Detailed Information about Estate Administration

A. Rights and Duties of Executors:

After you hire us, I will get an Employer Identification Number (EIN) for the estate, and we will go together to the court-house, where you will, that day, be appointed as executor and receive your short certificates (proofs of appointment). If there are any bank accounts only in the decedent’s name, we will proceed together to the bank to have the accounts moved into the estate account so that you, as executor, may immediately write checks on those accounts.

You will need two documents for the initial trip to Media: (a) the original will and (b) one or more death certificates. Other documents to be prepared will be prepared in this office; we have to insert the information that we will need from the death certificate and from the answers to questions we will ask you when we meet. Be very sure that the will that you have is the original. In the absence of the original, probate cannot be completed on the initial trip and we will need to petition the Register of Wills to probate a copy of the will.

If there is a safe deposit box, there is about a two-week lead time on arranging a safe deposit box inventory. On any account which is an “or” account, the joint owner can continue to sign checks. That is not true for power-of-attorney accounts which must be moved into the estate account. Basically, all checks should be written from an estate account, created by giving the bank a short certificate, a death certificate and tax identification number.

I am discussing only assets that are in your loved one’s name alone and, hence, governed by the will. Items that have beneficiaries or joint owners (such as, often, life insurance, annuities and savings bonds) are not probate assets and go to the surviving joint owners or named beneficiaries by operation of law, not to the beneficiaries outlined in the will. However, non-probate assets must still be included the Pennsylvania inheritance tax return if those assets are being inherited by anyone other than a spouse.

Your appointment as executor is, essentially, a post-death general power of attorney. All lifetime powers of attorney expire with death. As executor, you may do whatever your loved one could have done, in terms of signing tax documents, depositing checks, selling or redeeming assets, etc. “Short certificates,” or Letters Testamentary issued by the Register of Wills, are your proof of appointment. Note that short certificates are valid for 60 days, but death certificates never expire. These will be required by each bank and stock transfer agent, if there are any, as well as for such items as automobile transfers. Direct deposit items, if any, should be terminated. The Social Security Administration needs to be contacted along with the administrators of any pensions that your loved one received.

B. Inheritance Tax and Income Tax

Pennsylvania inheritance tax is at 4.5 percent on property passing to children of the decedent. IRA accounts, annuities and “in trust for” accounts, if any, are fully taxable. Joint accounts that were made joint more than one year before death are taxed at one-half of value. Life insurance is exempt. There is a five-percent discount on inheritance tax for any payments made within three months after death, which reduces the effective rate on gifts to 4.275 percent. No forms or final decisions as to value need be made in order to get the discount. All that is needed is a check, payable to REGISTER OF WILLS, AGENT, which we send in with a cover letter identifying the estate and the rate. Inheritance tax returns must be filed within nine months of death, though a six month extension is virtually automatic if requested.

A federal estate tax return is required only if the estate exceeds $5 million in 2011 and 2012. That includes life insurance, if any (with certain minor exceptions), and joint accounts at full value. Federal returns include many more formalities in terms of appraisals and related items.

There is no income tax on inheritances except to the extent that such items represent tax-deferred items (such as pension plans, annuities, IRAs and accrued E bond interest) or that they represent income earned after death (there is no inheritance tax on such post-death income). Income tax on such tax-deferred items is due by the beneficiaries in the year they collect them.

Inheritance tax deductions include all funeral-related expenses (cemetery charges, funeral director charges, funeral meal and funeral flowers), as well as all administration expenses (attorney fees, executors’ fees, probate costs, advertising, etc.) and all debts of the decedent.

Administration expenses are deductible for both Pennsylvania inheritance tax purposes and for federal income tax purposes.

A final year lifetime federal income tax return for your loved one must be filed, assuming he met the filing threshold or had withholding.

The estate must file 2011 (1041) income tax returns if it meets filing thresholds of $600.

Normally, rather than result in net taxable income on federal income tax returns, estate returns result in “excess deductions on termination,” which can be divided equally among the beneficiaries and used by them as itemized deductions, if they itemize deductions on their personal returns (forms 1040) in the year of termination of the estate. The estate is required, for Pennsylvania inheritance tax purposes, to report all taxable assets, including transfers within a year of death and joint property. If there is any such property, the estate, not the beneficiary, pays the inheritance tax on it, but the beneficiary pays the income tax, if there is any taxable income on the item in question.

