live at an address that is different from that of the deceased.

Until this form is received, the IRS will continue to send the decedent’s mail, including any important tax notices, to his or her former address. You will also need to obtain a federal tax identification number for the estate. To do this, you file IRS Form SS-4, Application for Employer Identification Number. Within 15 to 30 days, you should receive a number from the IRS. This number is required on the estate income tax return just as an individual income tax return would require a Social Security number.

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IDENTIFY AND EVALUATE THE ASSETS

Probably the most difficult, but also the most important, duty you have as an executor is to find the decedent’s assets, list them in an organized fashion, and assign them their proper values. Doing this involves systematically going through virtually everything that belonged to the decedent at the time of death, and creating an itemized inventory. If estate tax or state death taxes apply, you will need an inventory for tax purposes. And finally, the estate assets cannot be properly distributed according to the will until their nature and value are known.

Locate the Assets

If the estate is complex, the decedent’s will probably name a corporate or professional co-executor, such as a bank. In this situation, your duties will be far fewer than if you were the sole executor. Nevertheless, you will ordinarily be asked to locate and provide records, including the following:

• Bank records
• Canceled checks
• Income tax returns for the last three years
• All prior gift tax returns
• Insurance policies and appraisals
• Medicare information
• Salary records for any employees
• Business records
• Credit cards and statements
• Securities and brokers’ statements
• Deeds, mortgages, etc.
• Information as to jewelry, art and other valuables

In the majority of cases, where the estate is about average in size, it is likely that you will be doing much of the inventory work yourself. Depending upon how well or how poorly the decedent’s records were organized, you should be prepared to rummage through every room, chest, desk drawer, and "secret hiding place" you can discover in your search for valuable assets.

Sources of Information

If the decedent left an updated Estate Planning Documentation Binder, your task will be simplified, although you should still check carefully to be sure nothing was overlooked. A good place to start is with the prior year’s income tax return. This should list most income-producing assets and a wealth of other information about the decedent’s financial affairs; furthermore, other substantiating records are often kept in the vicinity of the tax forms. Another excellent source of information is the decedent’s checkbook and file of canceled checks for the previous year. Look for payments made for investments, insurance, debts, mortgages, medical expenses, tax payments, vehicle registration fees, and safety deposit box rental fees. Identifying the source of deposits can also give you needed information. It is a good idea to monitor the decedent’s incoming mail for at least six months, and possibly a full year. Checks for dividends, pensions and payments of various types owed to the deceased; bank or brokerage statements; insurance premium notices; and charge accounts bills, etc., all provide clues as to the decedent’s assets and liabilities, and some of these are sent out only on a quarterly, semiannual, or annual basis. You can probably have the decedent’s address changed to your own address if you provide the local postmaster with identification and a copy of your Letters Testamentary.

Safe Deposit Box

You will also need to locate and inventory the contents of the decedent’s safe deposit box(es), if any. You may find a small flat key with a number imprinted on it among the decedent’s personal belongings, and you may also find a statement or a canceled check for the yearly rental fee from the depository institution. If not, you may have to check all banks at which the decedent maintained an account. If you cannot locate any boxes, but still feel that the decedent had one, TASDA, a national organization located in Greenwood, Indiana (317-888-1118), will canvas its member banks and savings institutions for boxes in the name of the decedent or even under an alias. There is a fee for the service, which may take a number of months, and you will be required to show documentation of your authority for requesting it. Once you have determined the institution at which the box is located, you may contact it for further instructions as to how to obtain access to the box. If the key cannot be found, a charge may be imposed since the lock may have to be replaced. Ordinarily, the box will be opened only for the surviving joint tenant, or for the court appointed personal representative. Safe deposit boxes are the usual receptacle for important papers such as deeds, insurance policies, stocks and bonds, and promissory notes. They may also contain actual assets such as jewelry, coin collections and cash. Any time you anticipate that cash may be found, whether in a safe deposit box or secreted somewhere among the decedent’s belongings, you should have at least one witness watch you open the receptacle and to sign a statement as to the amount that was found.

Preserve the Assets

As you go through the decedent’s papers and effects, your first concern must be to prevent the destruction or deterioration of any assets you discover. If there is a residence that will be unoccupied, you must make certain it is kept locked and take appropriate precautions to avoid burglary or vandalism. If there are motor vehicles, they should also be secured and kept in running condition. Valuables such as jewelry or securities that were not jointly owned but are part of the estate should be kept in a safe place, such as a safe deposit box rented in your own name. If the decedent maintained an ongoing business, you will need to decide whether to make arrangements to continue the business at least temporarily or to close it down.

