EXHAUSTIVE MEMO FOR
NEWLY APPOINTED TEXAS EXECUTORS

GENERAL COMMENTS APPLICABLE TO ALL TEXAS PROBATE ESTATES

All estates, taxable or nontaxable, large or small, must be wound up by someone. Usually that will require, at a minimum, the filing of the decedent's will in the County Court of residence, an Inventory and Appraisement and List of Claims listing the assets owned by the decedent. These two matters are usually handled by an attorney. If the estate is large and requiring substantial time to wind up, the estate is said to be "in administration" until it is wound up. An executor (named in the will) is appointed by the court who will take charge of the estate during such period, file the necessary tax returns, collect the estate's assets, finally distribute such assets to the heirs designated in the decedent's will. This could take up to two years or more to complete. Usually, an executor serves independent of the court. If a person dies without a will, the court will appoint an administrator to do these same duties for the estate but is accountable to the court. Not leaving a will can cost unnecessary legal fees.

Some of the duties of the executor include the filing of the decedent's last income tax return and the filing of a Federal Estate Tax return and State Inheritance Tax return in case the decedent's estate is over $1,500,000 in size. The decedent can still file a joint income tax return with his surviving spouse for the year of death.

The Federal Estate Tax return is due nine (9) months from date of death. The State Inheritance Tax return is due at that same date. If any death taxes are owed, they will have to be paid in full upon filing the return.

A decedent's estate consists of his(her) own separate property and his(her) one-half of community property. Texas has community property laws and normally all assets accumulated by husband and wife during marriage are presumed to be community property. However, Texas laws do recognize that separate property does belong to one spouse or the other if such separate property was acquired (a) prior to marriage, (b) inherited by that spouse, (c) gifted to that spouse, (d) or was acquired through a partition agreement between spouses. All other property accumulated is presumed to be community property, unless specific tracing is possible.

As pointed out above, death taxes will be owed in case a decedent has a taxable estate of more than $1,500,000.

Assuming a couple has only community property, if their combined estates total $3,000,000 or less (for 2006, or later years $4,000,000 and more), there will be no Federal death taxes.

Even so, the executor must still file the will for probate and must file the inventory and appraisement with the County Court.

The death tax rates are graduated rates, beginning with 18% and graduating upwards to 52%. The tax is calculated on the taxable estate, which is arrived at by adding up all of the values of your assets, deducting therefrom funeral expenses, administration expenses (executor fees, attorney fees, accountants fees, appraisal fees, court costs). The remainder is the taxable estate.

You were named as an executor in the will of a decedent. Many times this is an honor to be named as such by your deceased relative or friend but it also carries with it responsibilities as well as personal liabilities for winding up the affairs of the decedent's estate.

As an executor, you have a lot of authority and many responsibilities, all of which start from the decedent's will. You can only do what the will says. You have no authority to do otherwise.

GENERAL COMMENTS APPLICABLE TO ALL TEXAS EXECUTORS

Probating the decedent's will is the judicial process establishing the validity of the will. If filed by a certain Thursday, the will lays on the court docket for ten days. Thereafter, the probate judge will "hear the case' and will appoint you as the executor. In Texas, in most instances you will be independent of the court. You are the personal representative of the estate, and you must take certain steps to assure the proper disposition of the decedent's property. Having qualified as independent executor, you now have the sole responsibility to administer the estate without further supervision or approval of the probate court. You must file certain notices and an Inventory and Appraisement and List of Claims with the court. However, you are subject to strict legal requirements of prudence and fairness in administering the estate in accordance with the will and the law.

In your capacity as independent executor, you are the decedent's representative for purposes of terminating his affairs. As a start, generally this includes:

- locating and assisting in the valuation of assets

- the payment of debts

- payment of expense of administration

- payment of taxes

- distributing the assets to beneficiaries named in the will

- you are to take care of the property just as you would your own

- open a separate estate checking account, and perhaps a separate estate savings account, should be opened in the name of the estate

- obtain a Federal identification number for the estate to be used for all bank accounts, savings accounts, investments and for filing tax returns, all income of the estate should be deposited into the estate's checking account or savings account and all estate debts and obligations should be paid out of that bank account,

- look at the liquidity of the estate, to assure sufficient cash is available from which to pay debts and taxes, decisions on possible sales of property may be indicated

- preserve, secure all real estate properties of the estate, check on insurance coverage,

- filing the necessary tax returns.

