Q: After a brief illness, the sister of a friend of mine passed away. My friend made it through the funeral with the help of the funeral director they had used when her mother died, but now she needs to know the next steps. Her sister died without a will, and as her only surviving sibling, the court appointed her as administrator of the estate. I’m trying to figure out what she needs to do and provide any assistance possible. Any guidance you could offer would be appreciated.
A: I’m sorry to hear about your friend’s sister. When the brother of one of my friends died unexpectedly, we located a very caring funeral director in the city where he lived. The director was very knowledgeable and helpful in determining the steps she should take without any commitment that she utilize his services. That situation has prompted me to think about pre-planning my own funeral and encouraging my family, friends and clients to do so. Of course, to date I haven’t done anything other than talk about this. I’ll cover pre-planning your own funeral in another column after I’ve completed my own.
Hiring an estate-planning attorney experienced in administering estates would be a very helpful step for your friend to take. Some of the duties expected of her as executor are addressed below.
She will need to identify and value her sister’s assets and debts. Debts need to be paid off prior to any distributions to rightful heirs and beneficiaries. Medical expenses not covered by insurance, both paid and unpaid, need to be tracked separately. Any expenses exceeding 7.5 percent of her sister’s adjusted gross income for this year may be deducted on her sister’s final income tax return. Depending on her sister’s income and expenses for the first five months of the year, this could significantly reduce the amount of taxes owed. Alternatively, if her sister’s estate is $5.12 million or more, the medical expenses can be deducted on the estate tax return.
A final income tax return will need to be filed for her sister. The final 1040 will cover the period from Jan. 1 through the date of death. The return is due on April 15, 2013. Since the courts appointed your friend as executor, I assume her sister was unmarried. If there is a surviving spouse, the final 1040 can be filed as a joint return.
In addition to the final 1040, the estate’s income-tax return, form 1041, may also need to be filed. If the estate had an annual gross income below $600, form 1041 is not required. This form is also not required if all income-producing assets bypass probate and go directly to heirs by contract or operation of law. IRAs with account beneficiaries, real estate or investment accounts owned jointly with rights of survivorship and life-insurance with designated beneficiaries are examples of these types of assets.
If the sister made sizable gifts (over $13,000 in 2012, over $12,000 in years 2006-2008, over $11,000 in years 2002-2005 and $10,000 in 2001 and earlier years) and/or her estate was worth over $5.12 million, Form 706 of the U.S. Estate Tax Return will also need to be filed.
If sizable gifts were made, these are added back to the estate to see if the estate meets the $5.12 million threshold. Form 706 is due nine months from the date of death, with a possible six-month extension. Any life insurance owned by the decedent is usually included in the value of the estate even though the proceeds go directly to the beneficiary tax-free. Surviving spouses who are U.S. citizens may inherit an unlimited amount of assets, and no estate tax will be due.
If a Form 1041 or 706 needs to be filed, the estate will need a federal employer identification number (EIN). Form SS-4 is the form needed to apply for the EIN. Once the EIN is obtained, a checking account in the name of the estate should be opened to allow acceptance of deposits from income earned by the estate and to pay expenses of the estate.
The IRS needs to be notified as to who will be acting on behalf of the estate regarding tax matters. This is done by filing form 56.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 99466, Raleigh, NC 27624