When you die, everything you leave behind is your “estate.” This will include all of your real estate, personal property, debts, etc. At Ascent Law LLC, we can help you with estate administration or the process of distribution of the estate after the death of a loved one.
Two types of taxes can be assessed against your property after you die—estate taxes and inheritance taxes. The federal government imposes only an estate tax, but some states collect one or the other, or in some cases, both. Collectively, they’re often referred to as death taxes. The name Death tax was coined years ago to put a negative spin on the federal estate tax. But although they’re both death-related, they’re actually quite different. The death tax can be any tax that’s imposed on the transfer of property after someone’s death, whether that tax is based on the total value of the decedent’s estate or the value of a single bequest. Although beneficiaries are responsible for paying the inheritance tax while estates pay the estate tax, many estates step in to take this financial burden off their beneficiaries and they pay it for them. It’s a personal decision, not a legislative one, often provided for in a decedent’s will.
An estate tax can be imposed at the state or the federal level. The government charges it on your right to transfer your property to your heirs after your death. This tax generally isn’t levied against the entire value of an estate but only on the amount by which it exceeds certain thresholds called exemptions.
The federal government doesn’t impose an inheritance tax but several states do. An inheritance tax is imposed by a state government on the privilege of certain heirs or beneficiaries to receive a deceased person’s property. Property left to a surviving spouse is exempt from the tax in all six states, but only four states exempt transfers to descendants. This tax is to be paid by the beneficiaries based on a percentage of the value of their inheritance.
State and federal laws change frequently and this information may not reflect recent changes. For current tax advice, please consult with an accountant or an attorney. Once a person dies, a loved one usually files a petition in probate court to start proceedings to settle the estate. Estate settlement involves appointing a person to manage the estate an executor if there’s a will, an administrator otherwise including final bill payment and distribution of the deceased’s property. If no one files for estate proceedings in court, what happens next depends on the type of property the deceased, known as the decedent, owned, whether he had debts and state law.
Some or all of the estate’s assets may be lost if no one files for estate proceedings in court. For example, if a decedent owned a home with a mortgage, because no one is working on the estate, the mortgage won’t be paid and the lender will foreclose on the home. Further, the person handling the estate usually secures the decedent’s valuable property such as a car. If no one has taken any action on behalf of the estate, valuable items be may damaged or lost. A car, for instance, may be deemed abandoned property by the state if left parked for an extended period of time.
State laws don’t allow creditors to file claims against an estate once the deadline for the claims passes. A creditor of the decedent with a valid claim has a legal interest in the estate because payment of the debt comes from the estate’s assets. State laws differ on procedures and deadlines. A creditor often files a petition for administration, which is used when a decedent doesn’t leave a will, because the creditor has no way of knowing whether the decedent had a will or its location. Because the creditor has to list the decedent’s heirs on the petition, he may have to investigate the decedent’s family history. The court may appoint a public administrator to manage the estate if no relatives step forward after the creditor files a petition.
Necessity of Proceedings
State laws differ on when formal estate proceedings are necessary. Some estates don’t require court proceedings; these include the estate of a decedent who left no assets or only left property that isn’t subject to state probate laws like property in joint tenancy. For example, if a brother and sister own a house together as joint tenants, and the brother dies without having any other assets or debt, because they were joint tenants, the brother’s ownership interest automatically passes to his sister at death, leaving an estate with no assets or debt to settle. Assets that pass outside of probate commonly include life insurance proceeds and retirement accounts; these assets go to the person the decedent named as beneficiary on the plan paperwork.
If an estate is opened by a person other than a relative or beneficiary, such as a creditor, the court appointed administrator has to confirm and try to locate all heirs. The estate may have assets left after all creditors are paid, and the heirs have a right to the assets. If there are no heirs or the court can’t find them, what happens to the assets depends on state laws. Usually, the estate goes to the state of residency of the decedent.
