BASICS OF PROBATE ESTATE ADMINISTRATION Loretta Morris Williams, CELA CAP Attorney  Partner HALE BALL Carlson Baumgartner Murphy PLC Fairfax, Virginia

This workshop will consider the basics of administering the probate estate, presented through the viewpoint of advising the client who is an executor or administrator. We begin with the initial consultation, discuss when to qualify and executor, marshalling assets, the inventory, accountings, payment of debts, and distribution to beneficiaries.

Before the Initial Consultation

A potential client calls you for help with administering her mother’s estate. Before the consultation is even booked, the client should be asked where the decedent died, whether or not there is a Will and, if there is a Will, whether the potential client is the named executor. Get the names of the spouse, heirs-at-law and beneficiaries of the Will.

Send the client a questionnaire to collect key information about the estate, such as where the decedent lived, marital status, heirs at law, etc. The Hale Ball questionnaire is provided as a model.

Practice Pointer: Run a conflicts check before scheduling the initial appointment. This is particularly important if there are multiple attorneys in your firm.

During the Initial Consultation

Gather as much information as you can from the questionnaire and the client. Remember that the client may be experiencing grief or stress and may not have much information about the decedent’s assets and debts during the initial consultation.

Ask whether the family has notified Social Security, pension or other payers of income and the health insurer of the death. Often the funeral home will have informed Social Security. Advise clients that income paid after the date of death may be withdrawn from the decedent’s account, or have to be repaid by the personal representative of the estate.

Try to ascertain as much information as possible about the following:

Jurisdiction: Section 64.2-443 of the Code of Virginia (1950), as amended, sets out the jurisdiction for probate of Wills. The Will shall be offered for probate in the circuit court of the county of residence; or if none where the decedent’s realty located; or if none, where the decedent died or has estate.

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If the decedent last resided in a nursing home or similar institution, jurisdiction is rebuttably presumed to be the same as it was prior to entering the nursing home.

Practice Pointer: Death certificates may incorrectly list assisted living facilities as nursing homes. Be prepared to document residence in the appropriate county to rebut the presumption, if needed.

Testate Estates: Determine whether there is a valid will. That is not always easy. If the client brings in a Will, review it for:

 Testamentary intent? (§64.2-404 of the Code). If the writing is not clearly a Will, the probate clerk will not be able to admit it. You will need to petition the court for admission of the Will.  Is it signed by the testator and two witnesses? (§64.2-403)  If it is holographic (solely in the testator’s hand), witnesses are required to attest to the testator’s handwriting. It is not necessary that the Will was witnessed at the time of its execution. (§64.2-403)  Does the writing contain a self-proving affidavit that is similar to the statement in §64.2-453 and signed by a notary and two witnesses?  Does the Will make complete distribution of the testator’s estate?  Does the Will waive surety on the executor’s bond?  Does the Will address fiduciary compensation?  If the decedent is married, to what extent does the Will provide for the surviving spouse?

Intestate Estates: Determine the heirs at law in accordance with §64.2-200. The course of descents is:  Surviving spouse o All to the surviving spouse, if the children of the decedent are also children of the spouse. o If the decedent had children that are not children of the spouse, 1/3 of the estate passes to the spouse and 2/3 to the children.  If no surviving spouse, to the children, and their descendants,  If none, then to the parents or surviving parent  If none, to the siblings, and their descendants  If none, then the estate divides into “moieties” with one-half to the maternal kindred and one-half to the paternal kindred o Start with grandparents and their descendants and search until you find an heir. o Virginia estates only escheat to the state if no living relative of the decedent - or the decedent’s most recent spouse if married at the time of death - can be found.

Marriages: If the decedent was married, inquire whether the decedent had a premarital or marital agreement. If there is an agreement, check to see whether the

Probate Basics Page 2 of 12 surviving spouse waived any rights to the estate, and whether the deceased spouse has any obligations to provide for the surviving spouse.

Determine whether assets will be passed to persons other than the surviving spouse. If so, the spouse may file an elective share claim to increase his or her share of the estate.

Inquire about prior marriages and get a copy of the divorce decree(s). The decedent may have been required to maintain life insurance, provide child support or otherwise provide for a former spouse.

Probate Assets: Determine, to the extent possible, the assets that will be subject to probate. Only assets in the decedent’s sole name, without a designated beneficiary or survivor, are subject to probate. Review copies of bank statements and beneficiary designations, as available. The client may want to contact the financial institutions prior to the probate appointment to inquire about the existence of transfer on death or beneficiary designations; sometimes the financial institution will confirm the existence of such designations, without disclosing the identity of the beneficiary or extent of the assets.