A person's taxable estate consists of everything he owns, to the extent of his one-half community property interest therein, plus his separate property, and includes:

(1) Real estate - residence, land, oil and gas properties

(2) Stocks, bonds

(3) Cash, certificates of deposit, notes receivable

(4) Life insurance on life of decedent if policy is owned by decedent at death

(5) Automobiles

(6) Furnishings

(7) Jewelry, silverware, furs

(8) Annuities, retirement plans, IRAs

(9) All other properties

These properties are valued at their fair market value on date of death, with an option to revalue them six months later if that were an advantage to do so.

The values at which properties are reported in the Federal Estate Tax return (or Inventory and Appraisement and List of Claims) will become the basis (subject to depreciation and depletion) for determining gain or loss on subsequent sale.

Once the estate is ready to be closed, the executor will distribute the estate's properties to the heir(s) named in the will. The estate usually can not be closed until the Estate Tax Closing Letter has been obtained from Internal Revenue Service.

How soon an estate can be closed is a matter of how complicated the estate assets may be, how soon the Internal Revenue Service will examine the return. Generally, we tell most clients you can expect the estate to be open for at least two years. Here's why.

First, you file the Federal Estate Tax return (Form 706) by nine months from date of death. Then you sit still for a while until IRS is ready to examine the return. Every Federal Estate Tax return is examined. If the return is well documented, with ample support as to how valuations therein were arrived at, it may be that IRS will merely have an office review thereof within four to six months from the date the return was filed. If so, they may "survey it", meaning accept the return as filed. Then, you could expect the Estate Tax Closing Letter in about two months thereafter. If, however, the IRS sends the return out for field examination, you may then first hear from IRS in about nine months to twelve months after filing the return. If they question some of the valuations at such face to face examination, and if additional values will be agreed to, then another time frame comes into the picture. You will get the revenue agent's report in about six weeks, a billing for the tax and interest about six weeks later, then a notice is sent to the State Comptroller notifying him of the changes made in the Federal return. He in turn will bill the estate for the additional State Inheritance Tax and interest in about four weeks thereafter. Once the additional taxes and interest have been paid, the estate will then get the Estate Tax Closing Letter in about four weeks thereafter. Hence, at least two years will have gone by before the estate can be closed.

CHECKLIST FOR SOME OF EXECUTOR'S DUTIES

Note the code letters below which designate the responsible party:

A Attorney

E Executor

C Accountant

F Family member

E 1. Select attorney for estate (actually for the fiduciary of the estate, the executor or administrator.)

A 2. Probate the will. Attorney will file application to admit will to probate.

A E 3. Prepare, sign, and file with the court the Declination if the first-named executors want to decline to serve as executor.

A 4. Have the personal representative be appointed as executor, he will receive the Letters Testamentary from the Probate Court (County Court). You will need a number of certified copies of Letters Testamentary, to furnish when trying to cash in C/Ds, transfers of stock, oil and gas properties, retirement plans, etc.

E F 5. Inventory lock box.

E 6. Advertise in local newspaper for claims against estate within one month after your qualification. A published affidavit with a copy of the ad needs to be filed with the court.

E 7. File claim for life insurance benefits, request Form 712 from insurance company. You will need one death certificate for each life insurance policy. These funds pass outside the will and are paid to the named beneficiary in each policy.

E 8. File claim for retirement plans, pensions, IRAs owned by decedent, if any.

E 9. Apply for lump sum Social Security benefits and V.A. benefits (usually done by funeral home for family and will apply such benefits towards the funeral bill).

E 10. File Form 56 (Notice of Fiduciary Relationship) with IRS.

E 11. Open Estate checking and savings accounts. If community funds are involved one-half of all the balances on deposit on date of death can be transferred into the new estate checking account. Order checks for the estate. Order deposit slips for the estate.

C 12. Write banks to confirm balances on deposit as of date of death.

