When a
Loved One Passes Away
The
experience of facing the loss of someone close is always sad, somewhat
frightening, and quite confusing. For the person who must also deal with the
financial and legal implications, it carries some heavy responsibilities as
well. To assist in this area, here is an outline of what should be done from a
tax and financial standpoint in order to settle the affairs of one who has
passed away. While some of the issues are hard to face, it is for the good of
all concerned to deal with them openly.
Overview of the Process
It's
best to initially look at the whole picture. The first, and saddest decisions
come early on at the hospital shortly after death. The attending doctor has the
responsibility to sign the death certificate, and decide whether an autopsy is
required. For most states, unless the death is due to violence, or suspicious, unexplained
causes, no autopsy is performed. However, there may be instances where you
would want an autopsy done in case the cause of death may relate to an
hereditary issue. If so, your time to make this decision is limited. Similarly,
if the deceased was an organ donor, time is of the essence.
Next,
decisions must be made regarding funeral arrangements. It is important to find
out if the deceased had any specific wishes in this regard, and to coordinate
with family and friends. Following this, a number of financial and legal
decisions will be required.
The
estate of the deceased must be settled. That is, remaining net assets must be
transferred to legal heirs. This is
called the probate process. In conjunction with this, various federal and state
tax returns may be required to be filed on behalf of the deceased.
Succession
("Inheritance") Tax Returns may be required as well as a final
Individual Income Tax Return. If the
deceased has an estate that is yielding income while it is still being
probated, a Fiduciary Income Tax Return may also be required.
Lastly,
a so-called Final Accounting is done at the end to verify with the legal
authorities that all the net assets have been distributed properly after all
allowable expenses have been paid.
Within
some of these steps are important issues that should be discussed in detail.
Since the courts hold the executor of the estate responsible for proper and
timely filing of various documents, it is essential to have a good, working
knowledge of these various aspects, and due dates involved. Included at the end
of this text are several checklists that identify in detail what should be
done, and what steps must be taken in sequential
order for tax purposes.
Get Copies of Death Certificate
You will
need to submit copies of death certificates to various places, so make sure you
have a number of copies. These are provided at either the hospital, or, more
commonly, by the funeral home. The cost for extra copies averages $2-8 dollars
each. To claim insurance benefits, employer benefits, transfer of assets, etc.,
requires furnishing a copy of a death certificate.
Find the Will and Safe Deposit Box
Assuming
you know that a Will was made out, it is important to find it as soon as you
can since it may provide many important guidelines. It may contain burial and
funeral instructions; it certainly identifies the person who will serve as the
executor–the one who handles all the legal and financial matters after death.
It also may list locations of other important papers such as life insurance
policies, and safe deposit boxes. Conversely (and this is a mistake many people
make) the Will may be inside the safe deposit box, so you
will need legal authority to open the box. If you can't find the safe deposit
box, you can do a local search of the banks with the help of a lawyer, and you
can also contact the American Safe Depository Association in Indiana. They have
lists for all participating banks.
What if
you can't readily find the Will? Try asking friends or relatives if they knew
which lawyer was used by the deceased. Also, look through address books, file
cabinets, checkbooks, or storage facilities to search for clues.
How
about someone who dies without a Will? This makes things more complicated.
Unfortunately, approximately 60% of all Americans don't leave a Will, according
to today's statistics. In effect, they die "Intestate." If this is
the case, the courts will handle the matter based on the individual state law. They
will appoint an executor, and all net assets from the estate will be
distributed according to state laws, not necessarily the way the deceased may
have wished.
Contact Professional Advisors
Getting
a lawyer to handle the probate and estate process is an early priority. Most
people use the same lawyer who handled the setting up of the Will. But you are
allowed to use any attorney with whom you feel comfortable.
You
should also contact the professional who will handle the filing of the various
tax returns. A mistake most people make is assuming the lawyer handles
everything in the estate process. This is rare. While most lawyers will handle
filing the Succession Tax Returns, they do not usually handle the Income Tax Returns,
or the Fiduciary Tax Returns. These must be filed on a timely basis. So the tax
accountant should be contacted early on in order that a coordinated effort can
be made with the attorney.
Begin the Probate Process: Gathering
Information
This is
the complicated job of recording all assets and debts of the deceased, and all
the pertinent financial records to comply with the Will, the tax laws, and the
courts.
The
first step is to locate all assets and debts. As we mentioned, sometimes the
Will contains most of this information. But, even if it is listed, don't assume
it is up to date. If the Will had been made out years ago, many changes may
have occurred to increase or decrease the assets and debts of the deceased. You
must make a reasonable effort to do a preliminary inventory of the estate
within specified time periods in accordance with state laws. Finding this
information can be tedious. The information you will need comes
from many sources, including life insurance policies, bank accounts, brokerage
accounts, safe deposit boxes, stock certificates, bonds, real estate contracts,
vehicle registrations, and old tax returns, to name a few. You should also
check to see if there were any ties to various fraternal, military, or social organizations.
This
information is gathered, and a preliminary inventory is made which is used to
begin preparing the Succession Tax Returns, and to account to the Probate
court. The lawyer and/or tax accountant can assist in organizing these items.
The
second step is to arrange for the payment of various benefits that may be
available upon death of a person. Life insurance benefits, Veteran's benefits,
Social Security, IRA's, Keogh's, SEP's, and other employee-related benefits are
the main ones. Proper tax planning when it comes to the distribution of these
funds (especially IRA's) can be critical to the recipients so definitely get
tax advice here before you make the payments.
It's
important to be thorough here because these benefits are not automatic; you
must apply for them by providing proof of death, and proof of the
beneficiaries.
