What’s Involved in the Probate Process?

SWAAY’s recent article entitled “What is the Probate Process in Florida?” says that while every state has its own laws, the probate process can be fairly similar. Here are the basic steps in the probate process:

The family consults with an experienced probate attorney. Those mentioned in the decedent’s will should meet with a probate lawyer. During the meeting, all relevant documentation like the list of debts, life insurance policies, financial statements, real estate title deeds, and the will should be available.

Filing the petition. The process would be in initiated by the executor or personal representative named in the will. He or she is in charge of distributing the estate’s assets. If there’s no will, you can ask an estate planning attorney to petition a court to appoint an executor. When the court approves the estate representative, the Letters of Administration are issued as evidence of legal authority to act as the executor. The executor will pay state taxes, funeral costs, and creditor claims on behalf of the decedent. He or she will also notice creditors and beneficiaries, coordinate the asset distribution and then close the probate estate.

Noticing beneficiaries and creditors. The executor must notify all beneficiaries of trust estates, the surviving spouse and all parties that have the rights of inheritance. Creditors of the deceased will also want to be paid and will make a claim on the estate.

Obtaining the letters of administration (letters testamentary) obtained from the probate court. After the executor obtains the letter, he or she will open the estate account at a bank. Statements and assets that were in the deceased name will be liquidated and sold, if there’s a need. Proceeds obtained from the sale of property are kept in the estate account and are later distributed.

Settling all expenses, taxes, and estate debts. By law, the decedent’s debts must typically be settled prior to any distributions to the heirs. The executor will also prepare a final income tax return for the estate. Note that life insurance policies and retirement savings are distributed to heirs despite the debts owed, as they transfer by beneficiary designation outside of the will and probate.

Conducting an inventory of the estate. The executor will have conducted a final account of the remaining estate. This accounting will include the fees paid to the executor, probate expenses, cost of assets and the charges incurred when settling debts.

Distributing the assets. After the creditor claims have been settled, the executor will ask the court to transfer all assets to successors in compliance with state law or the provisions of the will. The court will issue an order to move the assets. If there’s no will, the state probate succession laws will decide who is entitled to receive a share of the property.

Finalizing the probate estate. The last step is for the executor to formally close the estate. The includes payment to creditors and distribution of assets, preparing a final distribution document and a closing affidavit that states that the assets were adequately distributed to all heirs.

Reference: SWAAY (Aug. 24, 2020) “What is the Probate Process in Florida?”

What Taxes Do I Owe When I Inherit My Dad’s House?

Estate Planning When Near RetirementAfter the last surviving parent passes away, the estate may sell his home. The proceeds are then divided up, pursuant to the directions set out in the will. If children are the heirs, they may split the funds among themselves. However, what are the tax consequences?

nj.com’s recent article asks: “I inherited my father’s home. Do I owe any kind of taxes?”

The article explains that the federal estate and gift tax exemption amount is now $11.4 million. In Illinois, residents are subject to the Illinois Estate Tax if the value of the adjusted gross estate exceeds $4 million. Many residents do not have Estates with a value subject to either the Federal or Illinois Estate Tax.  However, there is also the question of income taxation.

The proceeds from the sale of the house will be subject to income tax. However, it’s unlikely that a person would incur the tax because income tax is paid on the difference between the sales price and the basis of the asset, minus costs of the sale.

“Basis” is generally defined as the purchase price, plus the cost of improvements.

Assets owned by a decedent receive a “step-up” or a “step-down” in basis to the value, as of the date of death.

This means that a sibling inheriting a parent’s home and then selling it would only be taxed on the difference between the sales price and the value at the date of death, less selling costs, assuming the parent owned 100% of the home at the time of his death.

If this difference between date of death and sale values is substantial, the adult child would incur a tax, typically at capital gains rates. However, as a general rule, there’s little or no gain to tax.

Be sure to keep evidence of the date of death value of the parent’s home, in case there’s an income tax audit down the road. If you need help understanding the taxes tied to your inheritance, contact our Midlothian tax planning attorneys at 708-852-0733.

Reference: nj.com (March 11, 2019) “I inherited my father’s home. Do I owe any kind of taxes?”