During the period of administration, you will be taking other precautions to preserve the assets. Following are some examples of actions you may need to take, depending on the estate:

• Make sure that insurance policies on vehicles and real estate are kept up.
• Make sure mortgage payments are made.
• Make utility payments if required to keep property from deteriorating.
• File claims for Medicare, private medical insurance, or casualty insurance benefits.
• Return to the issuer any charge cards that are not jointly owned, for possible refunds of annual fees.
• Cash in unused airline tickets.
• Cancel club memberships and magazine subscriptions if refunds are available.
• Cancel any margin accounts or standing orders to buy or sell stocks or commodities with brokerage houses.

Classify and Value the Assets

As you discover assets, you must compile an inventory and assign a value to each item. The method of valuation to be used is dictated by the Internal Revenue Code under rules applicable to the feral estate tax, whether or not estate tax is eventually determined to be due. This is so because the value of the taxable (technically called "gross") estate must be determined before you can tell whether is is large enough to require the filing of an estate tax return. Generally speaking, if the taxable estate amounts to $650,000 or more as of 1999, an estate tax return must be filed even if no tax is actually owed, and the return is due nine (9) months form the date of death. Therefore, you should aim to complete your valuation within six months.

Time and Method of Valuation

Under federal tax law, all of the property owned by the decedent anywhere in the world, even property of which he or she owned only a fractional share, must be valued. The value must be determined as of the date of death, although for estate tax purposes an alternative valuation date may be used if it proves to be more advantageous in reducing taxes. The alternative date is the date six months after the date of death, or the date of sale for property sold within the six months. If the alternative date is elected, it must be used for every asset in the estate. The value of property is its fair market value. IRS regulations define fair market value as "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts."

Joint Tenancy Property

As you make your inventory of assets, you will probably identify property held in joint tenancy with a surviving spouse, an adult child, or one or more other living persons. Most types of assets can be owned jointly, although the most common are probably personal residences and joint bank accounts. Although such property is not included in the decedent’s probate estate, it must be listed on the estate tax return. As a general rule, the value of the entire property will be included in the taxable estate of the first joint tenant to die, unless: (1) it can be proven that the other joint tenant(s) contributed to the cost of acquiring the property or (2) the joint tenant was the surviving spouse. If contribution can be shown, then the percentage of the decedent’s contribution to the total acquisition costs is the percentage of the property’s fair market value at death included in the decedent’s taxable estate.

Where the only other joint tenant is the decedent’s spouse, a special rule applies. One half of the property’s value at death is considered part of the taxable estate of the first spouse to die, regardless of how much each spouse contributed to the acquisition costs.

Keep in mind that even where a safe deposit box was rented in joint tenancy, the property inside the box will not be considered to be joint tenancy property without additional evidence. Such property is considered the sole property of the first renter to die, unless you can prove otherwise.

Specific Types of Assets

The following paragraphs present the general rule of thumb methods used in valuing different types of assets. The IRS regulations contain detailed instructions for virtually every type of asset, and one of our estate planning attorneys should be consulted whenever you run into an unusual or difficult situation.

Tangible Personal Property

One type of asset included in virtually every estate, not matter how small, is tangible personal property. This category includes everything from simple furniture, clothing, and memorabilia, to major appliances, motor vehicles, and farm machinery, to art collections, expensive jewelry and antiques. The value of personal property is the price that a willing buyer would pay to a willing seller. Accordingly, if an item or group of items is not saleable, such as well-worn clothing, there is no need to list it in your inventory.

You will need to visit the location(s) of the property and make a room-by-room survey, looking for the kinds of items that could be sold for more than a minimal, "rummage sale" price. All items that could realistically be sold should be listed, although items of a similar nature with individual values of less then $100 can be aggregated. For example, dining room furniture could ordinarily be listed as a single item. If the estate is very small and you find virtually nothing that could be sold, it may be a good idea to make an inventory entry such as "Personal effect - $200" or some other nominal amount. This will show any interested parties, including tax authorities, that you did not forget to consider this category. Whenever you encounter articles with artistic or "intrinsic" value such as jewelry, furs, silverware, works of art, or stamp collections, it may be a good idea to have an expert appraise the item(s). The IRS requires a professional appraisal if any one article is valued at more than $3,000 or any collection of articles is valued at more than $10,000.

