Paul Allen, co-founder of Microsoft, passed away on October 15, 2018. He led an amazing life full of accomplishments that would span several blogs. Some noteworthy items include being the sole investor of SpaceShipOne suborbital commercial spacecraft, redeveloping the South Lake Union neighborhood of Seattle, owning the Seattle Seahawks and Portland Trail Blazers and donating more than $2 billion during his life to charitable causes. When he died, his estimated net worth was in the range of $20-$26 billion. Allen signed The Giving Pledge in 2010, where he promised to leave at least half of his fortune to philanthropic and charitable causes.
Experts anticipate that Paul Allen’s estate will take anywhere from three to five years to settle. While this may seem like a long time, this is actually very quick for his level of wealth and unique asset mix. The “average Joe’s” estate generally takes anywhere from six months to two years to settle. Here is a general outline of what estate settlement looks like.
Funeral arrangements can be laid out in a health care directive or health care power of attorney. The State of Arizona has created forms to help Arizona residents get started. If a person has not provided funeral instructions, the next of kin, in the order specified in Arizona statutes, decide how to handle the person’s remains.
It is important to secure a person’s assets immediately after death. This should be done concurrently with making funeral arrangements. The goal is to prevent theft of estate property and keep the property maintained during estate settlement.
For Paul Allen’s estate, this may include re-keying locks or changing security codes for his home, yachts and vehicles; periodically checking on the house and personal property; and ensuring that his security system remains operational and insurance remains in force during estate settlement. For the “average Joe,” this step doesn’t look all that different, except for the part about the yachts.
Locate and review estate planning documents
Representatives should retrieve and review the deceased person’s estate planning documents. If the deceased person did not provide the location of the estate planning documents to the representatives before death, the representatives will need to search the deceased person’s paperwork or electronic files or contact the deceased person’s legal, accounting or investment professionals to see if they have copies.
Inventory assets and liabilities
Ideally, everyone would create and periodically update a list of their assets and liabilities. In situations where a person does not create an inventory, that person’s representatives must do so, which can be difficult in some situations (see my earlier post here). The inventory doesn’t need to be perfect, but it is a helpful starting point for meeting with legal, accounting and investment professionals.
Meet with the attorney, accountant, and investment advisors to discuss next steps
If a probate is required, the attorney may prepare and file the paperwork to open the probate with the court. The accountant generally works with the representative to get a new tax ID number for the estate or trust. Representatives cannot continue to use the deceased person’s Social Security number after death.
Gather assets and transfer accounts to the estate or trust
Assets should be transferred out of the deceased person’s name and Social Security number into the name and tax ID number of the estate or trust. When financial institutions prepare tax documents, they use the tax ID or Social Security number on the account to issue 1099s. The sooner a representative can transfer the accounts from the deceased person’s Social Security number to the estate’s ID number, the easier it will be at tax time to get the proper income split between returns. Items with beneficiary designations go to the specified beneficiary.
Final medical bills, credit card bills, utilities and other expenses need to be paid if there are sufficient assets to pay all creditors. In situations where there are not enough assets to pay all creditors, it is important to discuss the order of payment with an attorney since a representative may be personally liable if they make payments to lower priority creditors without paying higher priority creditors first.
- 1040 (Individual Income Tax Return): The final individual tax return of the deceased person will need to be filed to report the income from January 1 through date of death. It is due April 15 (October 15 if extended).
- 1041 (Fiduciary Income Tax Return): Just like an individual has to pay taxes, so too do estates and trusts. This “fiduciary” income tax return reports income earned after a person’s death. A fiduciary return must be filed every year until the estate distributes the assets to the beneficiaries.
- 706 (Estate Tax Return): This return is required when a person’s gross estate (including any gifts made during life) exceeds the unified credit amount, currently $11.4 million per person in 2019.
- 709 (Gift Tax Return): If the deceased person made gifts to a single recipient in the year of death that exceeded the $15,000 annual exclusion amount, a gift tax return is required to be filed.
After all of the previous steps have been done, the representative can distribute any remaining assets to the beneficiaries of the will or trust. The representative should consult with the estate planning team prior to distribution.
Hopefully this outline provides you with a better idea of why estate settlement often takes a year or more, even for the “average Joe.” A representative must be diligent, careful and thorough at each step, even though it takes a little bit longer. This extra time is worth it to avoid personal liability and potential claims of the estate being mishandled.
Jennifer A. Maas