Jennifer Gumbel - Welcome to Introduction to Probate with Quimbee. I'm your host, Jen Gumbel, an attorney with over 12 years of experience in Minnesota. I'm with the firm, Wagner Oehler in Rochester, Minnesota. I'm the host of the podcast, "Good Legacy," and educator at the website, organizedafterlife.com. Today is an overview of a probate process. There are specific areas where I won't be able to go into great detail because of the time, but I hope that that will start to get you to become curious and encourage you to take more CLEs down the road.

First, let's discuss what probate court is. It's the court that deals with the law and the issues that come up at death and incapacity. This includes legal issues through guardianships or conservatorships, when individuals are unable to make decisions for themselves or pose a danger to themselves through their decision-making power, and the court determines whether or not their own autonomy should be taken away. Probate court also includes appointing guardians for children who are left without parents, or more commonly dealing with assets that are left in minors' names, children who are under 18. But the vast majority of legal issues that probate courts deal with involve the administration of assets that are stuck in a dead person's name. These assets make up the estate. These proceedings are what we're gonna talk about today. Keep in mind that probate proceedings are extraordinarily regimented and dependent on the local court requirements. This may be one of the most bureaucratic areas of practice. That means that you need to have an internal mythology in order to keep the matter moving along. This is one of those rare areas of law, where you may not get clients calling you on a frequent basis, asking what's going on. You also won't get the court necessarily telling you they need certain things or asking what's going on.

If you practice in probate, along with other areas of law, you need to have a method to keep this top of mind, because unlike real estate transactions, litigation, and other legal issues, these might not necessarily scream at you. And that means that these files can inadvertently languish, but when they languish, your clients and other people who are interested in the estate, usually people who are grieving a person close to them are left wondering what's going on, maybe second guessing the personal representative, placing strain on relationships. In a lot of ways, you need to be proactive to give these files the attention that they deserve. Your role typically is representing the fiduciary of the estate. And that's the focus that we're gonna put on today. Of course, there can be disputes and litigation, and you may decide that you'll also practice and represent heirs or beneficiaries or creditors who have claims and have questions. But the vast majority of representation in probate matters involve representing the fiduciary of the estate. You should be guiding them in avoiding liability. And in many ways, I feel like this is job one when representing a fiduciary, keep them out of hot water. And like I already talked about, keep the file moving. Your fiduciary, other interested parties, and sometimes the court itself, may not be pushing on this matter moving forward. In a lot of ways, it's up to you to get this through efficiently. And you can make all the difference, if you're being proactive versus letting these files languish. Now, as a fiduciary, your client has a duty to all of the interested parties. That means beneficiaries and creditors alike. And their duties include things like safeguarding property, ensuring proper distribution of assets and candor to the individuals involved. What does a probate proceeding accomplish?

Well, the first thing is appointing a fiduciary. And in a bit, we're gonna talk through what kind of proceeding you might need. Determining that proceeding usually boils down to the requirement of whether or not you need a fiduciary put in place by the court. Now the fiduciary is commonly called an executor or personal representative. I'm going to use those terms interchangeably. Here in Minnesota, we have the more modern term of personal representative, but many places still use the term, executor. And that's what many lay people use as terminology. But it's the same thing. If you hear me talk about both, know I'm talking about the same thing. A probate proceeding will also determine if there is a last will and confirm whether the document in front of them is the last will. Probate proceeding addresses creditors, and also confirms the correct distribution of assets.

The very first legal decision that you will help your client make is whether or not you need a court administration at all. After an owner's death, keep in mind that assets can move in two different ways. Simply because someone died doesn't necessarily mean you need to go to court. And this is a common misconception that lay people have. You're in your initial conference. Your potential client is expecting the need to go to court. Usually, they do have no idea on whether or not a court process is needed. But the existence of particular documents won't determine whether or not there's a need for probate proceeding. It's the assets themselves that will determine that.