Cash and Bank Accounts

Cash in possession of the decedent as well as money deposited in savings, checking, and money market accounts or invested in certificates of deposit is accorded its face value at the time of death. Interest accrued up to the date of death is generally included in these amounts. Checks outstanding at the time of death may be subtracted from the total if they are later honored and charged against the decedent’s account. If the cash includes foreign currency or foreign bank accounts, the value should be stated in terms of the official rate of exchange on the date of death. List the name and address of each savings institution, the account numbers, and the dollar amount for each account.

Real Estate

Where the decedent owned real estate, such as a personal residence, commercial buildings, a summer or winter home, farmland, etc., a professional appraisal is almost always necessary, since under the law each parcel of real estate is unique. Under certain conditions, real property that consists of a family farm or a closely held business can be valued on the basis of actual use, when such a value is less than the value of its "highest and best" (most lucrative) use. The property’s description and location should be listed, as well as the appraised value and the basis for the appraisal. Pay particular attention to any real estate that is located outside Illinois. You may be required to employ an attorney in that state and undergo ancillary (supplementary) probate proceedings there as will as in the home state.

Stocks and Bonds

The value of publicly traded stocks, bonds, and mutual funds can be determined by reference to a newspaper such as the Wall Street Journal or New York Times for the date of death. Where the decedent was enrolled in a dividend reinvestment program, you may have to contact the administrator of the program to find out the exact number of shares and fractional shares owned at the date of death. Interest, dividends, and capital gains accrued up to the date of death must also be included in the estate inventory. If the decedent owned a very large block of stock in a single company, or shares of privately traded or closely held stock, special rules apply, and an expert appraisal may be needed to determine the value. The inventory description of each stock should show the number of shares, whether the stock is common or preferred, the issue, the par value, and the price per share. Bond descriptions should include quantity, denomination, name of the obligor, kind of bond, date of maturity, rate of interest payable, and interest due dates. The name, account number, number of shares and price per share on the date of death should be listed for each mutual fund. 

Do not try to value securities until we have provided you our Administrative Checklist, which expedites the process. Fortunately, we have access to a firm that will value the securities for (as of 8/98) $1.50 per security. To avail yourself of this service, bring the original stock and bond certificates to our office on order that we might make a copy.

Business Interests and Partnerships

The valuation of unincorporated business interests held by the deceased requires appraisal of all the assets of the business, including goodwill. The portion of the business owned by the decedent should be given a net value equal to the amount that a willing purchaser would pay to a willing seller in view of asset value and earning capacity. A valuation professional’s examination of the business will almost always be necessary. Where the decedent was a member of a partnership, the surviving partner(s) should be able to provide you with a certified statement of the decedent’s ownership interest and capital worth. The partnership may charge the estate for the cost of providing this information. For estate tax purposes, you will need to obtain a statement of partnership or business assets and liabilities for the valuation date and for the five years immediately preceding the valuation date.

Loans, Notes, Mortgages

Loans, promissory notes and mortgages held by the decedent as well as contracts to sell land are generally valued at the amount of unpaid principal, together with the accrued interest, unless you can establish a lower value or prove them to be worthless. If a note is forgiven in a decedent’s will, it is nevertheless included in the gross estate. The following information should be listed: face value and unpaid balance, date of mortgage or note, date of maturity, name of maker, description of any property securing the loan, interest dates, and rate of interest.

Life Insurance

As the executor, you should be aware of every life insurance policy on the decedent’s life, whether or not is is subject to estate tax or is part of the probate estate. If an estate tax return is filed, every policy must be listed regardless of whether is is subject to tax. If you suspect the decedent had life insurance but cannot find any information about the policy, the Policy Search Division of the American Council of Life Insurance, 1001 Pennsylvania Ave., N.W., Washington, D.C., 20004 (800-942-4242), will, without charge, ask member companies to search their files.

