Random Thoughts

Issues relating to estates, inheritance, trusts, etc are the definition of “champagne problems.” I’m mindful of the fact that planning for the distant future is itself a luxury that many folks can’t afford. However, I also know that many people likely will have some assets at the time of their death and that how beneficiary designations are set up can make a big difference in how much hassle you leave to your executor and desired beneficiaries.

I am not an estate planner or an estate attorney. I have, however, just spent the last 4+ months as my father’s estate administrator/executor and learned some things along the way that will be useful to my own estate planning and may be useful to other folks, so I thought I’d share.

It is important to say right off the bat that as executor I had it easy! My dad was an estate attorney, so he had done almost everything to make my job as easy as possible. I had been managing his finances for a few years before his death so I knew what accounts and policies he had, and had access to those accounts. My brothers and I all get along and we didn’t have any family squabbles which could greatly complicate the process. However, the fact is that even my dad didn’t get everything quite right, and while he did get most things right and I had it as easy as it could be: being an executor is still a hassle.

I’ll break this post into three parts: advice for the executor; a primer on tax issues; and advice on estate planning to make the executor’s job easier.

Advice for the Executor:

If you learn that you’ve been named as executor of crazy Aunt Bertha’s estate see if you can resign and have someone else take the job. No really.
Assuming you’re stuck with the job I’d advise not appointing someone co-executor. While it may seem like a help to have someone else to share the load, the reality is that everything the executor has to sign off on will simply require two signatures instead of one and sometimes you may not be able to talk to financial institutions without both of you present or on the call. You have a bunch of hoops to jump through; you really don’t want to try to jump through them “tandem.”
If the deceased had set up a Trust, try to get yourself appointed as the sole Trustee of the Trust as well. It’s the same principle as in #2: the ability to act alone simplifies the tasks. This requires “trust” from the Trust’s beneficiaries that you’ll do the job honestly. Whereas an executor swears an oath before the court, has their work reviewed by the Commissioner of Accounts and is answerable to the law for any malfeasance, the Trustee is only accountable to the beneficiaries who would have to police this themselves and sue for wrongdoing. I’ll say more about Trusts and why they’re a blessing later.
If there is a Trust, you will need to apply for an EIN (Employer Id Number) from the IRS for the Trust. The Trust will be treated as a business partnership and will have to file a tax return. You can apply online at irs.gov easily and have the number in an hour.
If there is good reason to expect family squabbles it isn’t a bad idea to have a non-family member serve as executor to reduce the odds of long-term damage to relationships. This will cost serious money if you appoint a lawyer. I’d guess I’ve spent well over 100 hours over the last 4 months on my dad’s estate issues, and there will be more down the road. Someone who knows what they’re doing might have spent less time, but not that much less.
Get multiple copies (5 or 8) of the official death certificate and the executor/administrator appointment document from the court. Many institutions require to see the original, though most will give/mail the originals back. If you’re dealing with multiple organizations you don’t want to have to wait on one to return docs before starting the process with the next. You’ll also need multiple copies of will and/or trust documents though not originals. Scan everything so you can upload or email them, which sometimes is acceptable.
If you do not have clear documentation of the decedent’s financial holdings you may need to get tax returns going back a few years to see what accounts the estate may have.
If the deceased named beneficiaries or successor owners of insurance policies/annuities/IRAs/529s, those designations will take precedent over the will/trust documents and the financial institution may only want a death certificate and contact information for those people from the executor. They will only discuss the account with the beneficiaries thereafter. The beneficiaries themselves will have to sign claim forms and mail those back. You will save everyone time and hassle in these instances if you print out the forms, fill out everything that needs to be filled out (account numbers, decedent personal info — SSN, etc) so that all the beneficiaries have to do is sign and mail. The more you control the process the easier it will be on everyone. If there are multiple beneficiaries, the institution will only need one copy of the death certificate even though each beneficiaries’ form will say it is required.
Keep track of where each asset is in the process and which beneficiaries have completed what steps in each process. Communicate frequently. My brothers and I scheduled bi-weekly check-in calls to keep everyone on the same page and set deadlines to keep the process moving forward.
Keep good records for tax returns.

A Primer on Tax Issues Related to Estates:

<snarky aside> The tax code is crazy-rigged in favor of protecting generational wealth. The 2018 tax code doubled the estate tax exemption from ~$5.4 Million to ~$11 M. Only assets beyond that exempt amount are subject to taxation. Contrary to the trope that this is some sort of “double-tax” or “death tax”, this is more or less the only mechanism for taxing inherited income for descendents of the wealthy. Every time money changes hands it is subject to taxation except for inherited income. How does that make sense? </snarky aside>

