Losing a parent is a deeply emotional experience, and it can be overwhelming for adult children who are also the executors of the estate. Settling an estate is a lengthy process that can take months. If you find yourself in this role, it’s crucial to understand your responsibilities. Here’s a checklist to help you manage the process as the executor of your parent’s estate.
As the executor, also known as the personal representative, you are responsible for settling the estate. If your parent had a trust, the successor trustee named in the trust documents will handle the distribution of the trust assets. You might also be the successor trustee or co-trustee.
If your parents are still alive and you want to learn more about the role of an executor, now is a good time to discuss their estate plan and wishes.
After a parent passes away, you’ll need to gather various financial documents and statements. Determine how bills are being paid and ask the credit bureaus for a report to notify them of your parent’s passing. The funeral home usually notifies the Social Security Administration. Later, you’ll work with an attorney to discuss which assets may need a valuation. If your parent had a financial advisor, ask them for relevant documents to help you understand the situation.
An estate planning attorney will be essential. Hopefully, your parent did some advance planning. Assets owned individually by your parent that don’t pass through a beneficiary designation, like a retirement account or life insurance policy, or through a transfer-on-death or payable-on-death arrangement, will likely go through probate. It’s helpful to understand the differences between a trust and a will.
A copy of the will may need to be filed with the probate court. If your parent had assets in another state, you might have multiple probate estates. Consult your attorney to find out.
An estate account is a bank account set up to pay expenses and receive income owed to your deceased parent while the estate is settled. This account will need a separate Employer Identification Number (EIN), which the attorney typically obtains.
If your parent hasn’t taken their required minimum distribution (RMD) from retirement accounts for the year, it can go into the estate account. Make sure to do this before the end of the year.
You’ll need to ensure your parent’s bills are paid until everything is closed out. After someone dies, their individual bank account shouldn’t be used. Transition payments to the estate account and make necessary notifications. Consult the attorney for guidance as needed. It’s important to keep mortgage and insurance payments current.
If your parent was living alone in their home, notify the insurance company. Insurers need to know if the property is vacant, or they might not cover losses. If you plan to sell the home, discuss the process with a real estate attorney. A real estate tax lien can delay closing. Discuss eligibility for a federal capital gain exclusion on the sale of the home with your CPA.
You may need to file an individual tax return for your parent, following regular deadlines. Depending on the estate’s income, it may need to file state and/or federal returns. There may be state estate and/or inheritance tax due, depending on your state. If a federal estate tax return is necessary, it’s due nine months from the date of death. Gather tax documents and consult a CPA for help. The attorney might complete the estate tax return.
If your parent had property or assets in other states, consult an attorney to understand the laws in those states.
An estate’s value is determined at a specific point in time, typically the date of death. If the estate is federally taxable, the executor can choose an alternate valuation date, which is six months from the date of death. This can only be done if it reduces the federal estate tax liability.
Certain non-retirement assets or money in a revocable trust can be eligible for a step-up in basis to the fair market value at the date of death (or alternate valuation date, if applicable). In most states, the step-up portion will be 100% of eligible individual assets, including revocable trusts. This isn’t automatic, but it can significantly reduce taxes for the beneficiary. A financial advisor can help with brokerage and trust accounts, but also consider other property. If you don’t plan to sell an inherited home right away, get a valuation done.
The distribution of assets is the final step in settling an estate. Sometimes the executor may decide to do a partial distribution earlier, but there’s a risk if still subject to creditor’s claims. Once the estate’s assets have been valued and/or sold and all expenses and taxes paid, the remaining estate is distributed.
Retirement accounts typically pass directly to heirs via beneficiary designation. Your distribution requirements will depend on your parent’s age, the type of retirement account, and other factors. Most beneficiaries will need to empty an inherited retirement account within ten years, and annual RMDs may be required. Beneficiaries will need to set up their own inherited IRA accounts.
Trusts can be distributed in various ways. Assets might go to heirs outright once the estate is settled, but funds can also be held in trust. Beneficiaries of a trust have the right to ask for certain information from the trustee.
Depending on the estate setup, assets in retirement accounts may go into a trust if it’s the beneficiary. Similarly, real property, such as a home, could also be in the trust. A pour-over will is common, where other assets not held in trust during life go into trust at death. As the executor, you may also be the successor trustee. If not, that person will oversee trust assets.
The estate plan may include specific distributions of tangible property or cash to relatives or charity.
When the estate is nearing completion, you can focus on what an inheritance means for you financially. Depending on the estate’s complexity and the level of pre-death planning, communication, and organization, you might not be able to consider your finances until the end. Don’t rush into important financial decisions and consult with financial and legal professionals to make informed choices.