Your inventory description of the insurance must include the name of the insurance company, the name of the beneficiary, the face amount of the policy, the policy number, the amount of any outstanding loans against the policy, the interest on any loans, and the amount of any accumulated dividends on the policy. Accident insurance is treated as life insurance for estate tax purposes. The value of life insurance is the net proceeds received, if paid in a lump sum. If the proceeds are not paid in a lump sum (if, for example, they are payable to the beneficiary as an annuity), the value is the value of the future proceeds as of the date of death. To obtain this value, you will need to contact the life insurance company. For each policy, a company representative must complete an IRS Form 712 and return the form to you. You must obtain this form. Generally speaking, the proceeds of life insurance policies are taxable for estate tax purposes if (1) the proceeds are payable to the estate, or (2) the proceeds are payable to a named beneficiary but the insured had one or more of the "incidents of ownership" in the policy. "Incidents of ownership" include the power to change the beneficiary, to surrender or cancel the policy, to assign the policy, to revoke and assign, to pledge the policy for a loan, or to borrow against the surrender value of the policy. Even where the decedent transferred all the incidents of ownership to another person, if he or she did so within three years of death, the policy proceeds are included in the decedent’s estate. Accordingly, most life insurance proceeds will be part of the taxable estate, despite the fact that they are very likely not part of the probate estate. Insurance that a decedent may have taken out on the life of another individual is taxable for estate tax purposes to the extent of the replacement value of the policy.

Annuities

Annuities are included in the inventory because they are generally taxable for estate tax purposes, although they are not usually part of the probate estate. The amount includable is all or a portion of the lump sum, annuity, or other payment received by a survivor by reason of the death of the decedent, depending on whether and how much the decedent contributed to the plan. The term "annuity" covers a very broad range of contracts or agreements, and includes private annuities purchased by the decedent, as well as many types of employer-provided deferred compensation plans. Complex rules apply to the valuation of annuities, and you will need to contact the organization making the payments, as well as one of our estate planning attorneys, if your decedent’s estate includes this type of asset.

Gifts, Transfers and Powers of Appointment

You must also attempt to reconstruct all taxable gifts, transfers of property for less than fair market value, and powers of appointment held by the decedent during his or her lifetime. This can be a very complicated matter requiring more than a little detective work. If the decedent filed any federal gift tax returns during his or her lifetime, you must attempt to obtain a copy. If not, you must do your best to elicit information from the decedent’s family and friends.

Every individual is permitted to make a tax-free gift of up to $10,000 per year to each of an unlimited number of people. If the individual’s spouse consents to the gift, the annual amount is $20,000 per person. There are additional exclusions for gifts to pay medical expenses or tuition, but generally speaking, gifts over the $10,000 exclusion are subject to federal gift tax unless made to one’s spouse. Transfers between spouses are tax free, as are transfers of property incident to a divorce, but transfers prior to marriage under prenuptial agreements may well be taxable.

If effect, the law operates to add all taxable gifts made after 1976 to the value of the estate before computing estate taxes. Gifts are normally valued at their fair market value at the time the gift was completed, unless the donor retained a life estate or control over the property.

Miscellaneous Assets

Decedent’s estates may contain other types of assets such as rights to receive royalties on patents or trademarks, judgments in lawsuits, powers of appointment and reversionary or remainder interests. Professional assistance in identifying and appraising these kinds of assets will probably be necessary.

Small Estate Affidavit Procedure

This type of procedure typically may be used where the "probate" estate is made up of personal property not exceeding $50,000. Under the affidavit procedure, no Personal Representative is appointed. The person settling the estate, usually the surviving next of kin, signs a legal form known as an affidavit stating such things as that the statutory waiting period following the death has elapsed, that the estate does not exceed the legal limits, and that the person signing the form is legally entitled to receive the decedent’s assets. These forms are often available from the county probate court or from a stationary store selling legal forms. Parties receiving the affidavit are required to transfer the decedent’s property to the designated person. Because the probate court is not involved in overseeing the process of administration, the costs of using the affidavit procedure are low even if some assistance from one of our estate planning attorneys is required. The lack of court involvement usually results in much faster settlement. Accordingly, if your decedent’s estate qualifies, the small estate procedure will usually be most advantageous, provided that there are no serious conflicts among the beneficiaries.

Independent Probate

If the estate included any real estate or exceeds the monetary limits noted above, the affidavit procedures may not be available. However, Illinois law provides for administration independent or outside of court, in which a Personal Representative is appointed but can act much more independently than in formal "full-blown" probate. For example, you are not required to file an inventory or a report of all transactions with the probate court, or to notify all of the decedent’s creditors. Instead, you may be required only to send a final accounting of your activities to each of the beneficiaries, and to file a short closing statement with the court.