When someone dies, there's two ways their assets can move. One way is automatically through things like joint ownership and beneficiary designations. For example, a life insurance policy. Most life insurance policies have individuals named as a beneficiary in the beneficiary designation. And that makes sense. When the policy was purchased, the life insurance agent usually ask, where should this check be written out to, or who should this check be written out to? And usually a name is given. In those vast majority of circumstances, the company is simply waiting for those named people to show up. They're not looking for the personal representative because this asset is not going to the estate. It's going to an individual. Lots of assets can move like this. Joint ownership of real estate and bank accounts, payable on death designations on bank accounts, transfer on death designations on real estate, and business interest.

Another way that assets can move is when the assets are owned or set up to automatically transfer to a trustee under a trust agreement. This is how things like a revocable living trust is a tool to avoid probate. But keep in mind that a trust document doesn't mean anything unless assets themselves are saying they're owned by the trust. So it's not just whether or not a trust is created, but what do things like the deeds say, the ownership documents on bank accounts and financial accounts, Beneficiary designations can also list a trust. But when you have the assets saying they're owned by a trustee or owned by individuals in whatever method the asset lays out, then these assets are not part of the probate estate. They're not stuck in the person's name. These don't need court proceedings to transfer, but when the asset is stuck, this is the other way that assets transfer. By default, it goes into the deceased person's estate. And this is what's going to determine what kind of court proceeding you'll need. Essentially, do you need to go through a court probate process or not. The amount and nature of assets in the estate will determine whether a personal representative is required to administer the assets, and therefore whether or not you need a legal proceeding to put that person in place. Now keep in mind, simply because a will nominates a personal representative doesn't put that person in place. The court has to do that. You will run into many people who believe that simply the existence of a will that nominates someone gives them authority. It doesn't. The authority is given by the court. The will tells the court what the person wanted. It can feel kind of difficult to know what you need to do, at least initially. Your potential client might not have a full understanding of the assets and beneficiary designations. And that's okay. You're looking for enough to figure out if there's something that's going to trigger the requirement of putting the representative in place.

Here's how it plays out in Minnesota. If the estate, those assets that are stuck, all together total in excess of $75,000 or include any amount of real estate, we need a personal representative put in place by the court. And here's some ways that I go about trying to determine whether or not we need to probate in a fairly efficient way. I look up real estate deeds. It's fairly difficult for a layperson to figure out what's going on with real estate and be able to interpret a real estate deed or a clear title. I can do that. And I also have access to those records through our county recorder. Those are public. Other assets are not. If I call a bank, they won't talk to me. But I let my client know that if a bank is saying something like they need letters, that's code language that these third-parties are giving them to indicate the asset is stuck in their estate. Now, again, the statement from a third party that they need a probate. And by the way, letters, as we'll talk about in a bit, is the certificate from the court showing that an individual has authority as personal representative. They're called letters. If a third party says that the asset is stuck in whatever way they're saying it, it doesn't necessarily mean that you need to go to court. They don't know what else is out there, or what isn't out there. But that's their way of saying that this asset is stuck and there needs to be some sort of legal administration.

 Now let's talk about those kinds of administrations. Not all of them involve the court. The first one is a lot of times what you're hoping to find out, that you don't need to go to court. The court doesn't need to be involved because you have a small estate, like I just laid out in Minnesota, under $75,000 and no real estate. Let's say it's just a car worth $10,000. And everything else is transferring in some other method, but automatically to someone else. But the car is just in the deceased person's name and it's not moving. We use an affidavit of collection in that case. But pretty much every jurisdiction has some method to deal with these small estates so that the cost of administration don't outweigh the value of the asset. If you practice in probate law, have a clear understanding when you don't need to go to court. But if you do, for example, when I run across a deed and I confirm that there is some real estate interest that is stuck in the dead person's name, well, then I know I need a personal representative. Here in Minnesota, which by the way, is a Uniform Probate Code states. So this may be very similar to your own state, but again, keep in mind, each state is very particular.

Probate is an area of law that is specific to each state. So clearly understand your own state's laws about this. But there are typically two types of probate procedures, informal and formal. Informal is without judicial involvement. You still go through the court, but a judge is not making the decisions. Usually, a court clerk or probate registrar, they're reviewing the paperwork. And if there's no controversy and everything seems to be in order, then they sign off. And it truly feels like a bureaucratic dance of papers going back and forth between the court and your office, publisher, to interested persons, and back and forth.