Real Property: Review the most recent deed for any real property. Client recollection of title may not be accurate.

Practice Pointer: Do not assume that married persons hold property as tenants by the entireties or jointly with right of survivorship. There may be situations – including tax planning done years ago – when real property is titled to married persons as tenants in common.

As you have heard, in Virginia real property “drops like a stone”. In an intestate estate, the real property passes to the heirs at law. The administrator must request permission from the court to sell the real property, if there is good reason to do so. Northern Virginia courts generally will allow the administrator to sell the property where the heirs are numerous, long-distance, unknown or uncommunicative. The administrator may be granted power to sell the real property when the personal property is insufficient to settle the decedent’s debts. The petition for power to sell real property should include reasons for why doing so is necessary for the efficient and property settlement of the estate. The motion may be filed ex parte, but the court may require notice and convening of the parties as it deems proper. (§64.2-106)

When there is a Will, the executor may have been granted power to sell real property, either directly or by incorporation of the powers granted in §64.2-105 of the Code. The power is not a duty. It does not override a specific devise of the real property.

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Practice Pointers: Some title companies consider a residuary bequest to be a specific devise of real property, and will want the beneficiaries of the estate to approve the sale even where the executor is granted power to sell.

If the client owns a condominium, inquire about the parking spaces. In some places, the parking spaces may be separately deeded properties.

Bank Accounts: Bank accounts in the sole name of the decedent are probate assets. Accounts owned jointly with rights of survivorship are not estate assets, but must be listed on the inventory. It is possible, but less frequent, that the account is set up without survivorship or for convenience. It may be necessary for the executor or survivor to request the bank signature card to ascertain how the account is titled.

Practice Pointer: It is very common for the decedent to have owned an account jointly with rights of survivorship with an adult child. The account is not part of the estate, although the expectation may be that the survivor uses the account to pay funeral costs and debts of the decedent, then share the money with any siblings. A gift in excess of $15,000 from the survivor to another person is a reportable gift. The survivor may want to disclaim funds from the account so that they will revert to and be distributed by the estate.

Brokerage accounts. If the decedent has brokerage accounts, determine whether there is a transfer on death beneficiary. Determine which accounts are retirement assets and which were purchased with after-tax dollars. Often this information will be shown on a monthly statement.

Life Insurance: Inquire about the existence of life insurance. Veterans and federal employees/retirees may have insurance through their service. Tax returns may show dividends for whole life policies.

Practice pointer: The lack of a beneficiary designation on life insurance does not necessarily mean that it is an estate asset. The company may have an order of precedence in which it pays out if there is no valid beneficiary designation.

Stocks, Bonds and Savings Bonds. Always ask the client whether the decedent held stocks or bonds outside of a brokerage account or if they owned savings bonds. These assets are often forgotten or overlooked, especially if paper certificates are stored in a safe deposit box.

Vehicles. Ownership of registered vehicles is easily determined. Check the expiration date for the inspection and license plates, especially if the vehicle is not located on private property. The DMV will retitle vehicles directly to the beneficiary when there will be no probate or if the vehicle is specifically bequeathed.

Tangible personal property. Inquire whether a memorandum or list for distribution of tangible personal property was found with the Will. Review the Will to

Probate Basics Page 4 of 12 determine whether the tangibles are distributed to the same individuals who receive the residue of the estate.

Practice pointer: Clients often overestimate the value of tangible personal property. It is not purchase price or replacement value, but the sales value as of the date of the decedent’s death. When estimating the value of the estate for determining whether or not it is a small estate, try to avoid overestimating the value of the tangible personal property.

Decedent’s Debts. During the initial consultation, determine whether or not the estate is solvent. If it is not clearly or very likely solvent, assume it is insolvent until you know otherwise.

Mortgage. Check to see if the real property is mortgaged and whether or not there is equity in the property beyond the mortgage.

Personal loans. Personal debt of the decedent may be secured by a bank account or other property.

Medical. Ask about the decedent’s health prior to death and the extent of health insurance.

Credit cards. Inquire about credit card debt of the decedent. Caution clients against treating credit card debt as a priority if there is a cash flow issue in the estate or if the estate may be insolvent.

Unpaid Taxes. Inquire how the decedent filed their tax returns. The personal representative should get copies of returns for the past 2-3 years if possible. This information can be helpful in identifying otherwise unknown assets. It is also helpful if the Internal Revenue Service requests additional verification of the estate to avoid identity theft. If tax returns were not filed, the personal representative may need to request a transcript of income from the IRS to file the missing returns.

