After the probate hearing...what's left to do?

This could be part 2, a continuation of "what happens in a probate" series. I should have done "what happens before a probate hearing" but that can be a later prequel. Let's press on.

Basics:

After the hearing, assuming the court approves everything, you will walk away with "letters," testamentary if there was a will, or letters of administration if there was no will. Now what do you do?

These letters give you the power to do business on behalf of the estate, as if the deceased person was doing it. This means you can open and close bank accounts, pay off debts, and sell real estate.

You hope that there are no outstanding debts, but there almost always are.  When people pass away, you have burial expenses, last medical bills, last cellphone/credit card/power/cable etc., that have to be paid before you can start giving the grandkids their inheritance.  You have to pay these off, and if you do not and instead spend all the money or give it all away, you are personally liable for the debts. Make sure you do this right (If it was a "dependent" administration, you may be able to get out from paying some of the bills. This is a different discussion, for another day).  Further, creditors have up to 1 year from the probate hearing to send your their bills, and you must send a formal notice to secured creditors.

Further, you, as the executor or administrator, have to file a final inventory with the probate court. This is a "snapshot" of what the deceased person owned when they passed away. Exact bank account values, descriptions of real property, vehicles, insurance policies paid to the estate, investment accounts all this must be described and approved by the court.

Aside from this being required by law, there is a hidden benefit from this numbers on the inventory: the adjusted cost basis at death.

Adjusted Cost Basis Primer:

Certain assets are classified as "capital" assets, (for the IRS description, see here) but think your real estate, stocks, collectibles, furniture, or anything that you buy for your personal or investment purposes.  Whatever you buy it for is the item's "basis", or the bottom line for tax purposes. If you sell it, whatever it is, you will have to pay taxes on the difference between the basis and the final sale price. Of course you can have losses too, but we will keep things simple.  Depending on the type of asset and how long you hold it, the tax rates will fluctuate.  Regardless, you have to pay the tax, and it can be a significant amount. Here is the key: if you die holding one of these assets, then the basis becomes whatever its value was at the time you passed away.

According to 26 USC Sec. 1014, when you pass away with one of these capital assets, the basis becomes the fair market value at the date of the person's death, instead of whatever you paid for it. This can be a massive tax savings for your estate and beneficiaries, and one of the main reasons I think "probate avoidance" techniques do not make sense for most, if not all folks.

The most common scenario is that the decedent owned a house, which they lived in forever. They bought it for $100,000, now its worth $300,000. If they had sold it before they died or transferred it to their kids or heirs before they died, they would've had to pay the capital gains on the sale or their heirs would have received the house at the same basis as the decedent. When the heirs sell it, they pay the capital gains tax. At today's rates (15% for most folks, unless you make over $450k/year) here is how the math works:

$300k sale price - $100k cost basis = $200k capital gains x .15% = $30k in taxes due.

If they had waited and left the house to the kids by their will, the taxes would have been $0.

$30k in taxes to avoid paying a lawyer a couple grand to do your probate? That math does not add up. The same thing happens for anything that you transfer or sell before you pass away, and you do not get the basis adjustment.

Conclusion:

As the executor or administrator, you have some duties to fulfill. Get all the assets together, pay off the debts, and file a final inventory.  You might have heirs nagging you about "getting their money," but your duty is to the estate, not to the heirs. Also, you have to protect your own skin and not make sure you will be on the hook for any liability.  Finally, carefully go through all the assets, and see if there are adjusted cost basis tax savings to be had. If you look carefully, you can usually find them.

Yourtexasestateplan.com wishes all a happy and safe Independence Day.  Make sure if you leave the house, you have a designated driver.