Formal probate happens when there's a question, a controversy. Maybe you can't find the original will, but you have a copy. But in any case, there's something that just isn't 100% clear where the local court wants to have a judge review it or hold a hearing to allow for people to ask questions. Formal probates can be set up at the beginning where you're opening the proceeding with a court hearing, or you can start out in an informal probate process and find out there's an issue later, and convert it to formal, basically saying we didn't have any questions, but now we do. And we'd like to have a judge make a decision. This can be a good method to minimize and remove liability from your client. There's a question of liability or what the fiduciary should do, don't have them do anything, make the judge do it. You can also have supervised proceedings. That's judicial involvement for almost all significant decisions. In my state, they're incredibly rare. And frankly, from my perspective, I never wanna see this to be the case.

The first step in a probate proceeding is the application and acceptance of serving as fiduciary. The application itself will select the kind of probate you're requesting. You'll identify interested parties, and it will include an estimate of assets. This is a ballpark because, frankly, your client is not yet in a position to confirm these things in a lot of cases. And that's okay. This is also the stage where you're providing the last willing testament, if there is one, or saying you don't know of any. If you're in an informal proceeding and there's no questions, typically the court will sign off and you'll move to the next step. If there's a question or you've already asked for a formal proceeding, then you're waiting for your court hearing and the order from the judge, at least to get that appointment in place.

In the meantime, you're providing notice, which is the next stage. You're letting the people who need to know know about this proceeding. I think about three different types of notice. There's publication. This is putting the world on notice. And you're contacting a newspaper. Yeah, in this day and age, it is kind of an antiquated process. Creditors and family members aren't necessarily monitoring the local paper to see if something's going on. But it's the only way we have now to be able to do that. This can also be one of the stickiest areas. And sometimes the biggest holdup if you're not keeping this file top of mind. You send publication out. You put the file away. You don't set a reminder. Maybe the newspaper drops the ball. And then you get a call weeks later from your client saying, "Hey, what's going on? I have family members bothering me." Keep your thumb on this stage of the process. And if it doesn't go quite right, this can actually delay things, causing problems for your fiduciary, your client, who needs to be able to act, which in turn causes problems for you. Keep the notice piece moving.

The second type of notice is mailing to interested parties. These are the known people. In most states, including mine, we mail to the beneficiaries, the people who are listed in the will if there is one, or who are receiving it under intestacy laws. Those are the laws that decide what's gonna happen when there isn't a will telling us what to do otherwise. So we notice the beneficiaries. We may also decide to notice known creditors. You can review and see if anyone has filed a notice of claim. Many courts will want you to mail to those people that you're filing the probate proceeding. In fact, I look to see if there are any claims, either through judgment searches, or claims filed with probate court. I do this in the beginning to see if it even makes sense to commence a probate. You can probate what's called insolvent estates, estates that, "Oh, more than what's available." But in some cases, it might not make sense for the person in front of you to take on that duty.

I usually go through the step of reviewing judgements as well as those filed notice of claims before we go through the application process. You also notice the heirs, whether or not they're included in the will, the next of kin. Sometimes this can be a fairly sticky part of the probate procedure because they might be learning for the first time that they were not included, but it allows these issues to come to light now early in the process versus later when people maybe find out in other ways, or just kind of guess from the lack of anything happening, and maybe then they start asking questions. These issues come out of the woodwork early. That's part of the benefit of a probate. Finally, and this is kind of quirky, but if you are decedent, you're the deceased person, if they were born in a foreign country, if you have any interested party, whether they're creditors, beneficiaries, or heirs, who live in a foreign country, your state might require notice to a consulate or an honorary counsel. Understand exactly what your probate code requires in certain circumstances so that you make correct notice. Again, you don't want this to be clogging up the proceedings and delaying things. This is what you can control. And this is the piece where delays can come. Increasingly, there's a third kind of notice notifying your state for things like medical assistance claims.

