How to Probate a Last Will & Testament: You’ll Probably Need Help.
After the funeral is over, it is the time for processing the deceased’s Last Will & Testament. Probate is the legal term meaning to prove the deceased’s Last Will & Testament as authentic and valid. In common usage, probate has taken on the meaning of the process of administering a deceased’s estate. The probating of the Last Will & Testament is only the first step in a series of probate estate filings and tax filings. Not all of the deceased’s property is controlled by the Last Will & Testament. Only probate property passes under the Last Will & Testament and is governed by the probate estate administration process. It follows then that non-probate property passes outside of the Last Will & Testament by other means.
Probate estates in Maryland can be administered under several different set of rules: Small Estate Administration, Modified Estate Administration, and Regular Estate Administration.
What type of Probate Estate?
Small Estate Administration is a streamline process to finalize the probate estate administration quickly. To qualify for Small Estate Administration, all the probate property must have a value of $100,000 or less if the surviving spouse is the sole beneficiary or $50,000 or less for all other cases. The “value” of a probate asset is calculated by subtracting the balance of the recorded lien against the asset from the asset’s fair market value.
Modified Estate Administration is generally available when the probate estate is solvent, all the beneficiaries and heirs at law consent, and all the beneficiaries are exempt from inheritance taxes. Strict time limits are imposed on filing the Final Report (an Accounting) and making the final distributions. The burden of these time limits can make Modified Estate Administration less attractive than Regular Estate Administration. The remainder of this article discusses Regular Estate Administration.
Regular Estate Administration is the most comprehensive type of estate administration covering all types of situations, probate property, beneficiaries and heirs at law.
Petition for Probate
The first step in the probate process is the Petition for Probate. The executor named in the Last Will and Testament (called the “personal representative” in Maryland) completes the Petition for Probate with Schedule A and files it with the original Last Will and Testament and a death certificate with the Register of Wills for the county in which the deceased was domiciled. The term domicile means the deceased’s permanent home, the place the deceased would return to or intend to return to when away. Often the Register of Wills collects a fee when you file the Petition for Probate to cover certain costs in the probate process.
The executor also needs to post (file) a bond, which is like an insurance policy protecting the government and the beneficiaries under the Last Will and Testament. The amount of the bond, and its cost, depends on: the size of the estate, whether inheritance tax is expected, whether the Last Will and Testament waives the posting of bond and the county’s minimum requirement, known as the nominal bond. Even if the Last Will and Testament waves the posting of bond, the nominal bond and the bond for inheritance taxes are still required.
Some Register of Wills require the executor to file in duplicate a completed Form RW1114 – Notice of Appointment, Notice to Creditors, Notice to Unknown Heirs – with the Petition for Probate. Some Register of Wills complete this form for you. The information in this form gets published in a newspaper of general circulation in the deceased’s county of domicile. There is a fee associated with publishing this Notice charged by the newspaper.
If the Petition for Probate and the Last Will and Testament are accepted for probate and the executor is qualified, the executor is appointed and Letters of Administration are issued to the executor. Letters of Administration are also known as Letters Testamentary in some states. The Letters of Administration prove the authority of the executor to administer the probate estate. The executor is said to “step into the shoes” of the deceased person for purposes of managing the deceased’s affairs and property. The executor performs five basic functions: (1) marshalling (gathering) the deceased’s assets, (2) determining the cash needs of the estate and raising the cash, (3) paying reasonable funeral expenses, debts, administration expenses and taxes, (4) making all required probate filings and tax filings, and (5) distributing the remaining probate property according to the terms of the deceased’s Last Will and Testament and the Order of the Orphans’ Court.
List of Interested Persons
The List of Interested Persons is due 20 days after the executor is appointed but often it is filed with the Petition for Probate. The List of Interested Persons contains the names and address of the beneficiaries under the Last Will and Testament and those persons who would have inherited if the deceased died without a Last Will and Testament (called the heirs at law).