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PAY CLAIMS, EXPENSES, AND TAXES

While you are in the process of identifying the estate’s assets and creating a detailed inventory, you should also be creating a list of the estate’s liabilities. Your list may include bills such as insurance and mortgage payments, charge account payments, utility bills, payments on other outstanding loans, and bills for medical expenses, as well as expenses incurred after death for funeral expenses, attorney fees, court costs, appraiser’s fees, and your own executor’s fee. In addition, you will eventually need to compute and pay any federal or state individual income taxes, and any death or income taxes applicable to the decedent’s estate.

Establish an Estate Checking Account

Before you can pay any of the decedent’s bills, you will need to establish an estate checking account. Choose a bank or savings and loan association that is convenient to you, but be sure that it is federally insured.

You will probably want to choose the type of account that requires a low minimum balance and charges low fees, rather then the type that pays the highest interest, because this account is only a temporary "parking place" for funds during the period of administration.

If it later turns out that there is much more money in the checking account than is needed to pay the estate liabilities, state law or instructions in the will might permit you to transfer some of the money to a safe, interest-bearing account such as a savings account or a money market fund that invests solely in government securities. The account should be opened under a name such as "Estate of Mary Catherine Blake, Deceased; John Quincy Doe, Executor". The savings institution will tell you the exact format of names that it requires. To avoid delay, you may want to open the account using your personal funds which you can later recover from the estate. Once the account is opened, you can deposit all checks payable solely to the deceased, endorsing them in your name as executor for the estate of the decedent. Whenever you liquidate any of the estate assets, you will deposit the proceeds to this account. Whenever you pay an estate debt, you should use a check from this account rather than your personal check. You will be required to keep careful records regarding the source of every item that goes into the account, as well as every check you write. The size and complexity of the estate will determine the extent of the records you need to keep.

Decide When and Which Bills to Pay

Ideally, you would pay the decedent’s bills, debts and expenses as soon as it was apparent they were legitimate, thus avoiding any late payment charges. However, from a practical standpoint, you may want to postpone payment until you are sure that the estate will have sufficient probate assets to cover all expenses. Furthermore, some debts might be covered by insurance. You will want to investigate whether the decedent had credit life insurance that will cancel the unpaid balance on credit cards or credit union loans, whether mortgage insurance will cancel the unpaid balance on a mortgage, and whether health insurance will cover medical expenses. Although you might feel a moral obligation to pay the debts of a deceased relative or friend, you are not legally required to take on another person’s debts no matter how close your relationship. If the estate’s assets are insufficient, some creditors will not be entitled to be paid in full. Where a spouse and/or dependent children survive, Illinois provides for a "family allowance" of a specific amount that is exempt from creditor’s claims. Nevertheless, you will want to make timely payments for items needed to preserve the probate assets, such as continued insurance coverage and possible mortgage and utility payments. Thus, many factors must be considered before making any payments, and you may need to consult one of our estate planning attorneys to help you decide which creditors to pay and when to pay them.

If you are undergoing formal probate proceedings, you will probably be permitted to pay only those claims that are properly submitted according to whatever procedure the court requires. Claims that arrive after the state’s legal claim period may not be paid at all.

Keep in mind that only probate assets are used to pay the estate’s expenses and claims. Conversely, when you receive bills pertaining to assets that were held in joint tenancy, you must allocate the expenses between those incurred prior to death, for which the decedent’s estate is partially responsible, and those incurred after the death, which are properly the responsibility of the surviving joint tenant(s).

Illinois provides for a priority sequence that is used when an estate’s assets are insufficient to pay all claims. Liabilities are divided into classes, and all claims in the first class must be paid before any in the second, all those in the second class must be paid before any in the third, and so on.