The next step is the appointment of personal representative. In a probate process, the court will typically require some sort of documentation that the person is willing to serve and take on the duties of personal representative. When I file an application, I'm also filing an acceptance to serve. Once the court has everything it needs, confirmation that publication occurred, an affidavit of mailing showing that we mailed it out to the interested parties, and all of the other things it's looking for, then it issues the letters. The letters are the certificate from the court saying, yes, this person can act as personal representative. And it's go-time. They can act with authority. What does that mean? Well, they have a duty to administer assets. That means safeguarding assets, making sure that assets are holding their value. And I don't mean to say that they need to invest it wisely, or if it's in Bitcoin and Bitcoin tanks that they're somehow on the hook. They can't control the world and they're not expected to, but things like making sure the locks are good, inspecting real estate. Here in Minnesota, making sure that there's sufficient enough heat that your pipes don't burst in January. These minimal requirements to make sure that the value of things are holding the value as much as an individual can control it. Liquidation of assets, selling things and converting them into cash. Now, in some circumstances, someone might want a distribution of an asset, the home, the cabin, real estate, cars, certain things that they have an emotional attachment to. If you're aware of any of that, you might hold off for a little bit, but get an appraisal or somehow try to determine fair market value for that asset. We'll talk about a distribution of that in-kind asset later. You prepare assets for distribution, including conveying clear title for real estate.

Different practitioners have different ways of doing this. Some practitioners will actually go through a whole process of confirming clear title, going all the way back. I don't go to those links. I just wanna make sure that the things that we are doing are not creating title issues. So I know what my title examiners will require for title coming out of a probate proceeding. I've also confirmed who is on title currently. Now I might not know the history of it or know that they have clear title, but at least I know who needs to sign off at our stage of the proceedings. Now let's talk about creditor rights. A nice thing about probate proceedings is that they'll give you a due date for people to come out of the woodwork. The courts here in Minnesota, when they open the file, and when they issue the notice, the thing that we publish with the newspaper, they set a due date. It's four months after that notice that says, "Hey, creditors, if you don't show up, you're out," unless you're a known creditor. There's two categories of creditors. Known creditors have particular rights. And known creditors are defined at least in Minnesota and under the Uniform Probate Code as creditors that a reasonable person should have known about.

So if they're mailing bills, if they're sending emails, if they have ACH withdrawals on a periodic basis in bank accounts, or they've filed a judgment, they have a recorded mortgage or a lien against real property, or they've filed a notice of claim, they're known creditors. And if you ignore them, then you may have a problem. Caution your personal representative to get whatever access they can to mail, and email, and bank accounts. Review filed court judgements. Review filed mortgages and liens. Check those car titles to see if there's any car loans. And review filed notices of claim. Make sure that you're aware of any creditor that would be considered a known creditor. And then wait to see if any unknown creditors show up.

For example, a neighbor who says, "Yeah, we had an agreement that I was gonna mow their lawn and here's my bill." Well, if they don't show up within at least in my case here in Minnesota, four months from the issuance of notice, then they're out of luck. That's even though they might have a contract statute of limitations for longer, but now that the individual has died, they need to move, and they need to let us know who they are. There's one exception. In most states, the state does not have to follow this claims due period. Here in Minnesota, we are notoriously strict in medical assistance recovery. And claims for medical assistance, these are the programs that pay for nursing home care. If there's a medical assistance claim that is not subject to our claims due period, this is why issuing notice to the state and saying, "Hey, by the way, this person passed away, did you provide nursing home care or did you pay for it?" And in our state, that extends to their spouses. If they have a predeceased spouse, the state can make a claim against their estate as well. We shake that out of the tree.

