Author’s Note: This is the fifth in a six part series of personal finance columns on the subject of being the executor of an estate. These columns are based on my own personal experiences in this regard. Individuals should consult a professional advisor and take their own circumstances into account. While my primary objective is to show my readers how to maximize the value of the estate, I will also try to prepare my readers for the unimaginable difficulties faced by the executor.
Part 4 of this series dealt with the process of getting organized and ready to take on your tasks as executor. Today, I will address what I refer to as “the meat of the matter”: how to deal with car leases, life insurance, IRA’s, and the sale of real estate.
Car Leases
If the deceased had a car lease, you may be under the mistaken assumption that the estate is stuck with the lease. Not true. You can assume the lease if you want to, but you are in no way obligated to do so.
If you don’t want the car, simply call up a car dealer and arrange for a lease turn in. You don’t have to explain why you are turning the car in, and you don’t even have to turn the car in at the dealer from which it was originally leased. In my case, the car was leased in Philadelphia, but we turned it into a dealer in Florida, because that’s where the car was at the time of death.
When you turn the car in, get an odometer statement proving that the car was returned. If there was no visible damage to the car, have the dealer provide a notation to that effect on the odometer statement.
The car leasing company will sell the vehicle. In theory, they may come after the estate for the difference between the sale price and the residual value of the vehicle. In practice, this does not happen.
Life Insurance
It is possible that the deceased had one or more life insurance policies. If the deceased was elderly, it is also possible that the policies themselves are quite old and were issued by companies that are no longer in business. In my case, the deceased had two small life insurance polices that were more than 50 years old!
If the companies that issued the policies are no longer in existence, should you just assume these policies are worthless and throw them out? No. You should do what I did — use the web to investigate whether or not the policies were assumed (bought out) by another extant insurance company. Start with a search of the name of the company that originally issued the policy. This may lead you to the name of an acquiring company. It may take you a while to find your way up the ownership chain, as your policy may have been acquired multiple times. In my case, it was especially difficult because at one point the ownership chain branched out in two directions, with half of the policies being acquired by one company and the other half being acquired by another! Eventually, I found my way to the top of the chain. Much to my surprise, both policies were still valid! The day I spent doing research on the web yielded a $3200 payoff. Not exactly a fortune, but not a bad sum for a day’s work either. And the thought of these insurance companies keeping the money really made me ill. Sadly, I suspect that a lot of old life insurance policies go unclaimed because it never occurs to people to search for a chain of ownership. Your loss is the insurance company’s gain. Don’t let it happen.
When you contact the insurance companies, they will send you a claim form. You will need to provide the names and addresses of the beneficiaries, as well as a death certificate for the deceased and a death certificate for the original (first) beneficiary if applicable. By the way, these claim forms may also ask for an enormous amount of detail about the deceased’s medical history — names of doctors, dates of hospitalization for the past ten years, etc. You don’t have to complete any of this information. This is just an attempt on the part of the insurance companies to make it difficult to claim and obtain what is rightfully yours.
IRA’s
If the deceased had an IRA, you may be under the mistaken assumption that the IRA must be liquidated immediately and distributed to the heirs after taxes are paid on the full amount withdrawn. Fortunately, this is not true. The heir(s) of the IRA can have their respective portions of the deceased’s IRA rolled over into a special kind of IRA called an inherited IRA. In the year of death of the deceased, a minimum withdrawal must be made based on the deceased’s age (assuming the deceased was making withdrawals). Check with the brokerage company to see if the annual withdrawal was already made or partially made by the deceased before the date of death. In subsequent years, the heir(s) must make a minimum withdrawal each year from the inherited IRA based on their respective ages.
Rolling over the deceased’s IRA into an inherited IRA provides enormous tax benefits — the majority of the IRA can remain invested, accumulating interest without tax payments. You pay taxes on what you withdraw each year, but no penalty for early withdrawals. Basically, you are receiving an annuity funded by the deceased’s IRA. At least that’s how I look at it.
Note: inherited IRA’s should never be combined with other IRA’s, as monies from inherited IRA’s must be withdrawn each year.
If you wish, you can transfer the inherited IRA to a different financial institution. If the deceased’s IRA was with broker A, and you use broker B for all of your financial activity, you can open up an inherited IRA at broker B and transfer the assets from broker B to broker A. However, I do recommend opening up the inherited IRA first in the same institution as the deceased (broker A). This makes transferring the assets to another institution easier, as the assets are moving in kind from one broker to another.
Once the money is in an inherited IRA, you can control the investments just like any other self directed IRA.
For more information on inherited IRA’s and minimum withdrawals, check with the deceased’s brokerage house and with your accountant.
Real Estate
In part 3 of this series, I advised putting the deceased’s properties up for sale as soon as possible, but I didn’t discuss how much you should ask for the property. Here are some suggestions for determining the listing price. First, the deceased’s financial papers might reveal a recent appraisal on a property. In my case, the deceased had recently taken out a home equity loan, and there was an appraisal less than one month old on one of the properties! If there is no appraisal, a real estate agent can provide you with comps to help determine a price.
The next question is: should you list the property at fair market value, or at a lower price in order to sell the property quickly. You should consider the ongoing monthly expenses for maintaining the property in making this decision as well as state of the current real estate market. If it is a buyer’s market, you may want to list the property at less than fair market value to sell it quickly.
But here is another factor you should consider in determining a listing price — one that many people overlook. If the deceased owned a condominium, my advice is that you price it to sell quickly, because a condominium, by definition, is a major assessment waiting to happen.
Allow me to explain. The deceased paid a monthly maintenance fee for the condo — probably somewhere in the area of $300 to $500. But condo owners also get hit with periodic assessments to do major repairs and improvements — rebuild balconies, put a new roof on the building, repave parking lots, upgrade facilities, etc. These assessments can be huge. In my situation, the deceased had incurred not one but two $25,000 assessments in years past. One was a $25,000 assessment on a $120,000 property, the other a $25,000 assessment on a $150,000 property. I share these details with you to underscore how huge these assessments can be relative to the property value.
The longer you hold onto the condo, the more likely you are to get hit by an assessment, which has the effect of reducing the value of the property by the amount of the assessment. Even worse, the work related to the assessment can make it impossible to sell the condo for a very long period of time. For example, if the balconies are being rebuilt, the windows of the condo may be boarded over for a year or longer while the work is being performed. And trust me, only people with X-ray vision are interested in a condo with an ocean view that is boarded over by plywood.
You can talk to the condo’s homeowner association to find out if there are any assessments on the horizon, but my suggestion is that you sell and close as quickly as possible, even if that means selling at a discount to fair market value.
As I noted in part 2 of this series, for tax purposes, the cost basis of the property is the value at the time of death, not the purchase price of the property. Also, if you sell the property for less than fair market value, the heirs may be able to carry over some capital losses onto their personal income tax returns, using the losses to offset gains. Consult your accountant in this matter.
You do not have to be present when the closing takes place on the property. The closing documents can be sent to you, and you can sign them in the presence of a notary and return them to the title company handling the closing.
Coming in part 6: Closing out the estate and integrating the deceased’s personal effects into your life
