Those who are nominated to serve as someone’s personal representative in their last will and testament may feel honored to be entrusted with such an important responsibility.
While honorable, the duties of a personal representative, also commonly known as an executor, can also be a complicated undertaking. Those duties include following the final wishes of a loved one or friend, properly settling the affairs of the estate and ensuring that beneficiaries receive their inheritances as intended.
A major responsibility of the personal representative is to distribute assets from the decedent’s estate. However, many estates are composed of both probate and non-probate assets, which requires that distributions be made in the proper legal order depending on the nature of the asset.
Many people assume that all of their assets are distributed by their will or trust, but that’s not the case for most situations. The distribution provisions of a trust only apply to assets that are titled (or funded) in the name of the trust. Also, the personal representative named in the will isn’t necessarily the same person who is named as the successor trustee of the trust.
Regardless, the order of asset distribution is an estate settlement formality that must be followed for certain types of accounts, property and other valuables that are to be inherited and to cover the final expenses and debts of the decedent.
Improper distribution of an estate’s assets is a serious matter that can lead to tax implications, financial losses, creditor claims, family disputes and disappointments, potential legal liability for the personal representative and trustee and delays in finalizing the estate.
One critical concern is that the personal representative understands that the distribution provisions of your will only apply to assets without beneficiary designations that are owned in your individual name. Assets and accounts with a valid beneficiary designation are distributed according to the designation. A fact that is widely misunderstood is that beneficiary designations, like those on a bank account or insurance policy, supersede contrary wishes that may be listed in a will or a trust.
At your passing, your assets are distributed in a specific order until all of them are distributed. Generally, the non-probate assets are distributed before the probate assets. The state’s intestacy statute provides strict guidelines that must be followed to distribute any assets that are not otherwise directed to a beneficiary.
Once an asset is distributed, contrary distribution instructions at a subsequent level are ignored. For example, a bank account with a pay-on-death designation will be paid to the indicated person, even if a different person is named as the beneficiary in your will.
What are considered estate assets?
Estate assets refer to everything a person owns in their own name at the time of their death, however, understanding what is considered an estate asset can be complex and may vary based on jurisdiction and specific circumstances. In general, estate assets typically include real property, such as a home or real estate; personal property, such as a wide range of tangible items like jewelry, cars, artworks, boats, furniture and collectibles; financial assets including bank accounts, retirement accounts, annuities and pensions; life insurance policies; business interests such as shares in a corporation, partnership interests or sole proprietorships; intellectual property such as copyrights, patents, trademarks and other intangible assets; and debts owed to the decedent.
What is the order that assets are distributed?
There is a sequence of four steps that are followed by the personal representative and successor trustee to distribute assets after a person dies.
The four steps are known as:
- By operation of law.
- Through beneficiary designations.
- By the provisions of a trust.
- Through the probate process, which includes by last will and testament and via intestacy.
Assets are distributed by operation of law outside of probate when the property's title includes survivorship language, making a surviving joint owner the property’s owner immediately without any action being needed. Some examples include survivorship deeds and survivorship property. Survivorship deeds refer to real estate ownership designations, and survivorship property refers to non-real estate assets, such as a bank account, that are co-owned in a way so the surviving owner or owners automatically inherit the deceased person’s share.
Beneficiary designations are the next priority in the order of asset distribution. They include pay-on-death and transfer-on-death designations. For a beneficiary designation to be effective, the designated beneficiary or an alternate beneficiary needs to survive the owner for the designation to be effective. If the designation fails, the asset becomes part of the decedent’s probate estate. Beneficiary designations are commonly used for retirement accounts, annuities, life insurance, bank accounts, securities accounts and car titles.
Next in the order of distribution are assets funded, or titled, into the name of the decedent’s revocable living trust.
Most trusts include a provision for a successor trustee to provide funds to the estate’s personal representative for taxes and other liabilities. If necessary, this distribution is made before any distributions are provided to the trust’s beneficiaries.
After a distribution to the estate is made, if necessary, any specific bequests of either money or property are taken care of first, then whatever remains is distributed under the trust’s residuary clause. For example, if the trust says to pay $10,000 to a local animal shelter and then divide the remaining assets equally among four children and the trust’s assets total $12,000, the animal shelter gets $10,000 and the children get $500 each.
The final step in the hierarchy of asset distribution is through the probate process. The probate process distributes any remaining assets that were titled in the decedent’s name. If no assets remain (beneficiary designations were effective and trust was fully funded), nothing is distributed in probate.
The first priority of the personal representative is to make sure all of the decedent’s expenses, fees, taxes and liabilities are paid. If the probate estate has insufficient assets to satisfy all liabilities, the personal representative will need to ask the court to pull assets that were distributed outside of the probate process back into the probate estate.
How are assets pulled into the estate?
The personal representative must file a petition with the probate court that states the amount of the debts that remain unpaid and the assets that were distributed outside of the probate process.
The court will then issue an order requiring the beneficiaries who received the distributed assets to return them to the estate. If the beneficiaries refuse to return the assets, the personal representative can file a lawsuit against them.