But what happens if you get a creditor claim that doesn't make any sense? Here's some examples. A creditor that no one knows about, a creditor that no one knows about and your decedent happened to have a very common name, a creditor who maybe said over the phone, "You know what? They've passed away. We're gonna waive that bill now," or creditors who don't have a very good claim anyway, "Six years ago, I fixed his car." What do you do in those cases? Well, under the probate code, here in Minnesota and the Uniform Probate Code, you have to act fast. You have a period, usually 60 days, to disallow the claim. But once you disallow it, then the creditor has the burden to prove it up. If they don't respond, you don't have to pay it. They're out. Finally, even if you get a good claim, a claim that everyone agrees is valid and should be paid, don't necessarily pay it right away. There's a classification of creditor claims. If a general credit card is paid off and later on someone with higher standing, say, expense of the last illness or a funeral bill comes up later and you don't have enough money to pay it, the personal representative can be on the hook. In fact, this is one of the few areas where someone can be on the hook for the debts of the deceased person when the fiduciary screwed up. I general don't like bills to be paid until after that claims due period has passed and we know exactly who the creditors are. Sometimes I'll have some exceptions to this. If my fiduciary was the financial power of attorney before the person's death and had a very good handle on the finances for a significant period of time, where we have pretty good certainty of who the creditors are, when we have an estate, that's very much solvent, at least as we know it. Maybe it's a small claim. Maybe they're willing to negotiate if they're paid early. But for the most part, I don't like paying creditor claims early.

This also extends to distributions. Distributions out of the estate to the beneficiaries or the heirs. Don't distribute without certainty. Rule of thumb, if it goes out, don't presume it's going to come back. Generally, I caution my fiduciaries to wait to make a distribution until we're ready to close the estate. This is after the claims due period and we know who our creditors are. That means that my probates don't close until that four-month period. Now, in some cases, there might be specific reasons why someone wants a distribution. Sometimes that's okay. For example, if we have a surviving spouse that needs to get the home in their name, because they need to get a mortgage or refinance their mortgage, that can work because some things are exempt from creditor claims.

Some things clearly go to the spouse no matter who else is involved. If I have certainty in other ways, then it might make sense. But for the most part, I want to wait. In some cases, you may have beneficiaries who don't want the value of the asset. They want the asset itself. And we need to talk about this because even though a request for what I call an in-kind distribution, not the money of the thing, the value of the thing, they want the thing, the car, the real estate. When someone wants a distribution of a particular kind of asset, almost always the family gets confused. Almost always the family and my client come up with a common-sense approach. And they kind of treat the distribution as a purchase, but the way they do it ends in an incorrect total distribution. And when I lay it out initially, almost always they don't believe me, but when I lay it out with particularity and showing what happens over the whole life of probate with the total distributions, it starts to make sense. But I wanna talk this through because this can really be a way where you might allow your personal representative to follow what feels like common sense. And they screw up. And you didn't advise them not to. So not only did they screw up, you screwed up too. So let's talk this through so you have a clear idea, so that you can explain it clearly to your fiduciary and all of the players involved.

So let's talk about this common-sense approach which treats a distribution almost like a purchase. Now the purchase method, let's talk through a purchase method. I mean, it's not really a purchase method because no one's actually paying for market value. No one's writing a check. But they're treating it like a purchase, and this kind of mixing of a distribution and a purchase really throws people off. So here we go. Chris dies. She leaves in estate, after all expenses and debts are paid worth $3,600. Hey, you might not like the numbers. You may think the numbers are silly, but I like easy math. Let's stick with the easy math. Okay? She leaves an estate worth $3,600, $3,000 in cash and $600 in value of a vintage car. Now, how do we know that? We probably got some sort of appraisal or Kelly Blue Book value or something to have an independent review and confirmation of what the value of this car is, but okay. So $3,600 of assets in the estate.

