|
|
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 2000 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 D.C. 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 benfits 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 biggest chunk 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 $675,000, 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 55% 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.
3. Begin the inventory process of recording assets, their values at
date of death, and any debts/liabilities the deceased had.
4.
5. Apply for federal and state tax identification numbers for the
estate, if needed.
6.
7. Prepare federal and state Succession/Inheritance tax returns.
8.
9. Handle accounting reports for Probate.
10.
11. Prepare outstanding Individual income tax returns for deceased.
12.
13. Prepare Fiduciary income tax returns for estate.
14.
15. Do final accounting to close estate.
16.
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.
|