Probate and Qualification

Determine whether probate and/or qualification of a personal representative is needed.

Small Estate Administration. If the assets other than real property are valued at less than $50,000 small estate administration may be advisable (§64.2-600 et. seq). Assets with cumulative value of less than $25,000 can be collected directly from the custodian of the asset. Single use certificates can be obtained through the probate clerk for use in estates valued at less than $25,000. (§64.2-1411).

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Small estate affidavits can be used in estates valued at less than $50,000. The will, if there is one, must be probated and notice of probate sent to the heirs and beneficiaries.

Persons receiving the estate through small estate administration are required to see to the proper application of the funds, including paying debts of the decedent and filing the final tax returns.

Qualification of a Personal Representative: If qualification is necessary, prepare your client for the probate appointment. Local practices vary, but any court will need a certified death certificate, biographical information on the decedent, a list of heirs, and a preliminary list of probate assets. Contact the probate website or office for a list of what the client should bring to the appointment. Prearrange surety bond if needed.

Notice of probate and/or qualification of a personal representative must be provided to the heirs at law and beneficiaries of the Will (who will take in excess of $5,000) within 30 days of qualification. An affidavit of notice must be filed with the court within four months of qualification.

If the only purpose of qualifying on the estate is to pursue a wrongful death claim, consider having your client qualify pursuant to §64.2-454 of the Code in the jurisdiction where the claim arose.

Practice Pointer. Consider providing written instructions for your client if you will not be attending the probate appointment, particularly if you want them to probate without qualification, qualify on a small estate, or qualify under §64.2-454.

Administration

Some clients can follow the Will and the instructions provided at the probate appointment, manage the probate assets, pay the debts and taxes, distribute the assets and properly account without a lot of assistance from the attorney. Others will need assistance every step of the way. You or your staff should be prepared to help an overwhelmed client prioritize tasks, break them into manageable steps and work through them.

Marshalling Assets

Early in the administration of the estate the personal representative needs to get recognized by the financial institutions holding assets and the creditors of the decedent. Usually this can be done by calling the third party or checking on its website for instructions for survivors or executors.

The estate will need its own employer identification number (EIN). In most cases, the number can be obtained through the IRS website.

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Practice Pointer: Submit required documentation electronically whenever possible. When providing the certificate of qualification and death certificate in person (or by mail) request that the documents be photocopied and returned.

Real Property: If the real property is part of the estate, the personal representative needs to keep it secure and protect it from waste until it is distributed or sold. Hazard/liability insurance should be purchased in the name of the estate. Essential payments – condominium and homeowner association fees, mortgage, real estate taxes, and utilities – must be made to protect the property. Items and services not needed to avoid waste – cable, internet, phone, etc. – should be terminated. In most cases, the real property should be distributed or sold within a few months.

Appraisal of the property may be needed if the spouse needs to fix the date of death value for tax purposes or to facilitate buy out by a beneficiary or to fix the value of the property if it will not be sold directly. Comparative market analysis by a realtor should suffice if the property will be sold within a few months.

Common problems in dealing with real property include the fiduciary or beneficiary living in the property at the expense of the estate or the fiduciary’s emotional attachment to the property interfering with the efficient administration of the estate.

Tangible Personal Property: Securing, selling and distributing tangible personal property can dominate the early period of estate administration. Grief and emotional considerations can make this part of estate administration difficult for some personal representatives. It is important that the personal representative follow any written list made part of the Will pursuant to §64.2-400.

Items of significant value – generally $500 or more – will need to be itemized on the inventory. Appraisals may be needed to distribute property in approximately equal shares or for tax purposes in some estates. In some estates where estate tax is not a concern, the beneficiaries may be satisfied with less formal valuations of property to reduce the cost of administration.

Vehicles: If a vehicle is to be sold, transferred or donated, the personal representative can sign over the title and provide a copy of the certificate of qualification to the recipient. If the title is lost or the registration is expired, the personal representative may need to title and register the vehicle in the name of the estate prior to sale or distribution.

Bank Accounts: Check for automatic debits and credits to the main checking account. These debits and credits will be disrupted when the account is closed and the funds transferred to the estate checking account. If there is a credit card or personal loan secured by the account, the amount owing may be deducted by the financial institution prior to payment of the funds.

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Brokerage Accounts: Contact the financial advisor listed on the statement or in the decedent’s records for assistance in opening an estate account. If there is none, check the website or call the company and talk with the estates section. The account will need to be closed and a new account opened in the name of the estate. The holdings do not need to be liquidated immediately. If there are only a few beneficiaries and the funds are not needed to pay debts, the personal representative may be able to distribute the holdings in-kind.