C 13. Value securities, those listed on exchanges can be obtained from the WALL STREET JOURNAL. Correspond with brokerage house to obtain valuations of other securities not listed therein, such as municipal bonds, mutual funds, etc. Calculate or obtain amounts of accrued interest and/or declared but not collected dividends.

E C 14. Obtain appraisal on real estate, such as on the residence, other lands. Ascertain whether estate may qualify for special use valuation on farm and ranch properties under Section 2032A.

E 15. Pay all bills, funeral expenses, debts of decedent's estate, including ad valorem taxes.

E 16. Obtain an estimate of executors fees, if any, attorneys fees, accountants fees, court costs.

E 17. File claims for refunds on medical bills with Medicare and any other hospitalization insurance company.

C 18. File joint income tax return (Form 1040) with surviving spouse for year of death, due by April 15.

C 19. File initial fiduciary income tax return (Form 1041) for estate. The estate is a taxpayer and will pay income tax on its net income (after distributions, if any).

If a testamentary trust is provided for in the will it won't come into existence until it is funded; meaning, when the executor turns over the estate's rest and residue properties upon receipt of the Estate Tax Closing Letter from IRS. Thereafter, the trust will file annual fiduciary income tax returns until it is terminated later.

If the will provides that a certain portion of the estate goes into a trust, the executor must become familiar with the funding requirements set out in Rev. Proc. 64-19 (requiring a distribution) that is "representative" of all of the assets in the estate.

E C 20. Decide whether the administration expenses (executors fees, if any, attorneys fees, accountants fees, court costs) are to be claimed as deductions in the estate tax return or in the income tax return.

C 21. Obtain alternate valuation date values (as of six months following DOD) for Federal Estate Tax return (Form 706).

E 22. Agree not to elect (or to elect) to qualify certain terminable interest property for marital deduction. (QTIP election)

C 23. File Federal Estate Tax return (Form 706) by nine months from DOD. File State Inheritance Tax return by nine months from DOD.

E 24. Decide if executor's fees are to be charged by the executor. Such fees are set by the Probate Code of 5% of cash in and 5% of cash out, with exceptions of cash on hand at date of death and for distributions to beneficiaries. Such executor fees do not have to be charged in every estate. however, if they are charged they are a deduction in arriving at the taxable estate. Such fees are income to the person receiving same. By election by executor, such fees may be deducted in the income tax return instead.

A C 25. Have attorney prepare and file Inventory and Appraisement and List of Claims with the court within 90 days of qualification. Extension of time can be obtained.

C 26. Apply for a Federal identification number for the estate.

C 27. Later, if the will provides for a testamentary trust, when trust is funded, apply for a Federal identification number for the trust.

A E 28. Get the attorney for the estate to promptly divide all community property between the estate and surviving spouse. This will include transfers of all oil and gas properties, or all stocks and bonds, certificates of deposit, bank accounts.

Such attorney should notify the operators of various oil and gas leases that billings for lease operating expenses should now be sent directly to the estate and the surviving spouse.

Similarly, such attorney should notify the various ad valorem tax authorities (County Appraisal Districts) of the division of ownership.

E 29. Agree to let the local accounting firm prepare the Federal Estate Tax return, State Inheritance Tax return and annual income tax returns.

F 30. Continue to make quarterly payments of declarations of estimated tax for the surviving spouse.

The estate will not have to start making payments on estimates until its second tax year.

The testamentary trust will start making payments on estimates when it starts receiving income.

E 31. If the will provides for bequest to a charity, notification to such charity of the bequest should be done in 30 days of the probate hearing. Payment of the charitable bequest should be made within one year following date of death.

E 32. Notify within four months after qualification, by registered or certified mail, any secured creditors of the estate who may have recorded liens against real property of the death of the decedent and the name of the independent executor.

E 33. Upon delivery of any bequest or distribution of inherited property under the will, obtain a receipt and release from each such beneficiary.

E C 34. Ascertain whether the estate may qualify to pay its estate tax out in installments over a 15 year period under Sec. 6166 IRC.

E 35. Stop all subscriptions, request refund on unused portion. Stop all dues payments, notify organizations of death. Notify insurance company to add name of estate as co-insured. Be aware of losing casualty insurance coverage if a dwelling remains vacant for more than 60 days.