The court considers several factors when deciding whether to order the return of assets that were distributed outside of the probate process. These factors include the size of the estate, the amount of the debts, the value of the assets that were distributed, the needs of the beneficiaries and the intent of the decedent.
If the court orders the return of assets, the beneficiaries will be required to return the assets to the estate. They may also be required to pay interest on the value of the assets for the time that they were in their possession.
It is important to note that the process of pulling assets that were distributed outside of the probate process back into the estate can be time-consuming and expensive. It is important to consult with an estate attorney if you are considering this option.
Here are some additional things to keep in mind:
- The personal representative must act as a fiduciary and in the best interests of the estate. This means that they must not distribute assets to beneficiaries if it will make it more difficult to pay the debts.
- The personal representative must also comply with all applicable laws and regulations. This includes filing all required paperwork and paying all required taxes.
- If the personal representative does not properly administer the estate, they may be personally liable for the debts.
What is an insolvent estate?
An estate is insolvent when its liabilities exceed its assets, and the administrator of the estate is unable to pay off all of its debts. If an estate is insolvent, state law determines the order in which the insolvent estate’s assets are to be distributed. The estate’s beneficiaries do not receive any property from an insolvent estate. Also, if the executor has made distributions to beneficiaries without settling the debts of the estate, creditors may have the legal right to pursue the executor personally – and even beneficiaries – to recover the distributed funds. The probate court also can issue fines and other penalties to the personal representative for making improper distributions from the estate.
To avoid such potential liability and if the personal representative is concerned the estate is insolvent, they should seek professional guidance to assist with the complexities of estate insolvency. Key actions to take include creating a comprehensive inventory of estate assets and liabilities; notifying creditors; prioritizing debts; selling assets if necessary; rejecting or accepting creditor claims; distributing remaining assets after debts are satisfied; and filing final tax returns and other required documents.
An estate planning attorney can help you understand your legal obligations and ensure that you take all necessary steps to protect yourself, the estate and its beneficiaries.
After the estate’s debts are paid, what happens?
After the estate’s debts, expenses and other obligations are resolved, the next step is for the personal representative to distribute assets as directed in the last will and testament.
The personal representative distributes specific bequests of either money or property first, then whatever remains is distributed under the will’s residuary clause. The estate’s residue (all property not subject to a specific bequest) is usually sold and converted to cash prior to distribution.
Finally, the state's intestacy statute determines the distribution order of any remaining assets. Any remaining assets that were not distributed previously are distributed in equal shares to the heirs identified by the statute.
For example, let’s say the decedent has an adult son and daughter. His estate included the following assets:
- A home held in joint tenancy with rights of survivorship with daughter.
- An individual retirement account (IRA) with a beneficiary designation to his wife (pre-deceased).
- A bank account titled in name of trust with a pay-on-death designation to the daughter.
- Household furnishings.
- A car.
The decedent’s estate plan consists of a revocable trust and a will. The estate plan includes a Declaration of Intent to fund untitled property into the trust.
The trust includes the following distribution clauses:
- Home to son and daughter equally.
- Household furnishings to daughter.
The will includes the following distribution clauses:
- Bank account divided equally between son and daughter.
- Car to son.
- Will does not have a residuary clause.
The assets are distributed as follows:
- The daughter is sole owner of house via survivorship.
- IRA is distributed equally to son and daughter via intestacy.
- The bank account goes to the daughter via pay-on-death designation.
- Household furnishings go to the daughter via trust.
- The car goes to the son via will.
Because the bank account’s beneficiary designation listed the daughter, it supersedes the clause in the will that says the bank account is to be divided equally between the son and daughter.
Also, the disposition of the home is determined by the survivorship deed, not the clause in the trust. The deed gives the home to the daughter alone by rights of survivorship. Because the home is not funded into the trust or deeded to the trust, the son will not receive 50% ownership as stated in the trust.
The decedent was predeceased by his wife, who was the designated beneficiary on his IRA. As a result, the IRA becomes part of the probate estate because his wife is no longer alive to inherit it, and intestacy laws direct that the IRA be distributed equally to the nearest class of heirs, which is the son and daughter.
Summary
The personal representative’s key responsibility is to distribute the assets from the probate estate. Estates, however, typically include both probate and non-probate assets. As a result, the distribution of assets must be conducted in the proper legal order that is determined based on the nature of the asset.
Not all assets are distributed by a person’s will or trust. In fact, only assets that are funded into the trust are distributed according to provisions in the trust.
For an estate to be properly settled, personal representatives and successor trustees must abide by the important formalities regarding the order of asset distribution. That way, the distribution of bank accounts, investments, property and other assets is to their rightful heirs and the expenses and debts of the decedent are paid in full.
In short, improper distribution of an estate’s assets is a serious matter that can lead to legal troubles, financial loss, family discord and other complications. It underscores the importance of following the correct legal process and seeking professional legal advice when dealing with estate settlement matters.