Steps in estate settlement

If the decedent has a will, the estate settlement process usually begins with trying to locate the decedent's most current will. If a will can be found, it usually names a personal representative for the estate.

If the will is not found in the home, it most likely is in a safe deposit box. Locating the key or combination is a first order of business.

For a trust there will be a trustee or trustees named. They will be in charge of the settlement process. If no will or trust can be located, you might check with the attorney (or law firm) of the deceased to see if they have a copy of the will or trust.

Locating the most current will or trust document is a crucial part of the settlement process.

Before going too far with the estate settlement process, you might want to select an attorney to help with the settlement procedure.

Select an attorney with whom you are comfortable and who has experience in estate settlement. Your attorney should provide legal and practical guidance to get you through the estate settlement process. You may wish to discuss costs, including attorney’s fees, during your first visit.

In Minnesota, attorneys cannot base their fees on a percentage of the estate value and therefore most will use an hourly rate. However, some Minnesota attorneys choose to charge a flat fee which must be based upon a “reasonableness” defined and found standard in Minnesota statutes.

The personal representative (a will) or trustee (trust) will need several copies of the official death certificate. Generally the funeral home where the deceased will be prepared will supply you with the death certificates. Insurance companies and other holders of assets will request them before they can make cash payments. Request four or five copies of the official certificate to begin.

Another initial step in the process is to inventory and list all assets in the estate. Once a list is finished, a fair market value will need to be assigned to each asset. Large taxable estates may require a certified appraisal.

Assets such a land will also need a certified appraisal.

Assets should be listed by categories and valuation taken as of the date of death. If the estate decides to use values as of six months after death for tax purposes, valuation will have to be made on that date also. The alternate valuation date is chosen if it reduces the estate tax in large estates or increases the basis of assets passed to heirs in small estates.

The inventory and valuations will likely be reviewed by both the attorney as well as the court. The values are usually of vital interest to the beneficiaries.

The personal representative or trustee is charged with paying all lawful claims of creditors and paying the bills of the deceased. These bills include medical expenses, funeral, utilities and other outstanding business and personal bills. Keep receipts for proof of payment.

Life insurance policies should be located. Companies should be informed of the death and forms should be filed to initiate payments to beneficiaries.

Throughout the settlement process, the personal representative or trustee should pay attention to income tax and estate tax possibilities. The attorney or an accountant should be able to give advice on this matter.

Perhaps the least understood area of taxation involves the establishment of basis in assets. Basis is the decedent’s value in the asset as of the time they acquired it via purchase, gift or inheritance. Basis is the tax cost or expense you deduct when the asset is sold. Heirs get a stepped up basis to fair market value on assets they inherit. It is important that the personal representative or trustee informs them of this basis at the time of asset distribution.

If the deceased was collecting payments on an installment sale, a certain percentage of the principal is subject to taxation. It is determined by the profit percentage calculated on the sale and used annually to determine taxable income. Since the heirs must continue to pay  income tax on the installment contract income, they should be informed of the profit percentage. Heirs will also have to pay income tax on the interest received from installment contracts. Heirs should be informed of any other tax ramifications.

Minnesota requires the value of any gifts given within three years of the decedent’s death to be added back into the decedent’s estate value to determine if any Minnesota estate tax is due. This also applies to non-Minnesota residents who own real estate or tangible personal property in Minnesota. Finding documentation of any gifts would be necessary in closing a decedent’s estate.

Unless the will or trust advises or stipulates to the contrary, large assets are usually sold for cash so that a later cash distribution can be made to beneficiaries. The car, the house, other real estate, mutual funds, etc. are usually sold and receipts deposited in the checking account. If the will or trust calls for direct distribution of assets to certain heirs, assets would be held until the date of distribution.

One exception is if the decedent has a retirement investment account. If allowable, heirs may want to roll the investment into their name and allow it to continue to be invested and to grow in value. Seek the help of a qualified financial planner in this matter.

One of the final steps is to distribute all assets to the rightful heirs according to the will, trust agreement, or state intestate laws.

If a will exists, the court must supervise all distribution of assets.

If a trust exists, the trustee(s) can distribute the assets according to the trust document.

Legal transfer is made of non-cash items and checks are written to heirs. A prudent personal representative or trustee might retain some funds in the checking account if future tax bills are a possibility. If tax contingencies never arise, a later distribution to heirs closes out the estate checking account.

The personal representative or trustee will have to file income tax and estate tax returns on behalf of the decedent. Verify due dates of such returns early in the process so deadlines for filing can be met.