C. Advertising Appointment of Executors; Other Notice

Advertisements cost about $180 and are usually omitted where there are no disputes with creditors and none expected with heirs. The only two drawbacks to not advertising are: (a) If disputes do arise, they cannot be referred to the court for resolution until at least four months after advertising, and creditors have one year from the date of publication to raise claims; and (b) If advertising is not completed, there is a longer period of lack of protection against creditors who present late claims.

We are also required to give formal notice of the filing of the will to all legatees named in the will.

A formal audit is necessary where there are disputes to be resolved by the court, but takes place in less than five percent of estates.

There is also a “status report,” which must be filed upon completion of administration.

D. E Bonds, IRAs, Stock, Furniture

If there are U.S. savings bonds, the significant factors are: (a) the turnover date and (b) income tax on accrued interest. The “turnover date” means, essentially, that since bonds increase in value every six months, there is a loss of up to five months’ interest if cashing is not made in one of the two months in each year in which value increases. There are three choices with respect to reporting accrued interest on savings bonds: (1) report it on the decedent’s final return (form 1040); if she owes no tax, even with the interest included, this is the clear choice; (2) report it on the estate’s return (if this is done, timing of estate deductions, such as fees, should be watched to get the maximum advantage of offsetting such items against bond interest); or (3) transferring the bonds without cashing (rarely recommended).

IRAs are a complicated subject. Essentially, if there is a named beneficiary, then the beneficiary should consider the possibility of electing to stretch the payout over his or her own life expectancy. The beneficiary can still elect, later, to withdraw the entire balance. This has substantial income tax advantages, but must be elected by October 15 of the year you receive the inherited IRA.

If you decide to make the house you inherit your primary residence there is no federal income tax due if you later sell it if your gain is less than $250,000 if you are single and $500,000 if you are married filing jointly.

I can file new deeds to remove your loved one’s name from the properties he or she owned for a separate fee after the estate administration is completed.

No inventory of furniture and personal effects is required under the Pennsylvania inheritance tax laws.

E. Closing of Estate

There are two ways of closing an estate — formal and informal. A formal closing (“account and audit”) involves gathering together a list of receipts and disbursements, stating proposed distribution and any disputes, and filing that with the court at least four months after the estate has been advertised. The parties are then sent copies of the filing and advised of the date on which they must appear with any objections to the account or the proposed distribution. Informal distribution, which is probably used 95 percent of the time, involves little more than a closing statement, which we prepare, signed as approved by all residuary legatees. Nothing is filed with the court.

The Pennsylvania inheritance tax return is due nine months from death. There is no difficulty in getting a five-month extension, if desired, which it rarely is unless there are problems in selling the house within nine months after the date of death.

F. Fees

The executors’ fees are set forth in Johnson Estate, a copy of which is attached. Bear in mind that executors’ fees, if claimed for inheritance tax purposes or otherwise taken, are taxable income, subject to both federal and state income tax. For that reason, they should not be claimed as inheritance tax deductions except to the extent that they are actually to be taken.

We do wills, estates and real estate matters, which, hopefully, eliminates the likelihood of expensive estate mistakes on such question as:

a. How does timing of payment of attorney fees and executors’ fees interact with excess deductions on termination for income tax purposes?

An estate can pass on an income tax deduction to the legatees for the excess of administrative costs (legal fees and charges of the Register of Wills) only in the closing year of the estate. Therefore, those expenses should, for the most part, be bunched into the year of closing.

b. Whether fees are being charged on named beneficiary items?

We do not charge those fees. Our fee is complete and includes, to the extent necessary, probate, inheritance tax returns, estate income tax returns, distribution statements for closing, all requirements for audit and whatever else has to be done (excluding only will contests and litigation, which are, hopefully, not expected). It does not include charges of the Register of Wills, newspapers, etc.

c. What should I do when the home owners’ insurance expires?

The policy is probably invalid if it is renewed in the name of a decedent. On the other hand, notice of death should never be given to the insurance company sooner than six months from the date of death, since Pennsylvania state law prohibits cancellation or refusal to renew within six months of death.

d. What receipts should I keep that will be deductible on the Pennsylvania inheritance tax return?

You should keep receipts for the following expenses that are deductible on the Pennsylvania inheritance tax return:

• Funeral costs;
• Funeral luncheon;
• Funeral flowers;
• Attorney fees;
• Final medical bills;
• Final utility bills;
• Costs incurred to sell assets of the estate;
• Probate fees paid to the Register of Wills;
• Probate publication fees.