Estate administration is the set of tasks to wrap up a decedent’s affairs and transfer assets. Particulars vary with the size and complexity of the estate, as well as the quality of the decedent’s estate plans. The usual steps include collecting assets and clearing title, determining liabilities, paying debts, distributing assets, and accounting to beneficiaries.
Most people will need to hire a lawyer (for probate court) and a CPA (for income tax returns and accountings). Decedent’s insurance agent and financial advisor have roles, too.
It is usually safe to wait a month or two before starting. In the meantime:
• Ask your funeral director for death certificates. One for each life insurance policy to be collected, one for you, and one for your lawyer may be enough. To be safe, most people order five or so.
• Call decedent’s insurance agent, confirm adequate property and casualty coverage is in force, and calendar the dates and amounts of the next premium payments.It’s customary to leave decedent’s name on homeowners’ and automobile policies until the asset is distributed. If an executor or administrator is appointed, he or she can be added later as an additional named insured.
• Call decedent’s financial advisor. Ask if decedent traded on margin, owned options, or used complex strategies that require immediate attention.
• Locate the original Will and keep it safe. Probate of a copy is slower and more expensive.
• Tell debt collectors the estate has not opened yet. That answer will hold most of them the first few months. Do pay insurance and utility bills.
When ready, contact a lawyer. Any Texas lawyer may handle a decedent’s estate. Visit tbls.org to locate one that is Board Certified in Estate Planning and Probate Law. Expect a questionnaire and a written agreement. Some offer no-obligation initial interviews, so you can weigh your options first.
Speak with a CPA about decedent’s final income tax return. The same one can prepare the estate’s income tax returns, but ask if he or she is comfortable with IRS Form 1041 fiduciary income tax returns. Many CPAs are not. The usual deadline to probate a Will is four years from the date of death. Plan to meet with a lawyer by March 30 of the year following death. The discussion about IRAs explains why.
Decedent’s Estate; Clearing Title
The size of an estate depends who’s asking. “Decedent’s gross estate for federal estate tax purposes” includes everything the decedent owned or controlled at death, including probate and non-probate assets.
A death certificate is enough to clear title and collect “non-probate assets.” Common non-probate assets: i) life insurance, annuities, and brokerage accounts with designated beneficiaries, ii) bank accounts, joint brokerage accounts, and cars with joint owners with right of survivorship, and iii) living trusts.
A death certificate is not enough to collect “probate assets.” A typical decedent’s probate estate includes a house, maybe a timeshare, mineral interests and other real estate, the car, bank account, and household goods. Closely held businesses tend to be probate assets, too. Probate clears title to these assets.
Probate clears title to assets that otherwise could not be collected. Probate or not, decedent’s assets are encumbered by his or her debts, which means a creditor can sue anyone receiving estate assets, even if they already spent the money. Worse, the creditor may collect the entire debt from just one heir; they don’t have to be fair and collect a pro rata share from each family member. This puts savers at greater risk than spenders. Probate allows a personal representative to resolve debts, so that heirs can accept their inheritance without fear of decedent’s creditors.
A Will is admitted to probate by a court order, following a brief hearing to authenticate the Will and confirm the executor decedent named.
When decedent dies without a will, the court determines the heirs and appoints an administrator. In the case of intestacy, probate assets go to family, not the State of Texas.
Small estate affidavits can sometime be used to collect probate assets without a personal representative. However, as a rule of thumb, probate is required to collect accounts when the decedent left more than $75,000 in savings or investments. When probate is granted, the “Executor” or “Administrator” receives “Letters” that come with unique powers and duties set out in the Texas Estates Code. The personal representative can re-quest information and collect assets that banks and other custodians won’t give out otherwise. The personal representative has much more control over creditor claims than family would without probate.
If there are no assets, or debts are significant, family may simply walk away, without any estate administration. Sometimes, probate is more trouble than it’s worth. If so, any Will should be delivered to the county clerk. In larger counties, the Will is accepted with-out charge, and is microfilmed and filed of record, in case someone else needs to probate it later.
The hardest part of estate administration isn’t probate. In Texas, most probate is in-dependent of court supervision, a helpful, efficient innovation now copied by ever more states. The most difficult part is gathering information and assets. Few people balance a checkbook any more, much less leave a balance sheet and cash flow statement. Because the personal representative has more powers than beneficiaries, probate makes reconstructing a decedent’s finances and transferring the assets easier, not harder.
A personal representative can request tax returns, tax transcripts, and credit reports, which lead to assets much more quickly than waiting by the mailbox for an annual statement. The personal representative may speak with decedent’s CPA, insurance agent, and financial advisor and request their files; usually, family may not. A personal representative can also cut off creditors who fail to file proofs of claim. Finally, title companies, operating companies, banks, brokers, and IRA custodians much prefer that distributions be authorized by personal representatives than by the beneficiaries.
IRAs and qualified plans require special attention. If the “wrong” beneficiary was designated, family or the personal representative can often make changes. The deadline is September 30 of the year following death. A tax-competent lawyer should be able to help. Probate by March 30 of the year following death should allow enough time.
Community property protects the surviving spouse from disinheritance. In Texas, all property is presumed community. On death it’s split 50:50 between the decedent and the surviving spouse, regardless whose name is on it. Clear and convincing evidence is required to overcome the presumption of community property. A home bought prior to marriage is clearly separate. An IRA established before marriage is not, because contributions and dividend reinvestments during the marriage are presumed community. This can mean that when Dad dies, his estate owns half the house, half the cars, half the IRAs (even the ones in Mom’s name), and half the dog. Sorting this out as soon as possible is a good idea, and a big part of estate administration.
Taxes and Final Distributions
Estate administration usually involves at least two income tax returns: the decedent’s final return, and one for the estate, to report income following the decedent’s death and before final distributions. If estate administration cannot be wrapped up and assets distributed before the second tax year of the estate, additional returns may be due. Whenever an estate’s income tax return is filed, the beneficiaries should receive an IRS Form K-1 from the CPA with the share of estate income that should be reported on their personal returns.
Interim distributions are often made to beneficiaries before the estate’s final income tax return is filed, with a reserve held for final taxes and administrative expenses. Final distributions may wait until after the estate’s last income tax return is filed, which can take a year or two following death. In most cases, a Texas inheritance is tax-free. For decedents dying between 2018 and 2025, the federal estate tax exemption is $10 million, adjusted for inflation since 2011. Some states still impose death taxes on smaller estates. Texas has never had an income tax and no longer has an estate tax. Death taxes on a Texas inheritance are unusual unless the decedent resided elsewhere or a major asset was located elsewhere.
To compensate for the federal estate tax (which almost no one pays any more), most assets receive a new basis on death. IRAs and qualified plans do not, along with assets held in certain trusts. When assets have appreciated, a new basis on death wipes out unrealized gain. In plain English, beneficiaries can sell an inheritance without paying capital gains tax the decedent would have owed. The personal representative should inform each beneficiary of the new basis of the assets distributed.
In Texas, moderately wealth families tend to find it easier to embrace probate than to avoid it. To determine the best course of action in your case, have a lawyer review the Will, heirs, and assets with you. Probate can usually wait a few months, so there’s time to take care of your loved one, your family, and yourself first.
IRS circular 230 disclosure: we are required to advise you that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used by any taxpayer (i) for the purpose of avoiding any penalties that may be imposed under the internal revenue code, or (ii) in promoting, marketing or recommending any entity, investment plan or arrangement, or any other transaction or matter discussed herein to any taxpayer other than the intended recipient hereof.
The ‘Estate Administration’ blog was kindly provided by Russell W. Hall & Associates, P.C. Attorneys at Law.