The Information Report contains a series of questions designed to discover if non-probate property is passing at the deceased’s death to a person subject to inheritance tax or if a material gift in contemplation of death was made to a person subject to inheritance tax within two years of the deceased’s death. For example, one of the questions is
“Except for interests passing to a person exempted by Code, Tax General Article, §7-203, at the time of death did the deceased have (a) any interest less than absolute in real or personal property over which the deceased retained dominion while alive, including P. O. D. account, (b) any interest in any annuity or other public or private employee pension or benefit plan, (c) any interest in real or personal property for life or for a term of years, or (d) any other interest in real or personal property less than absolute, in trust or otherwise?”
If any of the questions are answered “Yes”, e.g. non-probate property is passing to a person subject to inheritance tax, then information must be reported regarding the type and value of such property and the name and address of the recipient of such property. The Information Report is due three months after the executor is appointed.
The Inventory is also due three months after the executor is appointed. The Inventory lists the probate property and reports the fair market value of the probate property as of the date of death. Generally, a qualified appraiser is required to value the probate property by providing a written appraisal, which is attached to the Inventory. The executor can value certain property, such as bank accounts, money, and securities (stocks, bonds, mutual funds, etc.) listed on a national or regional exchange. The value of securities is based on the average of the high trading price and the low trading price of the security on the date of death. For real property, the executor may use the full cash value for property tax assessment purposes for some real property. If the real property is sold, the executor may use the contract price if settlement occurs within one year of the deceased’s death. For motor vehicles, the executor can use the “average value” of the motor vehicle reported in the NADA official used car guide or substantially similar price guide, such as Kelley Blue Book. The “average value” is the average of the retail price and the trade-in price of the vehicle or the private party value of the vehicle.
A carefully and accurately prepared Inventory is important because it is the beginning point for reporting all of the financial activity that occurs in the probate estate. Additionally, the Inventory is the beginning point of setting the tax basis for probate property for capital gains tax purposes for when the probate property is sold. The capital gains tax is based on the difference between the property’s tax basis and the net amount realized on the sale of the property. Because of the impact of capital gains taxes, careful consideration must be made on whether to secure an appraisal for real property or to rely on the property tax assessment. An understatement of value can be costly in capital gains taxes.
The Administration Account reports all of the financial activity that occurs in the probate estate and is at the core of the estate administration process. The first Administration Account is due nine months after the executor is appointed. If more than one Administration Account is necessary, each subsequent Administration Account is due six months after the date of the Order approving the previous Account or nine months after the previous Administration Account was filed if no Order has been issued. When filing the Administration Account, a Notice to Interested Persons of Filing Account must be sent to all Interested Persons. The Interested Persons are determined as of the date of filing, who include all unpaid beneficiaries under the Will and all unpaid creditors who have filed a Claim against the estate.
As mentioned above, the Administration Account reports the financial activity in the estate administration, i.e. receipts, disbursements and distributions, using the fiduciary accounting rules found in the Maryland Principal & Income Act. Care needs to be taken when allocating receipts and disbursement to income and principal because certain beneficiaries maybe entitled to the net income from the probate estate.
The Administration Account needs to include the following:
- Beginning balance of assets (the Inventory value of assets for the first Account)
- Receipts of miscellaneous principal items
- Disposition of assets (such as sales, closing of accounts)
- Receipts of income
- Distributions to beneficiaries – proposed and actual
- Inheritance Tax calculation
- Retained assets when the Account is not a final Account
- Verification of Account
- Certificate of Service
The Administration Account is the record that the Last Will and Testament and the laws governing the administration of probate estates have been properly followed as set forth in Estate & Trusts Article of the Maryland Annotated Code and the Maryland Rules concerning the settlement of decedents’ estates. The interaction of the provisions of the Last Will and Testament and these laws and rules is critical for the proper administration of the probate estate, especially when paying funeral expenses, statutory allowances, claims, executor’s commissions and legal fees. The executor must take great care to properly administer the probate estate because the executor may have personal liability for unpaid or improperly paid items (such as taxes) and erroneous distributions to beneficiaries. The deceased’s unfiled income tax returns and unpaid income taxes are a particular concern.
Another example is the payment of funeral expenses from the probate estate, which is limited to a maximum of $15,000 unless the estate is solvent and the Last Will and Testament provides for a larger amount or a special order is obtained from the Orphans’ Court.