Liquidate Assets as Needed

Where do you get the funds with which to pay the estate’s claims, expenses and taxes? You will have to liquidate the probate assets as needed, and deposit the proceeds into the estate checking account. Usually, your primary sources of funds would be those that are already in the form of cash: savings and checking accounts, and insurance proceeds that are paid to the estate rather that a named beneficiary. If these assets are insufficient to pay all claims, you will have to sell other assets such as securities, real estate, promissory notes, vehicles, and other personal property. The decision as to which assets to sell and which to distribute to the beneficiaries " as is" will rest on many factors, including tax considerations and beneficiaries’ preferences, and you may well need the advice of one of our estate planning attorneys in making this decision if the estate has insufficient liquid assets. Where formal probate is being undertaken, approval of the probate court may be required before certain assets can be sold. Your primary source in deciding which assets to sell is the decedent’s will. If the will does not provide otherwise, Illinois provides an order or priority in reducing gifts (bequests) made in the will, when necessary to pay claims.

Even when it is not necessary to sell assets to pay claims, in some instances it may be more convenient to sell them in order to carry out the distribution made in the will. For example, an unmarried decedent may have left her home to her six nieces and nephews, and the most practical way to effect this bequest may be to sell the property and distribute the proceeds. As another example, a decedent may have left shares of a number of different stocks to be divided among his four children, and distributing the shares themselves might mean that some heirs would get stocks that are appreciating in value more rapidly than others. Where the will does not contain specific instructions, the executor usually has a very broad range of discretion in deciding how to handle these situations. Make sure that you keep careful records of any sales you make. It may well happen that some items will have to be sold for less than their inventory value, and the estate’s beneficiaries may expect you to explain why.

Compute, File and Pay Taxes

As the executor, you are responsible for filing the federal, state and local income tax returns the decedent would have been required to file if he or she had lived. You are also required to file any necessary federal or state tax returns applicable to the estate itself. After death, there are three potential taxpayers: the estate, which may have to pay federal income tax, estate tax, and generation-skipping tax; the decedent, who is subject to income tax for the portion of the year before he or she died; and the beneficiaries, who may have to pay income tax when income from estate assets is distributed to them. Careful consideration must be given to the rules and the different tax rates that apply to each taxpayer and each type of tax, so that proper elections to minimize taxes may be made. For example, some deductions can be reported on one of several different forms, depending on what is more advantageous under the circumstances. The tax preparer may need to make several calculations using different alternatives before deciding which form should get the deduction.

Clearly, the job of filing tax forms is a complicated on and you may well need the assistance of one of our estate planning attorneys, particularly where a federal estate tax return is required.

Estate Income Tax Return

The estate of a decedent is a taxable entity separate from the decedent. It comes into being upon the decedent’s death, and generally continues to exist until the final distribution of the estate’s assets to the heirs and other beneficiaries. The income earned by estate assets during the period of administration is subject to income tax. Like other taxpayers, the estate is required to report its income annually. If the estate has gross income of $600 or more in a taxable year, the executor must file a federal Fiduciary Income Tax Return (Form 1041) for that year. The executor may choose to report estate income on a calendar or a fiscal year basis. The tax year selected begins on the date of death and ends no later that December 31, but the executor can select a fiscal year ending on the last day of any earlier month. Thus, the executor can spread the estate income over a longer period and reduce taxes by choosing a fiscal year end that results in a very short first tax year, a 12-month second tax year, and possibly a third tax year that is also short. If the estate is not closed within two years of the death, you will have to make quarterly estimated tax payments.

Taxable Income and Deductions

In determining what income is taxable to the estate and what is taxable to the beneficiaries, the general rule is that income that is retained by the estate during the tax year is taxed to the estate, but income distributed to the beneficiary of an estate will be taxed to the beneficiary. Thus, where the estate would pay a higher marginal tax rate than a beneficiary, it may be advantageous to distribute the income to the beneficiary as soon as possible. The beneficiary will then be required to report the income on his or her individual income tax return.

When estate assets must be sold to pay taxes or claims or to effect a distribution, any gain or loss on the property must be reported on the estate income tax form. The basis or starting point for computing gain or loss is the asset’s value at the time of death, not the price the decedent originally paid for it.

State Fiduciary Income Tax Returns

In those states that impose income taxes on individuals, the estate will also be subject to state income taxes. An estate is considered a resident of the state in which the decedent was domiciled at the time of death. In general, the federal tax rules apply in determining what basic income is taxable and what basic expenses are deductible by the estate. However, each state makes various adjustments to federal taxable estate income before arriving at the state taxable estate income base.

