When a loved one passes away there is routinely a need to appoint a person to legal authority to wind up their affairs. In New York State you go to a special court for that purpose. The court is the Surrogate's Court, an appropriate name, since you may seek there to be appointed as a legal surrogate of the deceased person (known as a decedent).
If the decedent had a will the proceeding brought before the Surrogate's Court is a probate proceeding. If the decedent left no will the proceeding is called an administration proceeding. Both proceedings ask the court to appoint a personal representative for the decedent known as an executor if there was a will and an administrator if there was none.
There are some of advantages to the probate proceeding over an administration. In probate you will not likely have to post a bond with the court. In most administration proceedings you do. A bond is an insurance policy which is filed with the court obligating the insurance company to pay to the ultimate beneficiaries the amount of the coverage should you fail in your performance as administrator.
In an administration proceeding the beneficiaries (persons who inherit decedent's property) of the decedent's estate are fixed by law, specifically section 4-1.1 of the Estates, Powers and Trusts Law of New York. That statute is essentially a list, in descending order of closeness of relationship, of the decedent's family.
For instance, if a decedent is married with children, the decedent's spouse and children receive his or her property, after debts and administration expenses. If decedent leaves no spouse or children, but has living parents, the parents are the beneficiaries. If there are no spouse, children or parents, then decedent's brothers and sisters are the beneficiaries. The list continues outward to more distant relatives but ends at descendants of common grand-parents.
In a probate proceeding the beneficiaries are named in the will. They do not have to be family members of the decedent. They can be friends, governments, corporations, charities, or any other entity capable of receiving property. This flexibility of giving is indeed what wills are for. They allow to give their property to whomever they wish, rather than merely have the law decide. Of course, it is usually true that most persons who make a will name family members as their principal beneficiaries.
Many people do not know that the property distributed by an administration or under a will is mostly limited to property which the decedent held in his or her name alone. There are many decedents, even middle class persons with some assets, who will have little property held in their name alone. A single person may hold all assets in their name alone, but many married people do not.
For example, a typical suburban married couple may own a house, a few bank accounts, some retirement accounts (such as IRA's), a couple of automobiles, and perhaps some life insurance. It is common for these assets to be held in joint name with the spouse, or for the asset to have a designated beneficiary (such as a life insurance policy or IRA beneficiary).
When the first spouse dies, nearly all assets may pass directly to the surviving spouse directly in his or her capacity as the surviving joint owner or direct beneficiary of the asset. In this example almost no property gets distributed by the will or the administration proceeding because almost no property is held by the decedent in their name alone.
An executor or administrator however has many responsibilities that come before distributing a decedent's property to beneficiaries. The decedent's property must be located and reduced to the personal representative's possession. The decedent's debts must be paid. This includes possible taxes.
There are usually 3 relevant taxes, estate tax, income tax, and estate income tax. The last involves income tax on income generated by estate assets while the estate is being administered, meaning from the date of death until the asset is paid out to a creditor or beneficiary. Many estates will owe no tax, but it is the personal representative's responsibility to determine whether any taxes are due, and file the necessary returns and pay the tax from estate assets.
The personal representative must determine if the decedent was required to file an individual income tax return (form 1040), and if so, file it and pay any tax due by April 15 of the year following the date of death. If the assets of the estate generate more than $600 in annual income from date of death forward, then estate income tax returns must be filed (form 1041).
The main tax people fear is in fact no problem at all for most estates. It is the federal estate tax. It has recently been popularly demonized as the "Death Tax," yet only 2% of decedent's estates will ever pay it. For decedent's who die after 12/31/03 no tax is payable and no return need be filed for estates valued at less than $1.5 million. That threshold further graduates to $2.0 million 1/1/06, $3.5 million 1/1/09. Current law repeals the estate tax completely in 2010, but re-instates it back to the $1.0 million in effect now for 2011. Congress will probably act to prevent that re-instatement.
These numbers are for federal estate tax. New York State has its own estate tax, but its current exemption level is the same as the pre 12/31/03 level for the federal ($1.0 million). Any decedent can pass an unlimited amount to his or her spouse without either federal or NY estate tax. Estate tax law provides what is called a marital deduction against the taxable value of an estate and there is no upper limit on the amount of that deduction.
One among many good reasons to consult with an attorney about estate planning is to make sure that any estate large enough to pay tax is arranged to benefit from both the husband's and the wife's individual estate tax exemption so that a married couple can pass to their heirs twice as much as an individual without estate tax. This requires consultation and careful planning.
Various devices are used including gifting to both individuals as well as charities. Trusts of a number of types are used. Wills are usually part of a well-constructed estate plan.
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