How an Estate Is Settled If There’s No Will: Intestate Succession
If you’re settling the estate of a deceased person who hasn’t left a will, you probably have more than a few questions about how the estate will be distributed. First, it’s important to understand that many kinds of assets aren’t passed by will, such as:
• life insurance proceeds
• real estate, bank accounts, and other assets held in joint tenancy, tenancy by the entirety, or community property with right of survivorship
• funds in an IRA, 401(k), or retirement plan for which a beneficiary was named
• funds in a payable-on-death (POD) bank account
• stocks or other securities held in a transfer-on-death (TOD) account, and
• real estate or vehicles held with a transfer-on-death (TOD) deed or title document.
To find out who inherits these types of property, you’ll need to locate the documents in which the co-ownership or beneficiary designation was established. To find out who inherits other assets generally, solely owned property for which no beneficiary has been formally named, such as a house you’ll need to consult state law. Every state has “intestate succession” laws that parcel out property to the deceased person’s closest relatives. When there is no will to name an executor, state law provides a list of people who are eligible to fill the role. If a probate court proceeding is necessary, the court will choose someone based on that priority list. Most states make the surviving spouse or registered domestic partner, if any, the first choice. Adult children are usually next on the list, followed by other family members.
The Basic Rules of Intestate Succession
Every state has laws that direct what happens to property when someone dies without a valid will and the property was not left in some other way (such as in a living trust). Generally, only spouses, registered domestic partners, and blood relatives inherit under intestate succession laws; unmarried partners, friends, and charities get nothing. If the deceased person was married, the surviving spouse usually gets the largest share. If there are no children, the surviving spouse often receives all the property. More distant relatives inherit only if there is no surviving spouse and if there are no children. In the rare event that no relatives can be found, the state takes the assets.
All states have rules that bar certain people from inheriting if they behaved badly toward the deceased person. For example, someone who criminally caused the death of the deceased person is almost never allowed to profit from the death. And, in many states, a parent who abandoned or refused to support a child, or committed certain crimes against a child, cannot inherit from that child.
Understanding Key Terms in Intestate Succession
Intestate succession laws refer to groups of people such as “children” and “issue.” You may think you know just what the term “children” means, but don’t be too sure until you check your state’s laws. It’s not always obvious. To qualify as a surviving spouse, the survivor must have been legally married to the deceased person at the time of death. Usually, it’s clear who is and isn’t married.
• Legal separation or pending divorce. If the couple had separated before one spouse died, or if one person had begun divorce proceedings, a judge may have to rule on whether or not the surviving member of the couple is considered a surviving spouse.
• Common law marriage. A few states allow common-law marriages (in which a man and a woman who never went through a marriage ceremony can be considered legally married under certain circumstances). Generally, to create a common-law marriage, the couple must live together, intend to be married, and present themselves to the world as married.
• Same sex marriage. There is considerable confusion over whether courts will recognize a same-sex partner as a surviving spouse. Couples who marry and live in a state that allows same-sex marriage should not have a problem. But if one spouse dies in a state that doesn’t recognize same-sex marriage, the courts will have to decide the issue.
Children and Issue
The simple term “children” can mean different things to different people — and under different laws. Many state statutes use the term “issue” to describe who should inherit in the absence of a will, meaning direct descendants of the deceased person (children, grandchildren, and so on).
• Adopted children. In all states, in the absence of a will or other estate plan, legally adopted children inherit from their adoptive parents just as biological children do.
• Stepchildren. Most states do not include stepchildren (children of the spouse of the deceased person who were never legally adopted by the deceased person) in their definition of children for purposes of inheritance. In a few states, however, it may depend on the circumstances of the relationship.
• Foster children. Foster children do not normally inherit as “children” of the foster parents.
• Children adopted by an unrelated adult or family. In most states, placing a child for adoption severs the legal tie between the child and the birth parents. The child can no longer inherit from the birth parents under intestate succession laws, and the parents can no longer inherit from the child.
