Hi everyone, Kevin Lynch back with you from Westminster Wealth Management.
We've journeyed through the initial shock and immediate tasks (Estate Settlement 101) and the diligent process of inventorying assets and addressing debts (Estate Settlement 201). Now, we arrive at the final stages, which generally span from Month 3 onwards, though complex estates can certainly take longer. This is Estate Settlement 301, focusing on tax compliance, distributing the remaining assets to the rightful beneficiaries, and formally closing the estate. This is where you cross the finish line.
Months 3-6 (and beyond, if needed): Tax Compliance
Taxes are an unavoidable part of settling an estate. Ensuring all tax obligations are met is a critical responsibility of the executor, and mistakes can lead to personal liability. The goal here is strict compliance.
File the Decedent's Final Personal Income Tax Return (Form 1040): This covers the period from January 1st of the year the person died up to the date of death. It includes all income earned and deductions allowable during that time. This return is filed just like any other individual tax return, but it will be marked as "Final." Any tax due is paid from the estate account; any refund becomes an estate asset.
File Estate Income Tax Returns (Form 1041): This is different from the personal return. If the estate itself earns income after the date of death (e.g., interest on bank accounts, dividends from stocks, rental income before a property is sold) and that income exceeds a certain threshold (currently quite low, around $600), the estate must file its own income tax return, Form 1041. This might need to be filed annually until the estate is fully distributed and closed. Income can either be taxed at the estate level or passed through to the beneficiaries who receive distributions, depending on the circumstances.
Address Estate and Inheritance Taxes (Forms 706 and State Forms): This is where things can get more complex.
Federal Estate Tax (Form 706): Currently, the federal estate tax exemption is very high (over $13 million per person in 2025). Most estates will not owe federal estate tax. However, if the total value of the gross estate (including life insurance proceeds in some cases) exceeds the exemption amount, a federal estate tax return (Form 706) must be filed, and tax may be due. This is a complex return.
State Estate/Inheritance Tax: This varies significantly by state. Some states have their own estate tax, often with much lower exemption amounts than the federal level. Other states have an inheritance tax, which is levied on the beneficiaries based on their relationship to the deceased (spouses are usually exempt, close relatives pay lower rates, distant relatives or non-relatives pay higher rates). Some states have both, and many have neither. You must determine the requirements for the state where the deceased resided and potentially where real estate was owned. The "L-8" form I mentioned previously for New Jersey is related to state inheritance tax clearance.
Consult Professionals (Highly Recommended!): As I mentioned last time, this is truly a team sport. Filing these tax returns correctly, especially the 1041 and any applicable estate/inheritance tax forms, requires expertise. I strongly advise working with a qualified CPA or an estate attorney experienced in estate tax matters. They understand the nuances, deductions, deadlines, and state-specific rules. Getting the taxes wrong can create significant problems down the road.
Months 4-7 (and beyond): Beneficiary Communication and Asset Distribution
With debts addressed and tax obligations being handled, you can now focus on getting the remaining assets into the hands of the beneficiaries according to the will or trust.
Confirm Beneficiaries and Heirs (Final Check): Double-check your inventory, the will, and any beneficiary designations to ensure you have correctly identified everyone entitled to receive assets and what share or specific item they are due.
Distribute Personal Property: If not already done, arrange for the distribution of tangible personal property (furniture, jewelry, artwork, vehicles) according to the will or any separate signed memorandum the deceased may have left. Get signed receipts from beneficiaries acknowledging they have received their designated items. Sometimes, family members can agree on a method for dividing items not specifically mentioned (e.g., taking turns choosing, using colored stickers).
Transfer Titles and Deeds: Formally transfer ownership of real estate, vehicles, and any other titled assets to the designated beneficiaries or to a buyer if the asset was sold by the estate. This involves preparing and recording new deeds and signing over titles, often with the assistance of an attorney.
Distribute Financial Assets: This is often the final major step in distribution. Working with the financial institutions (or your financial advisor), transfer cash, stocks, bonds, and mutual funds from the estate account or the deceased's accounts directly to the beneficiaries. For retirement accounts like IRAs, beneficiaries will typically need to establish inherited IRA accounts in their own names to receive the funds via a direct rollover – this is crucial for tax purposes. Life insurance proceeds are usually paid directly by the insurance company to the named beneficiaries outside of the probate process, once they file a claim with a death certificate. Remember my earlier point: beneficiary designations on accounts like IRAs and life insurance override what the will says for those specific accounts.
Obtain Receipts and Waivers: As you make final distributions, have each beneficiary sign a receipt acknowledging what they received. Often, you'll also ask them to sign a waiver of final accounting and release, indicating they are satisfied with their share and releasing the executor from further liability, assuming a full formal court accounting isn't required or desired. This provides important legal protection for you as the executor. Clear communication throughout the process makes this step much smoother.
The Final Step: Wrapping Up and Closing the Estate
Once all debts are paid, taxes are filed and paid, and all assets are distributed, you can formally close the estate.
Prepare Final Accounting: Prepare a final report summarizing all the assets collected, income received, expenses paid, debts settled, and distributions made. Even if beneficiaries waive a formal court accounting, you should prepare this for your records and share it with them for transparency. Your logbook is the backbone of this report.
Pay Final Expenses: Pay any last remaining administration costs, which are typically the final bills from the estate attorney and CPA for wrapping everything up.
Petition to Close Probate: File the necessary paperwork with the probate court to formally close the estate and discharge you from your duties as executor. The court will review the final accounting or waivers and, if satisfied, issue an order closing the case.
Close the Estate Bank Account: Once you have confirmation that all checks have cleared and the court has approved the closing (or waivers are secured), you can distribute any small remaining balance in the estate bank account and formally close it.
Retain Records (For 7 Years!): Keep a complete copy of everything – the will, Letters Testamentary, inventories, appraisals, tax returns, bank statements, receipts, waivers, your logbook, court documents – for at least seven years. This protects you in case any questions or issues arise later. Store these records securely.
Settling an estate is a marathon, not a sprint. It takes time, patience, meticulous organization, and often, professional guidance. It's a significant act of service for the loved one who appointed you.
I hope this overview, broken down into these 101, 201, and 301 stages, provides a helpful framework. As I mentioned in the video, we do have a more detailed checklist available here at the office. If you'd find that helpful, or if you just need someone to talk through the financial aspects of this process, please feel free to reach out to us at Westminster Wealth Management. We're here to help guide you.
Disclaimer: This blog post is for informational and educational purposes only and does not constitute legal, tax, or investment advice. Consult with qualified professionals for advice specific to your situation. Kevin Lynch Sr. and Westminster Wealth Management are not attorneys or tax advisors.