Chris's last and probated will devises her estate equally among Kim, Chloe, and Courtney. Kim is the appointed personal representative. And Chloe tells Kim, "You know what? I'd like to receive that car as part of my inheritance and the numbers shake out $600 as well within what would be distributed to Chloe." And Kim, Chloe, and Courtney, all agree. Yeah. It's kinda like Chloe's buying the car from Kim and Courtney. I can't tell you how often lay people think that this is how it works. And even attorneys can get caught up in this. So in accordance with this method, the parties agree that Chloe's final cast distribution will be reduced by $600. And Kim and Courtney would split it, each receiving $300 more in cash at the final distribution. Kim thinks, "Hey, this makes total sense," and writes out the checks in the following manner. $400 to Chloe. There's $3,000 left. She bought the car for $600. Okay. You have $400 left. Kim has $1,300. $1,000 of the cash left over and part of that payment of the car. Courtney, the same thing. But I hope this is starting to show how it doesn't quite make sense. The total distribution of Chris' estate is totally thrown off. Chloe only got a $600 car and $400 cash. That's $1,000. That's not a third of $3,600. Kim got $1,300, Courtney got $1,300, and that is more than one-third of the value of the estate. That's not equal. And that's not what the will said. Kim and her attorney now have a problem. How did this go so far off the rails, again, treating a distribution like a purchase? Now, if Chloe had paid $600 for the car through the $600 in the pot, and then they split the pot in threes, that's fine. But don't mix up a purchase and a distribution. Let's talk about the right way to do this. Chloe tells Kim she wants to get the car as a partial distribution. Kim, Chloe, and Courtney, all agree. It's like Chloe is buying the car from Kim and Courtney. And Kim talks to her attorney. He's like, "No, no, no, no, no. This is a partial distribution." And see, let's back up to the sentence before. Here's where the math goes wrong. It's like Chloe is buying the car from Kim and Courtney. That's wrong. Chloe is kind of buying the car, but it's from Kim, Courtney, and Chloe. Chloe already had an interest in the car. But the attorney wants to keep things clean. By the way, you're the attorney. You're the stick in the mud. You want to keep things clean because you don't want Kim to have liability, and in turn you having liability, keep it clean. Say this, "Nope, it's not a purchase. It's a partial distribution." So here's how we're gonna do it. Chloe gets $600 of the cash. She gets $1,200 out of the total estate. She already got $600 in the car. So she gets $600 of the cash. What's left over? Well, $2,400, half of which goes to Kim and half of which go to Courtney. And when you see the total distributions, Chloe got $1,200, Kim got $1,200, Courtney got $1,200 and we are in good shape. Kim did what the will directed her to do. If you're in this position, and I'm gonna tell you, you'll probably be at this position at some point, be ready to stay and firm and be ready to write this out clearly for everyone involved. Once they see the final distributions and how that all totals up, it'll start to become clear. Just hold your ground on this.

Now what happens if there is a dispute? First of all, try to avoid them if possible. Disputes increased timeline and cost. They might mess with your own business plan. Decide if you want to take on probate disputes because quite frankly, their litigation, which is far different than probate proceedings. If you're not ready to be a litigator, or if you just simply don't wanna be, know who you're going to call if a dispute arises so that you can hand off the file to competent counsel or co-counsel if you need to. But this is the benefit of the ability to convert to formal. If people don't like what the personal representative is doing fine, let's have a judge decide. By the way, that means we're gonna have to wait for the court to set a date for a hearing. By the way, that's gonna cost more. I have to file the request. I have to put that together. I have to notice everybody. I have to show up to the courthouse. All of those things cost money. And many times those are valid cost for the estate, which means that will come out of what the beneficiaries ultimately receive. Use your judgment as far as laying this out for the parties involved, but merely second-guessing what a personal representative is doing ultimately might not make a whole lot of sense to push too far from the perspective of a beneficiary. When they begin to understand that, disputes reduce. Let's talk about taxes. There are two main types of taxes that as fiduciary, your personal representative has the duty to address. The first is estate taxes. And I file these on a frequent basis. Might seem odd. I'm not doing that because I'm working with high-flying, high net-worth people. Not necessarily. I do work with those people. But they're not my only clients that have to file estate taxes because I'm in the state of Minnesota.