• Children adopted by a stepparent. A child who is adopted by a stepparent might still inherit from the biological parents; it depends on state law.
• Children born after the parent’s death. A child conceived before a parent’s death but born after the death (sometimes referred to as a “posthumous” child) inherits under intestate succession laws just as do children born during the parent’s life.
• Children born outside marriage. A child born to unmarried parents always inherits from his or her birth mother, unless an unrelated family adopts the child. If the parents were never married, usually the child must show some kind of proof to inherit from the father.
Brothers and Sisters
If an intestate succession law includes the deceased person’s “sisters and brothers” or “siblings” as heirs, this group generally includes half-siblings and may even include half-siblings who were adopted out of the family.
If an Heir Has Died
Obviously, an heir who has died can’t inherit. But if the heir was a close relative, such as a child of the deceased person, his or her offspring may be entitled to take some or all of what their parent would have received. Figuring out whether this is the case can be tricky, but it’s essential that you do so before distributing assets.
To inherit under intestate succession laws, an heir may have to live a certain amount of time longer than the deceased person. In many states, the required period is 120 hours, or five days. In some states, however, an heir need only outlive the deceased person by any period of time theoretically, one second would do. Many states have adopted a law (the Uniform Simultaneous Death Act) that says for purposes of inheritance, each person is treated as if he had survived the other.
Rights of a Deceased Heir’s Descendants
Intestacy laws often provide that if one of a group of heirs has died, his or her children inherit their parent’s share. In other words, they take the place of the parent.
Taking Care of Minor Children
Parents who have young children and who make a will typically name someone to serve as the personal guardian of their children. But if a guardian is needed and there’s no will, how does a judge know whom to appoint? In that situation, the court will appoint a guardian. The judge will gather as much information as possible about the children, their family circumstances, and the deceased parents’ wishes and try to make a good decision. The primary rule is that the judge must always act in the best interests of the children. When a loved one dies, it’s normal to feel grief and sadness. At such times, the last thing you want to do is field calls from debt collectors. Some such debts might be your responsibility to deal with, but others might have nothing to do with you.
But here are some general guidelines that will help you be as informed as possible when speaking with debt collectors.
• The estate pays off debts. Generally, family members are not responsible for any debts for someone who has died. Debts might need to be paid back, but that money has to come out of the person’s estate, not your pocket. As long as there’s money in an estate, debts are repaid first. Then any remaining money goes to beneficiaries. There is an order to how debts must be repaid. Funeral expenses, taxes and secured debts are the top. Unsecured debts, such as credit cards, are near the bottom. If the estate does not have enough money to pay back all the debt, creditors are out of luck. Remember that jewelry, antiques and other valuables must all be added to the estate. You might be forced to sell some of them in order to pay back creditors.
• Creditors can’t look outside the estate … usually. Of course, the estate may not be the only money the deceased person left behind. There might be a life insurance policy and retirement accounts, such as individual retirement accounts and 401(k) plans. If those have named beneficiaries—not the estate but a person—then that money is not considered part of the estate and doesn’t need to be used to settle debts.
• Cosignatories and joint owners are different. The above rule of thumb doesn’t apply for any loans you’ve cosigned or on which you are a joint owner. Those are your responsibility.
• There are exceptions in community property states. The estate rule is an exception in community property states
• Dealing with collection calls. If there are credit card debts, don’t be surprised if you find yourself answering calls from collection agencies. There are three things you need to determine: First, is the debt valid? Second, is it within the statute of limitations (typically four to six months after a death notice has been published)? Third, is it your responsibility?
But there’s no legal imperative to do so. If creditors are being aggressive, calling frequently and misrepresenting your responsibility, tell them to stop and then immediately follow up with a letter. The Consumer Financial Protection Bureau has sample letters you can use. You may also submit a complaint through the bureau.
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84088 United States
Telephone: (801) 676-5506