I recently taught a class
with the same title as this article. It was inspired by what I learned and
experienced personally as the personal representative (PR) of my late brother’s
estate.
Below are some key take-aways:
PR Definition-
A personal representative (PR) is a person or financial institution legally
appointed to settle a deceased person’s estate via probate. PRs can be named in
a will or appointed by the court. Some states (FL) use the PR term and others
(NY) use the words executor (with a will) and administrator (without a will).
The role and tasks performed are the same.
PR Importance-
A PR is granted legal authority and fiduciary responsibility to act in the
estate’s best interest. There can be legal and financial consequences if duties
are mishandled. A PR’s actions can directly impact the lives of estate
beneficiaries for many years.
The Probate Process-
Probate is the court-supervised process of managing a deceased person’s estate
(i.e., assets and debts). It involves validating the will (if one exists),
gathering and valuing assets, paying debts and taxes, and distributing
remaining assets to heirs.
Probate Avoidance
Strategies- To avoid having assets subject to
probate, people can use trusts, payable on death (PoD) designations on bank
accounts, transfer on death (ToD) designations on brokerage accounts,
beneficiary designations on life insurance and retirement savings accounts, and
assets with joint tenancy with right of survivorship (JTWROS).
Legal Assistance-
When serving as a PR, it is always best to consult an attorney in the relevant
jurisdiction (i.e., where the deceased person lived). An attorney can answer a
PR’s questions and handle court-related process steps and other tasks (e.g.,
obtaining an ETIN for the estate bank account and notifying creditors).
Small Estates-
Most states have a simplified probate process for small estates. The definition
of a small estate varies per state (e.g. $75,000 in FL and $50,000 in NY).
Qualification for small estate procedures generally depends on the total value
of probate assets rather than the deceased’s overall wealth. Wealthy people could
use one or more of the probate avoidance strategies listed above to keep their
probate assets below their state small estate cap.
PR Appointment Letter-
An appointment letter (a.k.a., Letter Testamentary) is a formal document issued
by a probate court, confirming the appointment of an individual (or entity) as
the PR of a deceased person's estate. This letter serves as proof of the
representative's authority to act on behalf of the estate (e.g., set up an
estate bank account, pay debts, and distribute property).
Gap Time-
It takes time for a PR to be issued an appointment letter. In the meantime,
someone needs to pay up quickly for a funeral or cremation and then get
reimbursed by the estate. Ditto for necessary expenses to maintain property
such as electricity, water, property tax, and lawn care.
Tax Implications-
PRs are entitled to compensation in most states, generally a percentage of the
estate’s value as defined by state law. PR compensation is taxable as ordinary
income on IRS Form 1040, Schedule 1. When PRs are also a beneficiary of the
deceased’s estate, many waive their PR compensation and inherit nontaxable
assets as a beneficiary instead.
This post provides
general personal finance or consumer decision-making information and does not
address all the variables that apply to an individual’s unique situation. It does
not endorse specific products or services and should not be construed as legal
or financial advice. If professional assistance is required, the services of a
competent professional should be sought.
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