Federal Estate Tax Returns

As mentioned above, a federal estate tax return (Form 706) must be filed whenever the decedent’s taxable estate exceeds $650,000 (for 1999), even if it is ultimately determined that no estate tax is due. The return is due within nine months after the date of death, although extensions might be available. At 36 pages, this form is extremely lengthy and complex, and traditionally the IRS has manually examined each and every Form 706 filed. Therefore, it is almost inevitable that you will need the advice of an experienced tax professional if your inventory of the estate shows that its value exceeds $650,000. By completing the detailed inventory and valuation process described in this pamphlet, you already have much of the information needed to complete the estate tax form. The next step is to determine and claim all available deductions and credits.

State Death and Inheritance Taxes

Currently, all 50 states, the District of Columbia and Puerto Rico impose one of three types of death taxes. In the majority of states, the tax is based on the federal state death credit. In other words, money that would otherwise be paid as federal estate tax is instead paid to the state, with some adjustments. A smaller group of states impose inheritance taxes on persons receiving the decedent’s property, and an additional tax to absorb the federal death tax credit. Illinois imposes an estate tax that is similar to the federal estate tax.

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DISTRIBUTE THE REMAINING ASSETS

Nonprobate Assets

Although we have saved the discussion of distribution of assets for the end, in reality you may begin to help distribute certain assets in the first few days after the death. At the time of death, nonprobate assets pass to survivors by operation of law, independently of the will or any action by the probate court. They are not subject to claims against the estate, so they may be immediately available for use by survivors. Accordingly, when you come upon a nonprobate asset, your main responsibility is to ascertain its value for estate tax purposes and then notify the joint owner or beneficiary of its existence. Although not strictly necessary, many executors also consider it a part of their duty to help the beneficiary transfer the asset to his or her own name. Retitling the property in the survivor’s name must be done before the property can be sold, and usually involves presenting a certified copy of the death certificate to the custodian of the asset or the transfer agent. For example, where the residence was owned in joint tenancy, the surviving joint owner records a certified copy of the death certificate with the county Recorder of Deeds. A joint bank account may be retitled in the survivor’s name by filing a new signature card. Our office can help you transfer stocks and bonds, but a copy of the death certificate may be needed for each certificate.

Life Insurance and Survivor’s Benefits

Life insurance policy proceeds are often an important source of cash for survivors. Such proceeds are nonprobate assets if the designated beneficiary is anyone other than the estate of the deceased. Recovering the proceeds generally involves filing a claim form, which you have obtained from the insurance company, together with a certified copy of the death certificate. Sometimes the company will also require you to surrender the policy, or submit an affidavit stating the policy has been lost. It may be a good idea to make a copy of the completed claim form and supporting documents and to submit the claim via registered or certified mail.

The surviving family may also need assistance in filing for the social security death benefit and survivor’s benefits, veteran’s burial benefits, or any employee, union, or worker’s compensation benefits available.

Personal Effects and Motor Vehicles

Even if the decedent’s residence was jointly owned, the furniture and personal effects in the residence are not necessarily joint property. In practice, however, they are often treated as belonging to the surviving joint owner of the home or to the decedent’s next of kin, except for items specifically bequeathed to others by the will. Once you have made your inventory for tax and probate purposes, and once it is apparent that the estate’s expenses can be paid without selling off these items, the personal effects can be divided among family members according to the will’s instructions. Where the will is silent or imprecise, it may be helpful to appoint one family member to take charge of the distribution and to see that unwanted items are donated to charity or otherwise disposed of.

Probate Assets

Once all expenses, claims, debts and taxes are paid or provided for, you will be ready to distribute the probate assets that remain and settle the estate. Of course, the instructions in the will govern this process.

When the estate is large or complex, the process of planning distributions should begin very early in the administration period, with the aid of one of our estate planning attorneys. Many considerations must be taken into account. Most important are the immediate needs and legitimate demands of the beneficiaries, along with directions and limitations imposed by the will and local law. Within these boundaries, careful planning can do much to minimize taxes that would otherwise be paid by the estate and/or beneficiaries.

A FINAL WORD

As you can see, the role of executor or successor trustee is an important one, involving a wide variety of skills and requiring you to make decisions that can affect the lives of survivors for many years to come. Nevertheless, the job is manageable if you follow the steps outlined above and consult with experienced professionals as needed. You should be able to proceed with confidence, knowing that when your tasks are completed and the estate is closed, you will have honored the memory of the deceased in a very concrete way.