Stocks and Bonds. The personal representative will need to individually research stocks and bonds held in paper form or on the books of the issuing company. Most major companies use a transfer agent to handle changes in ownership of such shares. The personal representative will need to determine whether to liquidate the asset immediately or to transfer the asset to the estate.

Paper savings bonds can be time consuming to marshal and liquidate or distribute. The personal representative should obtain a valuation of the bonds from the online Savings Bond Wizard and determine whether the decedent paid any interest on the bonds. The personal representative should consider whether to distribute any saving bonds still earning interest in kind. The recipient must set up a Treasury Direct account to receive bonds transferred from the estate.

The documentation to transfer of paper stocks, bonds, and savings bonds may need to bear a Medallion Guarantee. While this “super-notary” approval used to be readily available at banks, some are no longer participating.

Life Insurance. When life insurance is payable to an estate, it is often one of the quickest and easiest sources to infuse cash into an estate.

Online Accounts. Family members often have access to online account User IDs and passwords. Where this is not the case, the personal representative will need to contact each institution and use the procedures in §64.2-116, et. seq. To access the accounts. If there are no paper bank statements, the personal representative will need to look at debit cards or try to obtain access to the decedent’s email accounts to access online assets.

Paying Costs and Debts

Early in administering the estate the personal representative should contact known creditors. If bills are not obviously those of the decedent or estate, the personal representative should request documentation of the decedent’s debt. For credit cards, this includes an itemization of the charges and may include documentation of opening the account. For medical bills, the personal representative should ensure that claims were made to all insurers or third party payors prior to billing the decedent. A credit check may reveal additional creditors of the decedent.

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The priority for paying debts in insolvent estates is set forth in §§64.2-528 and 64.2-532. In 2017, an additional category for child support was added to the statute. When the ability of the assets to fully cover the debts is uncertain, advise the personal representative to follow the order for insolvent estates in paying debts. Failing to do so can result in the personal representative becoming personally liable for debts paid out of order.

Mortgages. Any liens against real property should be identified by title search at the time of sale. Many loans are recourse loans – if the securing property is “underwater” the lender can pursue the estate for the portion of the loan unpaid by sale of the property. Unless provided otherwise by the Will, real property passing by specific bequest or devise in the Will, or through a transfer on death deed, passes without the right of exoneration of the mortgage (§64.2-531.) An exception is made where the debt is incurred by an Agent or other fiduciary acting on behalf of an incapacitated testator prior to death.

Inventories and Accountings

The estate inventory is due four months after qualification of the fiduciary. The value of the assets on the inventory is the date of death value. Inform clients that the stocks within a brokerage account must be itemized on the inventory. The value is the average of the high/low price on the date of death. Tangible personal property worth $500 or more should be itemized on the inventory. The remaining tangible personal property can be given a consolidated value for “household items and personal effects.”

The inventory will be used for calculating fiduciary compensation and will be the starting point for the accountings to follow. Unless the Will states otherwise, use the fiduciary compensation schedule provided by the probate court or commissioner of accounts.

Statement in Lieu. A statement in lieu of accounting may be used in when the personal representative(s) and residual beneficiary(ies) or heir(s) of the estate are the same individuals. (§64.2-1314.) At least six months must elapse between qualification on the estate and filing of a statement in lieu. If the statement cannot be filed within the timelines for the first accounting, an interim accounting must be filed. The statement asserts that all debts and expenses have been paid, specific bequests have been made and the residuary estate distributed to the beneficiaries or distributees. The trustee of a trust is not considered a residuary beneficiary under the Code; a personal representative who is also a trustee must file a complete account, unless otherwise waived by law. Check with your local Commissioner of Accounts regarding when the statement must be filed, whether a request must be filed first and for any other local procedures.

Accounting. The first account covers the twelve month period following qualification and is filed within 16 months of qualification. The second and subsequent

Probate Basics Page 9 of 12 accounts (if any) begin at the close of the prior account, cover a 12 month period and must be submitted within four months of the closing date. The filing fee schedule may be provided to the fiduciary upon qualification or by the Commissioner of Accounts. Some jurisdictions have the filing fees listed on their websites.