F 36. File a disclaimer within nine months with the executor in case any heir wishes to disclaim part or all of his inheritance in favor of his descendants.

A 37. When the estate's period of administration is ready to be closed (after receipt of the Federal Estate Tax Closing Letter and after all properties have been distributed), the attorney for the estate will need to file the final closing document with the court.

A 38. If decedent owned real property (land, oil and gas interests) in other states, engage an attorney in such other state(s) to file the necessary probate papers there.

A 39. Have the estate's attorney file the decedent's will in each county in which property (real estate, oil and gas properties) was owned.

E 40. Check on estate's liquidity, assure there is sufficient cash on hand or available to pay funeral bills, administration costs, death taxes, debts of decedent, bequests. If liquidity is tight, review stocks, bonds, other assets to ascertain which may be candidates for sale to raise the needed cash.

C 41. Ascertain whether credit for tax on prior transfers is available. The credit is available if this estate includes assets which were included in another estate in the past 10 years.

E 42. If you will also serve as a trustee under a testamentary trust set up by will, read the trust provisions carefully and become familiar with the Texas Trust Act insofar as guidelines for depletion and depreciation reserves which may need to be withheld from otherwise distributable net income.

A 43. Obtain two certified copies of death certificates and two certified copies of will for inclusion in Federal Estate Tax return. Extra death certificates may be needed for claims on life insurance policies, IRAs, retirement plans.

E 44. If decedent was a grantor or trustee of a trust, obtain a copy of trust instrument and Forms 1041 previously filed by the trust to ascertain whether any of the trust assets are includable in the gross estate.

E 45. Obtain names, addresses, ages, social security numbers of relationships of beneficiaries to decedent.

E C 46. Obtain copies of any and all Federal gift tax returns filed by the decedent or by the spouse of decedent.

E 47. If decedent was divorced, obtain a copy of divorce decree and/or property settlement.

C 48. If decedent's spouse predeceased the decedent, obtain a copy of the spouse's Federal Estate Tax return (Form 706) and a copy of any income tax returns (Forms 1041) filed for that estate, copy of such decedent's will.

E 49. If decedent was in business for himself, arrange for successor management, consider sale of business, consider getting out of cattle operation business or make arrangements to rent farm/ranch land to reputable tenant. Assure accountability of successor management.

C 51. Obtain copies of financial statements of any closely held business for the past five years.

C 52. Review jointly held bank accounts, certificates of deposit to ascertain whether these are owned by the decedent (now belong to his estate) or whether these pass under "payable on death to" or "Joint tenants with rights of survivorship" clauses. Get copies of front and back of signature cards.

E C 53. Ascertain existence of life insurance on surviving spouse. Get cash value thereof on date of decedent's death. Review beneficiary therein to see if a change is now necessary because of the death of the primary beneficiary. Note who the owner of the policy(ies) is(are).

A E 54. Search for existence of decedent's interest in nonproducing minerals, such as royalties and leases, as well as undivided interests in real estate, partnerships, and the like.

C 55. Make a list of debts of decedent, such as funeral expenses, unpaid bills, expenses in connection with last illness, notes and mortgages.

E 56. Confer with accountant and attorney regarding elections which may be available to executor, such as:

E C (a) Alternate valuation date, valuing assets in estate at six months after death. Note that alternate valuation is not available unless the gross estate and the gross estate and the estate tax payable are reduced as a result of the election. Assets disposed of within six months of death are valued at date of disposition.

E C (b) Special Use Valuation on farm, timber or other closely-held business real property. Need appraisals which include comparables, with values based on applicable rental rate of Federal Land Bank in area. 

E C (c) Possible deferment of payments of estate tax over 14 years, if estate is eligible. 4% interest available for first four years.

A E C (d) If will provides for a trust for benefits of surviving spouse, or for a life estate in estate's properties to surviving spouse, consider whether such qualifies as a terminable interest property trust (QTIP trust). Surviving spouse must be sole beneficiary and must get all of the income of trust at least annually.