The executor’s commission cannot exceed 9% on the first $20,000 of the gross probate estate plus 3.6% on the gross probate estate in excess of $20,000. Allowable legal fees typically reduce the amount of commissions allowable to the executor. Neither the executor’s commissions nor the legal fees can be paid unless there is an Order from the Orphans’ Court (after filing a Petition) allowing payment or a Consent to Compensation has been signed by all Interest Persons and is filed with the Register of Wills. A word of caution: in estates involving substantial legal difficulties or acrimony, a Petition to the Orphans’ Court is absolutely necessary before paying legal fees and executor’s commission.
Distribution to Beneficiaries
The distributions to the beneficiaries under the Last Will and Testament may only be made if the estate is solvent, i.e. has enough assets to pay of the estate’s funeral expenses, claims, debts, taxes and administration expenses. If the estate is solvent but does not have enough property to make all of the distributions under the Last Will and Testament, then the “gifts” under the Last Will and Testament “abate” in an order specified by statute or by the Last Will and Testament. Abatement is a form of disinheritance. See the article entitle The Accidental Disinheritance for more on this topic.
The distributions to beneficiaries takes two forms: Specific distributions (specific gifts/bequests/legacies/devises) for specific property and one-time payments and residuary distributions for everything else. Residuary distributions come from the residuary estate, which is the residue of the gross probate estate less specific distributions and the disbursements made from the probate estate.
Care must be taken when making residuary distributions to ensure each beneficiary gets his or her proportionate share of the residuary estate. For example, Mark and Matthew are entitled to equal shares of the residuary estate. The residuary estate consists of two stocks that had the same value on the Inventory of $100,000: 1000 shares of ABC, Inc. and 500 shares XYZ, Inc. The executor distributes the 1000 shares of ABC, Inc. to Mark and the 500 shares XYZ, Inc. to Matthew. Both had the same Inventory value but the 1000 shares of ABC, Inc. had increased in value to $110,000 and the 500 shares XYZ, Inc. had deceased in value to $90,000 at the time of distribution. Mark did not receive his equal share of the residuary estate because of the difference in value on the date of distribution. What the executor should have done was distributed 500 shares of ABC, Inc. and 250 shares of XYZ, Inc. to Matthew and 500 shares of ABC, Inc. and 250 shares of XYZ, Inc. to Mark.
The good news is that generally an inheritance is not subject to income taxes, except for retirement assets and annuities. The bad news is that your estate does not escape the purview of the tax collector.
The executor must file fiduciary income tax returns for the probate estate when there is $600 or more of gross income during the tax year or if any beneficiary is a nonresident alien. Even if there is less than $600 of gross income in the final tax year, the executor may want to file a final fiduciary income tax return to pass out excess deductions and capital loss to the beneficiaries to use on their own income tax returns. The 2017 Tax Cuts and Jobs Act limits the beneficiaries ability to utilize the excess deductions beginning in 2018.
The executor is responsible for filing the deceased’s unfiled income tax returns and paying the tax from the probate estate. Additionally, the executor must file a federal estate tax return and a Maryland estate tax return if required. If the deceased made taxable gifts, the executor is responsible for filing the deceased’s unfiled gift tax returns.
If the deceased’s Last Will & Testament directs the executor to pay all death taxes, including inheritance taxes, the executor is responsible for filing the Application to Fix Inheritance Tax on Non-Probate Property and paying the inheritance tax on non-probate property from the probate estate. See What’s the Difference Among Death Taxes, Estate Taxes and Inheritance Taxes.
How We Can Help
This brief article cannot address the countless nuances and variables that occur when administering an estate. Our decades of experience can help make a difficult time easier when we assist you with the estate administration process. We are here to provide you with the guidance and counsel you need. Please call us at 410-628-0050 to schedule a consultation.
PLEASE NOTE: These materials are current as of the date of posting and are not a comprehensive discussion of the entire subject matter. They are presented for informational purposes only and should not be considered legal or financial advice as to any specific matter or transaction. They are not intended for the purposes of advertising or soliciting clients, and should not be misconstrued as establishing an attorney-client relationship. Readers should consult a knowledgeable attorney experienced in such matters for legal advice.
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