When settling a decedent's estate, many key issues are lurking below the surface that the lay person may overlook. Legal advice is critical, considering that the personal representative is personally liable for financial mistakes made during the estate - settlement process. Here are a few of the issues that must be addressed in most every state.
The $50,000 Exempt Property and Family Awance
These allowances are available to certain beneficiaries when the decedent dies without a will or with a will that excludes certain required beneficiaries. In small or insolvent estates, these allowances can defeat the claims of creditors and provide the surviving spouse and/or minor children with much-needed financial assistance.
Determining Lawful Heirs
Things can get complicated when there are deceased heirs, disabled heirs, missing heirs or heirs that are under the age of 18. Additional court proceedings - called conservatorships--may be necessary to make certain assets are distributed to the correct heirs or to representatives of disabled, minor or missing beneficiaries.
The probate rules are designed to protect not only beneficiaries, but creditors. There is a hierarchy established in the Colorado Probate Code specifying which creditors have a priority over other creditors. For example, charges made by a personal representative, attorney or funeral home has priority over credit card companies. Debts secured by collateral have a priority over unsecured debts. A personal representative who fails to abide by the rules will be personally responsible for financial mistakes.
In Colorado, there is no state or federal death taxes if the decedent's estate is $3,500,000 or less. Estates in excess of $3,500,000 are taxed at the rate of 46% on the overage. A Fonn 706 needs to be prepared and submitted with the tax payment 9 months after date of death. Colorado has no inheritance tax (which is the tax imposed in some states on the actual inheritors of estate assets). Income taxes most always need to be addressed by the personal representative. There are income taxes that must be paid for the last year of the decedent's life (Form 1040). There are income taxes that may need to be paid from the decedent's "estate" (Form 1041). And there may be income taxes that may need to be paid from any trust created by the decedent that survives the decedent's death (Form 1041). Taxes are a mind field for the personal representative to navigate. Legal counsel is always advisable when venturing into this area.
A disclaimer is a legal tax strategy that may reduce or eliminate numerous problems comlected with taxes and creditors. Rather than detail the law of disclaimers here,simply be aware that this topic should be discussed between the personal representative and the estate attomey in most every situation.