Okay, let's talk about what estate taxes are anyway. They're a tax on the estate, the taxable estate. That includes assets that are stuck in the person's name that you're administering. They also include non-probate assets, any asset that is transferring because someone died as part of the taxable estate and the federal government has an estate tax. The exemption though is over $11 million per person. And surviving spouses who didn't get a chance to use all of their first spouses estate tax exemption might be eligible to take not only their own, but the other persons'. Those are some high numbers. And while I've run into it, quite frankly, it's not often. Now the federal estate tax exemption can sunset and Congress can always change it. But I think it's fair to assume that estate taxes will never be lower than a few million dollars, or at least estate tax exemptions will never go under a few million dollars. Just recently, there was a huge debate in Congress about what the estate tax exemption should be, and if that should be rolled back. Heck, Bernie Sanders said he would like to see an exemption of $3.5 million, which works well for me in Minnesota, because that is very darn close but still more than what the Minnesota estate tax exemption is. Ours is $3 million. And you don't get to use your predeceased spouse's exemption. We don't have what's called portability. So we do file quite a few estate tax returns, at least because of the state of Minnesota. Understand clearly whether or not your state has estate taxes. Also understand clearly whether your client or at least the deceased person your client is acting on behalf of understand whether or not some of their estate might be in another state.

 If we have a Florida decedent who owned a partial interest in a Minnesota cabin, we still might have Minnesota estate taxes due. There's a handful of states with estate taxes. Some states have inheritance taxes. It's a tax that's not really paid by the people inheriting. Typically the estate's responsible for paying for it. But the calculation is based off of who's inheriting it. Our neighbor to the south Iowa is an example of that. But these are transfer taxes, taxes that come up because someone died and assets are moving. That's not the only tax that your client has to be aware of. They have to be aware of income taxes. They need to file the last year of reporting. If the estate earns income, or if there's a trust involved that earned income, then in that case, it's the trustee. But there's a fiduciary income tax return that's reported when an estate or a trust earns income. In some cases, the reporting isn't necessary because there isn't enough income to require it, if you aren't sure about basis. So for example, the house is sold. Not all of that is going to be taxable gain because basis will reduce that. If you don't know what basis is, start to learn what that means. Many times that can essentially remove the taxable gain.

Finally, and in our last few minutes, let's talk about accounting and closing the estate. Typically, estate will lay out a due date for what's called the inventory. Now in the application, there was a ballpark estimate of what was in the estate and you at least knew enough that something triggered the need for probate. But after the personal representative has authority, they're able to contact third parties and get more information. And by the due date, in my state, nine months from the date of death, the personal representative should have a very good understanding of what the assets are. And the inventory list out the values, importantly at the date of death. And this becomes important later if you need to do a final account. This is an account of what happened in the estate. It's a double accounting, at least in my state. And your base numbers are the numbers off your inventory. If you file an inventory and find out something later, then you should update your inventory so your accounting doesn't get thrown off. But essentially you're balancing it with what came in, what went out, and what's left over. And comparing that importantly to what's actually going to be the checks that are written out to the beneficiaries. That's why it feels like a double accounting.

Final accounts are, to be honest, burdensome. They take time, and sometimes don't always balance. But importantly they are waivable. The interested parties can waive this requirement. So for example, if you have a surviving spouse who's receiving all of the estate, she doesn't have to give herself a final account of what she did as personal representative. That's silly. Have a good understanding of when it makes sense to put together a final account and when you're going to ask for it to be waived. And start to understand when a court is gonna require it. But here's my tip, caution your client to keep good records from the beginning, including any expenses that they pay ahead of time. If they're paying for your retainer fee, they should document that because they can get reimbursed, but they should be able to show their work. Why did they get $2,000 back? Well, they were reimbursing themselves for a valid expense against the estate. Keeping good records of what they paid for. And what I do is I give them the classifications of the final account so that as they make payments, they're classifying those numbers for me. That makes a final account easier to make down the road if we need to do it. If not, all interested parties waive that final account. We may be stuck doing that and the work ahead of time really comes in to minimize the amount of time that you need to spend and the final cost for everybody.