E C (e) Whether to claim administration expenses (executor's fees, attorney fees, accountants' fees, court costs, appraisal fees, etc.) as deductions in estate tax return or in the income tax return.

E C (f) Whether an extension of time for filing the estate tax return (Form 706) is feasible or necessary.

E C (g) Whether to claim decedent's unpaid medical expenses as debts of decedent in estate tax return or to back them into the last income tax return to be filed for the decedent.

A E (h) Whether a disclaimer should be considered to correct any oversight in decedent's will in favor of lineal descendants or to pass inheritance on to such next generation. Assurance must be obtained that the disclaimer has not received possession of the proposed disclaimed property or the use, benefits and income therefrom before disclaimer is filed. Disclaimer must be in writing, within nine months, must be communicated to executor and must be filed in court records.

E 57. If the husband is first to die, assure that surviving spouse has sufficient funds available each month. Arrange for transfers of monies on current basis, monthly perhaps. Consider dividing up bank accounts, income producing properties as soon as possible to provide means of support for surviving family and obligations.

We trust this information will assist you in understanding your role as executor of the estate. You can obviously see that a lot of matters will have to be handled, that all of these will take time, and that others will assist you in doing the things set out herein.

The law firm will be glad to confer with you further on the content of this memo. If would be advisable to have a family meeting to review the content of this memo and to be sure that all family members understand the steps outlined herein.

You, as executor of an estate, should be aware of three other matters which may have an impact on the estate you are in charge of.

DISCLAIMERS

Sometimes, in instances where an inheritance would go to a person who already has a large estate, it is possible and it may be desirable to let some other family member inherit the bequest instead. This can be accomplished if the inheriting legatee will renounce (disclaim) a portion or all of his(her) inheritance in favor of a child or children. As an example, if the heir who were to inherit the municipal bonds in this estate, were already wealthy, and if such heir did not need the property or the income therefrom, such heir could disclaim (not inherit) the bequest by filing such renunciation with the executors. Such disclaimed bequest would then go to a child or children (lineal descendants only) instead. The disclaimer must be filed in writing, within nine (9) months of date of death, and before the heir accepts any benefits from the property or income therefrom.

THE TEXAS APPORTIONMENT LAW

The Texas Apportionment Act requires that executors collect a portion of the death taxes out of each bequest or inheritance, whether or not such inheritance comes out of the probate estate or passes outside of the will. This law was passed in 1987. The Act makes it mandatory to address the decedent's intent or desire as to who is to bear the burden of the death taxes. If the will states, as most wills do, that the death taxes are to come out of the residue estate, then any specific bequests can be passed on to such named heir without any reduction for a portion of the death taxes. But the will must so provide.

You should confer with the attorney for the estate and have him explain this law and have him interpret the will to see if this law is applicable to your estate.

COMMUNITY PROPERTY LAWS IN TEXAS

Generally speaking, all properties accumulated by husband and wife during marriage and while living in Texas are presumed to be community property, each spouse owning one-half thereof regardless of in whose name such property is held.

Separate property (belonging only to one spouse) can come only from one of four sources, namely:

(1) Ownership prior to marriage

(2) By inheritance

(3) By gift

(4) By written, recorded petition between spouses.

Everything else is presumed to be community property, unless the source of the funds used to acquire such property can be specifically traced to one of the four sources of separate property above.

Income (other than oil, gas royalties) from separate property is community income unless specifically designated otherwise in written pre-nuptial or post-nuptial agreements.

We strongly recommend a meeting between you and the attorney [and accountant], to review the impact of this outline upon your duties as executor of an estate.

The foregoing is a collection of instructions given by our firm to newly appointed Texas executors. It is intended merely as a service to our Texas clients. Since tax laws change frequently, we do not vouch for the accuracy of the above information when compared to current law. We therefore urge you to merely use this memo as a guide for thought on issues and thereafter confer with your probate and tax adviser as to its relevancy to your situation.

This memorandum contains general information and while the information presented is accurate as of the date of its publication, it cannot be relied upon as legal advice, as that can only be obtained through personal consultation with an attorney with whom you share your specific facts.

 Copyright © 2005 by Sterling A. Minor. All Rights Reserved.

Last Updated: May 17, 2005.