Life
insurance is usually the first to handle since the benefits can be distributed
to the heirs within 10 days of notification. Life insurance proceeds do not
have to go through probate (although they are subject to Estate taxes). Some
tips here: Check with the employer of the deceased for any group life
insurance. More than half of all life
insurance comes from group plans. Life insurance policies could be in the safe deposit
box. Coverage may also come from
associations, fraternal organizations, Veterans Administration,
credit card supplemental insurance (from death related to travel or accident),
bank SBLI insurance, mortgage insurance, some medical insurance policies,
credit unions, and others. If in doubt, go through the deceased's checkbook for
checks written out to life insurance companies or groups. You can also check
with the American Council of Life Insurance in Washington DC to see if any
participating companies are listed on behalf of the deceased.
Employee
benefits play an important role. Did the person have any pension, profit
sharing, stock options, or death benefits payouts available? Does worker's compensation
figure in if the person died from work-related injuries? If in doubt, ask for
assistance. Most companies have a person or department that can help you in
this area. Call them right away.
Military
benefits may be available for deceased veterans. These benefits can be in the
form of life insurance, burial insurance, pension benefits to survivors,
reimbursement for medical bills, or a lump sum death benefit. Your local VA
office can help, but you'll need to provide information on the service record.
Look for discharge papers to get this information.
Social
security benefits can be sizable if the deceased left a spouse with minor
children. There is also a small death benefit for funeral expenses. You can get
help here from the local Social Security Administration office. If the deceased
had been receiving social security or pension checks up until death,
keep in mind that any retirement checks of this nature that continue after
death may have to be returned. The Social Security Administration especially
does not immediately know about a person's death, so there can be a significant
lag. It's a good idea to contact them immediately to avoid this hassle.
Probate and Inheritance Process
There
are two related issues with which to deal. First, you must probate the estate.
That is, implement the transfer of assets from the title of the deceased to the
heirs. This involves a series of steps designed to finalize this transfer. The
death must be stated in an "open forum" which customarily means it is
listed in the local papers, and, in some cases, sent to individuals directly
(usually potential heirs and beneficiaries).
All
known debts are paid out of the estate, and various legal documents (including
a final accounting) are recorded with the courts to allow the assets from the
estate to pass on to the beneficiaries. This process can take
as little as one month, or many years depending on the size of the estate, if
it is being challenged, if the deceased died without a Will, and the backlog in
the Probate Court calendar.
Inheritance
taxes are a separate function. While they share a common denominator in that
the value of the deceased's estate must be established in order to institute
the process, the similarities end here. The Inheritance, or Succession Tax
function is designed to establish how much tax, if any, is owed to the federal
and state governments.
The largest portion of potential estate taxes usually goes to the federal government.
In effect, it is a graduated rate tax that is due on the net value of the
estate. Due to various federal credits, if the taxable estate is less than $5,000,000
(indexed for inflation), ($10 million for family estates) there probably will be no federal tax. Nor is there
usually any tax if the entire estate is left to a surviving spouse who is a
U.S. citizen. Beyond that, however, there is a federal marginal tax rate which
can reach as high as 40% of the estate. Normally,
this tax is due within nine months from date of death. There are certain exceptions to this deadline
and exemption amount if the deceased had a business, or owned certain types of
realty. State inheritance taxes can vary
widely from the
federal laws. Your lawyer/accountant team is usually retained to handle these
aspects for you.
Winding-Up the Process
Once the
Inheritance taxes have been paid, and the probate process has been completed,
the task is done. As you can see, it can
be quite complicated. The more organized the estate is before death, the
easier–and less
expensive–the process becomes. Moral of the story: Get your own affairs in
order before you die to save your surviving family and friends untold amounts
of wasted time and frustration.
Steps to Take for Tax Purposes
1.
Contact the lawyer, tax accountant, and other appropriate financial advisors
you will be using to help with the estate.
2. Begin
the inventory process of recording assets, their values at date of death, and
any debts/liabilities the deceased had.
3. Apply
for federal and state tax identification numbers for the estate, if needed.
4.
Prepare federal and state Succession/Inheritance tax returns.
5.
Handle accounting reports for Probate.
6.
Prepare outstanding Individual income tax returns for deceased.
7.
Prepare Fiduciary income tax returns for estate.
8. Do
final accounting to close estate.
Summary of General Steps to Take
• Make
necessary hospital decisions shortly after death. Autopsy or not, picking up
personal belongings, donating organs, and getting copies of death certificate.
• Locate
Will and safe deposit box, contact attorney and other appropriate financial
advisors.
• Arrange
for Funeral/Memorial, notify friends and family.
• Contact
decedent's employer for details on death benefits.
• Locate
life insurance policies, apply for proceeds.
• Arrange
for continuation of payment of decedent's bills.
• Notify
Social Security, Veteran's Administration, and other associations for possible
benefits.
• If
required, notify Post Office for address change.
• Contact
various financial organizations of deceased: banks, mortgage holders,
retirement plans such as IRA's, Keogh's, brokers, mutual funds, people who owed
money to the deceased, insurance companies holding auto, fire, medical
insurance policies, DMV, credit card companies.
• Arrange
for miscellaneous change and/or shut off of service agreements:
Utility
companies, oil companies, newspaper and periodical subscriptions, clubs, cable
TV.
• Follow
up on various tax matters as previously listed.
• Dispose
of decedent's assets, and belongings according to Will. If donating clothing,
furniture, etc. to "goodwill type" organization, provide a detailed
list and get a receipt for tax deduction purposes.
• Re-evaluate
your own situation regarding your Will, and information available to survivors
in event of your sudden demise. Make it easier for your survivors than it was
for you.
Reference:
Practice Enhancers, Able & Co.
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