Okay, your past the claims due date period. You've liquidated all assets, or at least the assets that won't be distributed themselves. Everything's sitting in a bank account. By the way, and I maybe should have mentioned this earlier. I like to have my clients open a separate estate bank account even if they have access to the individual's checking account. It helps with the accounting. And it's very easy to get an EIN number directly through the IRS website. It only takes a few minutes online and it's entirely free. The cost to set up a separate estate bank account can be much less than confusing accounting and trying to decipher what things are and how things should be classified later. Keep it segregated. But whatever needs to be liquidated is liquidated. There are no more assets in the person's name, or at least none that aren't ready to be turned over immediately. You've confirmed who the creditors are. You've confirmed that the state isn't owned any money for nursing home expenses. You've confirmed what taxes are, determined whether or not you need to make an estate tax return. You've made the estate tax return filing. And maybe you haven't made the income tax filing yet. And actually this can be kind of a sticky timing issue that we'll talk through in a second, because it's a common issue.

And it seems almost insurmountable, unless you know how to close properly. But you know almost exactly everything that needs to be paid out, then you're ready to close. And most states have a process that looks somewhat like this. You send out a proposal to the beneficiaries. Typically with creditors, you've already said that you're going to pay them or you won't pay them, or agreed on a negotiated number, but to the rest, you've proposed how to distribute out the estate. And a lot of times I just use percentages and not exact numbers. This can help avoid the need for a final account if circumstances warrant. If the beneficiaries or heirs, depending on whether or not there's a will, but the people who are supposed to receive, if they all agree with your proposal, great. Essentially at this stage, you're confirming what's going to happen, and you're confirming that everyone agrees with it. You want this confirmation because when your client no longer has authority as personal representative, you don't want any questions after that. You wanna know a certainty that nobody has any claims against your client. If everyone agrees to the proposal, then we can close. And if we didn't open formally, we can close informally. When we can close informally, we can send a statement to the court saying we've done everything we needed to as personal representative, or at least my client has done everything they needed to do as personal representative. I only do this if all the interested parties are happy in agreement and importantly have waived any claim against my client. But if they have all signed off on the proposal, and if they've all waived a final accounting and a hearing, then we send in this statement to close. This lets me know that the court file has ended, my client's liability is ended, and my liability is ended.

But here's a caveat, going back to income tax reporting because the issuance of tax documents doesn't always match your timeline. Maybe there was a sale of the residents and the closing agency issues their 1099s in January. Now, maybe you can request that they issue it early, but they're not required to do that before the end of January, and they might not. So what do you do? You can't file your tax return early anyway. You wanna close in July, but you still have to file a tax return that you can't even do until January of the next year. Here's how I deal with this, and it works really well. Before we propose the distribution, my client has worked with a tax prepared to confirm exactly the taxes that need to be paid.

Now I will say this, income taxes for estates can be reported one of two ways. The estate can report it and pay the taxes, or they can issue what's called K-1s, statements from an entity to the individuals benefiting from the entity and the individuals reported on their own income taxes. Leave this to the tax professionals or have a pretty good opinion. I like the estates to do it themselves because I know it's done. And there's no surprise for beneficiaries later. When beneficiaries are surprised, they're usually upset. And they're upset at the personal representative. We don't want that. In any case, we know exactly how the personal representative is going to report the taxes. We know exactly how that's going to be set up to be paid. And I caution my client to withhold 150% of the estimated taxes and 150% of the cost to file the tax return. The proposal for distribution is after that amount. Now it's 150%. So there should be funds left over. But a refund later on is going to work. Requesting beneficiaries, put money back is almost never gonna work. So that's how we approach it.

And then in our statement to close, we can tell the court the things that are still outstanding, typically final tax reporting and payment of my final fees. And that works, because in my state statute, filing a statement to close doesn't terminate the authority. It sets a clock for a year. And after that year, my client no longer has authority. That works really well to deal with taxes. If you can't do that process, if someone didn't agree, if someone didn't sign a waiver, then close formally. Again, you're removing any question of liability down the road. So have a court review everything and confirm it. But if you go formally, the court's expecting a final account. This is why it's so important to be ready to put that together. And if statute doesn't create a period of authority after closing the court file, or for court doesn't already do that in their order, request it specifically for those final payments and tax reporting. That's the life of a probate file.

I'm Jen Gumbel, attorney in the State of Minnesota, podcaster at "Good Legacy," and educator at the website, organizedafterlife.com. And it's been a pleasure to introduce you to this area of practice.