The accounting process is often frustrating for clients. Some have difficulty in obtaining or maintaining bank statements, photocopies of checks, invoices and receipts needed for the accounts. Others keep the records but have difficulty following the Commissioner of Account’s format for accounting. Problems that often arise are: failing to begin the account at the inventory value (or ending value of the prior accounting), using market values instead of carrying values for assets, confusing disbursements with distributions, and failing to check that the values on the accounting match the statements for the beginning assets and assets on hand.

The final accounting must show disbursement or distribution of all assets and have a balance of $0. The fiduciary must certify that all taxes have been paid or provisions for paying them have been made.

Taxes. There are three types of “death taxes” in Virginia.

Probate tax is collected when the Will is probated and/or a personal representative is qualified. It will be reviewed when the inventory is filed, if required, and adjusted if the value based on the inventory differs by more than $25 from the value provided at the probate appointment.

Estate tax is not collected in Virginia at this time. The federal exemption from estate taxes in 2019 is $11,400,000 for a single person. In 2026, the estate tax will revert to $5 million (adjusted for inflation). Only a few states still impose estate taxes, but you should double check each state’s rules if the decedent owned real property in multiple states.

Income taxes typically arise in two ways. There may be a need to file the decedent final tax return (and prior year returns if the decedent was not current on his or her taxes). The estate will need to file its own tax return if it has gross income in excess of $600. A tax preparer with experience in estate returns can be helpful in identifying opportunities for savings.

A Virginia personal representative has a duty to pay all federal taxes. There is also an affirmative duty to inquire with the Commonwealth and county/city of the decedent’s death to determine if any taxes are due.

Debts and Demands Hearings. The debts and demands hearing helps protect the fiduciary from creditors after the estate is closed. A D&D hearing is essential in an insolvent estate to set the order of payment of debts. In other estates, it can be useful to determine the validity of debts. For example, a fiduciary might contest a medical bill

Probate Basics Page 10 of 12 that has not been submitted for insurance payments or a collections bill that does not sufficiently identify the underlying debt.

The exact procedure for advertising and holding the hearing may vary by jurisdiction. Check with your local Commissioner of Accounts office to determine at what time the hearing may be requested (some require an accounting to have been filed), fees and notice requirements.

Some personal representatives will opt to forego the time and expenses of a debts and demands hearing. This is most appropriate where the decedent had little to no debt and the personal representative managed the estate as power of attorney prior to the decedent’s death and has good information about the decedent’s finances.

Show Cause Hearings. The show cause hearing is usually used as a follow up to the debts and demands hearing. It offers creditors a final chance to show cause as to why the estate should not be distributed to the beneficiaries. Circuit courts will vary in the procedure used to request and publish the hearing. Contact the probate office for local procedures.

Distributions

Real Property. If there is a specific devise of real property, there is no need for a deed to show distribution. The probated will acts as a deed. If there could be doubt about ownership despite the existence of a Will, a deed of confirmation signed by a personal representative with power to sell real property may be helpful for future title searches. For an intestate estate, any beneficiary or the administrator may file a real estate affidavit to show the successors to the real property.

Tangible Personal Property. The mechanics of distribution of tangible personal property are as varied as are clients. The fiduciary should ensure that they follow any directions in the Will or tangible personal property list and that they get an original signature on a receipt for the property distributed. The Will may state whether the estate or beneficiary bears the cost of transporting the property. The proceeds from sale of tangible personal property must be distributed as provided in the Will. The beneficiaries of the tangible personal property may not be the same individuals as the residuary beneficiaries.

Specific Bequests. Unless the estate is insolvent, specific bequests should be made within the first six month of administration, if possible. After one year, the beneficiary is due interest on the bequest. (§ 64.2-425).

Residuary Assets. The residuary estate may be distributed to the beneficiaries at one time or in partial distributions. In estates with significant income-producing assets, partial distributions can help minimize the tax burden. Partial distributions can also be helpful to beneficiaries in difficult financial circumstances. However, the fiduciary needs to be careful. The fiduciary should make partial distributions in proportion to the

Probate Basics Page 11 of 12 shares of the residuary beneficiaries. The fiduciary can require a refunding bond from beneficiaries of partial distributions, but this is not helpful if the beneficiary has spent the money.

Closing the Estate

In order to close the estate, all administrative costs, debts and taxes must be paid and the remaining assets distributed to the beneficiaries. The final accounting must show a zero balance. This can feel like a circular problem: how can the fiduciary get a zero balance when there may be final expenses to pay? One option is to have cashier’s checks issued for the final filing fee and other expenses, and to the beneficiaries. Alternatively, the fiduciary may close the account and put the assets into the attorney’s trust account, then issue final checks from the trust account. Either way, the fiduciary must account for all of the funds.

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