HOW TO ACCESS CASH ON DEATH
(CASH AVAILABILITY PLANNING)
By: David L. Crockett, Attorney, CPA
(CASH AVAILABILITY PLANNING)
By: David L. Crockett, Attorney, CPA
UCLA Law School ’69, UC Berkeley ’66
AN APPRAISAL IS NEEDED UPON DEATH OF A PROPERTY OWNER. A routine part of trust administration or probate administration is to obtain an appraisal of each property owned. This is for income tax reasons. Because the income tax basis is increased “stepped up” upon death to fair market value an appraisal is needed to prove the exact date of death value. A licensed appraiser is needed to do this. A realtor’s letter of value opinion is not sufficient. There are licensed residential appraisers and licensed commercial property appraisers. Aside from tax purposes, an appraisal is also useful to determine actual value to help to deciding what to do with a property.
INCOME TAX “BASIS” CONCEPT. Under our system of federal and state income tax, if the property is sold before death for more than what was pay for it then there is a capital gain. There are special rates which apply to capital gains depending upon one’s tax bracket. To compute capital gains, you subtract the income tax basis of the property from the net selling price. The income tax “basis” is what was paid for the property in the first place minus any depreciation and adding any expenditures for capital improvements.
DEATH AFFECTS THE BASIS. The basis of property acquired from a deceased person’s probate estate or trust is generally it’s “fair market value” on the date of the decedent’s death. Thus, the children who inherit a property from their parents through a trust or through a probate proceeding will have a date of death income tax basis. This is known as the step-up in basis at death. An appraisal is necessary to legally prove the date of death value.
SORT OUT WHAT NEEDS TO BE FILED. A routine part of trust administration or probate administration is for the Probate Executor or the Successor Trustee of a living trust to sort out the income tax situation. First, you have to determine if the individual income tax return filings of the deceased are up to date. Individual tax returns, form 1040 federal and form 540 state are due each April 15 for the previous year. Thus, 2016 returns were due on April 15, 2017 and so on. It is the responsibility of the Executor or Successor Trustee to make sure the proper returns are filed.
INDIVIDUAL RETURNS FOR THE YEAR OF DEATH. Individual income tax returns are due for the year in which a person dies, even if they do not live until the end of the year. Thus, if a person dies on October 10, 2016 for example, the normal individual returns for 2016 would have been due April 15, 2017. The due date can be extended 6 months by filing extension request forms by April 15. The returns filed should check the box “final return” and state the date of death of the deceased. If you forget to check the box of it being a final return, then the IRS will keep sending you letters in later years asking for returns to be filed.
FIDUCIARY RETURNS FOR THE YEAR OF DEATH. In addition to the individual tax returns, fiduciary income tax returns, forms 1041 federal and 541 for the state are due if the estate or trust has income received after the death of the person involved. (If the income is below the filing limit for that year the fiduciary returns may not be due but there may be reasons to file them anyway so the trust has a complete filing history.) Thus, in the above example of a person who died on October 10, 2016, there would need to be fiduciary tax returns filed to report the income received from October 10 until December 31, 2016. Those returns would be due April 15, 2017 but can be extended 5 months until September 15 if extension application forms are filed by April 15. This situation typically occurs where the trust or estate has income earning assets such as bank accounts or stock market accounts or rental properties.
(“When do I get my money?”)
By: David L. Crockett, Attorney, Certified Public Accountant
Typical situation. An elderly mom with two adult children, Sally & John, passes away with a house full of nice personal belongings (furniture, antiques, crystal and jewelry). Sister Sally lives with mom or in the same town and brother John lives 500 miles away. When mom passes, Sally notifies John but it takes him a couple of days to get into town for the funeral. Meanwhile, Sally picks through the personal belongings and takes for herself what she wants and doesn’t tell John about it.
What actually should be done but rarely happens. A Upon a death, the law requires that the deceased person’s personal property as well as money and real property be inventoried and accounted for. Whether it is a probate situation or a living trust situation (i.e. no probate because of there being a trust in place), somebody needs to pay immediate attention to the personal property within a day or two. It is a sad fact of life that I and nearly all other estate attorneys have observed that personal property often disappears without any trace unless steps are taken to preserve it. In the ideal situation, the entire house including the personal property is photographed immediately and then detailed lists are made, room by room, of what is there. Then, a personal property appraiser is hired to make a detailed listing of everything and appraise the values. Few people realize it, but there are professional appraisers. One resource is the American Society of Appraisers which can be found at http://www.appraisers.org/Disciplines/Personal-Property
What can be done to recover missing personal property? The short answer to this is that very little if anything can be done. This is the classic case of once the horse is out of the barn the remedies are few an ineffective. Theoretically, as in the example above, brother John can file a probate court petition against sister Sally but it is up to John and John’s attorneys to prove that Sally took the items in question. Unless there are photographs or written evidence created very close to the mom’s passing, John can’t produce evidence to prove (a) what the missing items were and/or (b) that mom still owned them at her death or (c) that Sally took the missing items. If John files against Sally she will typically deny any knowledge of anything. If it were money missing, then bank records can be subpoenaed to prove what money was taken and whose account it went into. Not so with personal property, unless the items are of significant value or are put up for sale in something observable such as Craig’s list. Because mom’s personal property is not typically on people’s minds in mom’s last days, not a lot of care or record keeping is done to keep track of what there is.
A father dies without a will leaving an estate of $100,000. Under the laws of intestate succession which apply because there is no will, his 4 children are to receive equal shares of the estate which would be $25,000 each. However, during the 10 years leading up to his death, the father had transferred $20,000 cash in total to his son Johnny thus creating a pre-death transfer. There was no documentation stating whether the $20,000 was a gift or a loan or an advancement against Johnny share of the father’s estate.
Up until 1997 a person could legally change his or her estate plan and the people previously benefited did not have any legal way to find out what the situation was. Before the law was changed to require disclosure as it is now, the state legislature committee reviewing the proposed legislation was presented with a case of a 90-year-old man who met the “love of his life” on a bar stool and married her three months later.
If there is a living trust and all of the deceased person’s assets have been placed into the living trust prior to death, there is no need for a probate court administration. Creditor Rights? For probates, there are specific court-supervised formal steps required to notify creditors and for approval and rejection of creditor’s claims. The situation involving a trust is much less formal and the laws differ somewhat. The person who administers a living trust following the death of the trustors (the persons who created the trust) is known as the successor trustee.
A trust is typically established by a document known as a declaration of trust will which is a document with instructions for how the trust assets are to be handled. The declaration of trust also identifies the trust creators, known as trustors, the beneficiaries who will be receiving money and benefits out of the trust and the trustee. The trustee is the person or institution responsible for administering the trust, writing the checks, paying the bills, etc. The trustees fees are what is paid to the trustee for doing the work of administering the trust.