The estate itself will be subject to taxes on assets over ~$11 M. If you’re the executor for an estate that big you’ll probably want to get advice from someone who knows something about that ‘cause I don’t.
The deceased will need a tax return prepared for the year they died calculated as a partial year tax return. The Trust, or the Estate (or God forbid both) will have to file a tax return for income generated after the date of death.
If the deceased had regular (not IRAs or 401Ks) investment income — capital gains(losses), interest and dividends made between the date of death and the date the assets are distributed to their ultimate beneficiaries are subject to taxes. You’ll need to reset the tax basis to the value on the date of death for these assets. So, if the deceased bought $10K in Apple Inc stock in 1995 and it appreciated to $200K in 2020 when the person died, no taxes are ever paid on that capital gain. The estate or Trust would be taxed only on the gain or loss between the $200K value and whatever the value is when it’s distributed a few months later. Another perk for the wealthy.
Traditional IRAs and 401Ks. Money went into these accounts “pre-tax” so will be taxed as money is taken out. If beneficiaries are named on the accounts the beneficiaries can (and would be wise to) set up inherited IRAs which will have required minimum distributions annually if the deceased was already taking distributions. You’d be taxed each year on whatever is withdrawn, but wouldn’t be taxed on the whole value at once. This puts off tax payments as much as possible. If a Trust was the beneficiary or no beneficiary was designated the executor will have two options: open an inherited IRA in the name of the Trust or take all the money out in cash and pay taxes on all of it then. The problem with the former approach is the Trust or Estate will then have income in perpetuity and will have to file a tax return each year.
Property or business partnership interests are undoubtedly a major hassle. Fortunately for me, my dad had sold his house and exited his law firm long before he died. I was nevertheless approached through the mail by folks offering to help sell such assets — remember that when you become an executor that fact is public record so real estate brokers troll the court records to find newly appointed estate administrators and offer their services. Navigating the emotional issues of what to do with an old family homestead or the complexity of selling a major business interest would be a real kettle of fish. If anyone reading this has advice on this to share please comment!
The Trust is treated like a business partnership, which is a pass-through entity. The Trust will file a return for the year(s) of its existence but the tax liability or credits will be passed to the individual tax returns of the beneficiaries of the Trust through partnership K-1s.
If the estate was largely left in a Trust any charitable donation bequests in the Trust documents will be credited to the Trust tax return, not the decedent’s.
It is therefore wise for the executor keep some cash from the estate available for preparation of tax returns and paying any tax liabilities owed by the deceased.

Estate Planning Advice to Make the Executor’s Job Easier:

(#1 - #4 are basics. #5 - #7 are stuff even my dad didn’t get quite right).

Have a Will prepared by an estate lawyer. Precise language and thinking through all the contingencies is imperative and Wills written by laymen usually create time-bombs for the families of the deceased.
Establish a Revocable Trust and have the Will leave everything to the Trust. Absent a Trust, the executor has to have all of their work reviewed and approved by the Commissioner of Accounts in Probate Court. This means extra hoops to jump through and an extra level of record-keeping exactitude. It also means all assets and distributions will be matters of public record and available to anyone who is interested in perpetuity. Assets placed in a Revocable Trust are still yours, you can do anything you want with them during your lifetime, it is just a legal construction that makes life easier for your heirs, because how the Trustee(s) handle the Trust is not subject to review by the courts.
Name yourself and your spouse as Trustees of the trust such that either can act independently of the other. You’ll also have “backup trustees” named in case both of you die at the same time.
If you have strong preferences about the disposition of property, valuables, family heirlooms, artwork, etc. specify them clearly in the Trust documents. It’s a good idea to outline a “lottery process” for unspecified valuables. For example: my 3 brothers and I each “drew lots” for picking order (reversing the order between each round) and went through selecting everything anyone wanted in a fair process that prevents arguments and hard-feelings.
Have your bank account and the bulk of non-retirement investment accounts owned by the Trust. That way, if one person dies the other already has access to those accounts as a Trustee without having to establish beneficiary status first (and losing access during that period).
For tax-preferred accounts (Traditional IRAs, Roth IRAs, 401Ks) it is best to designate the ultimate beneficiaries as the beneficiaries rather than having the estate or the Trust as the beneficiary. This allows your heirs to continue the tax advantages by creating an inherited IRA. The same could be done by the Trust but the Trust would then have to stay in existence and must file a tax return each year, which is a cost and a never-ending hassle.
If you own 529 Accounts it’s a good idea to name the 529 Account beneficiary as the successor owner if they are 18 or older, or their parent if not. Again, the Trust doesn’t want to have to act as the owner doing the paperwork into the future.

I hope this guide is useful to someone out there. I was fortunate to have time and expert advisors to help figure a bunch of this stuff out, and my dad’s estate was well set up to make it pretty straight-forward.

The advice given is based on playing the present “game” as it was set up to be played. How to reduce tax burdens, how to make sure heirs get what you want them to get, etc.

My next post will take on the topic of whether we should continue to hand down wealth from one generation to the next, or whether part of establishing a more equitable society involves ending inherited wealth.