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Personal Representative vs. Trustee: What’s the Difference?

A reader writes in, asking:

“I’ve read your book twice, and FINALLY got my wife to face the reality that I’m likely to die before her (I’m 82, she’s 76)!

I love the simplicity of the book, however there is one topic I think needs some fleshing out: the text seems to use the terms Personal Representative and Trustee interchangeably. The functional roles seem a bit fuzzy.

Am I correct that the Personal Rep assists the surviving spouse on immediate-death matters (a short-term function), and the Trustee assists the surviving spouse (and beneficiaries) on post-death (trust) asset management (a long-term function)?

Additionally, am I correct that that a spouse, beneficiary, or friend could be qualified to be a personal rep, but a trustee has more responsibility and thus requires higher qualifications? Lawyers and CPA are so qualified, but they are too expensive to use continuously. Do you have any suggestions on this?”

The personal representative (PR) and trustee roles are analogous but they are definitely not interchangeable. (And to be clear, in my writing I do not use the terms interchangeably. If a given sentence refers to a personal representative, it means specifically the personal representative. And ditto for referring to a trustee.)

In short, the PR is in charge of administering the estate, whereas a trustee is in charge of administering a trust (if any). But they both have the job of managing the assets in question for the benefit of the beneficiaries in question.

Either role could be short-term or long-term, because either an estate or a trust could be closed pretty quickly or could remain open for an extended period. It is true though that the role of trustee is more likely to be long-term, because an estate is not generally intended to remain open for many years, whereas that might be the intention for a trust. For example, a person might set up a trust for the benefit of their adult disabled child, and the explicit goal for the trust would be for it to last for that beneficiary’s whole life. In contrast, if an estate is still open after many years, it’s generally not because anybody intended for such but rather because something has stopped the PR from being able to close the estate. (For instance, the estate is supposed to be distributed equally among four beneficiaries, and 90% of the estate consists of a single asset that is both illiquid and indivisible. And none of the beneficiaries wants to kick in the necessary cash to buy out the other beneficiaries’ shares.)

In many cases, one person (often the surviving spouse or an adult child) is named as both PR and trustee. Though it would be important for that person to keep in mind that it is indeed two separate roles that they are fulfilling. (For instance, it’s critical not to intermingle the estate’s assets with a trust’s assets.)

I would not say that a trustee necessarily needs greater skills than a personal representative. In both cases, the person in question owes a fiduciary duty to the beneficiaries and will have to manage the assets in a way that can satisfy that duty. Depending on things like family dynamics and what skill sets are available within the family, that may mean hiring a professional.

Are you (or a loved one) a surviving spouse?

After the Death of Your Spouse: Next Financial Steps for Surviving Spouses

Topics Covered in the Book:
  • The estate administration process
  • Responsibilities as personal representative (executor)
  • Social Security planning
  • Handling inherited retirement accounts
  • Reassessing your own finances
  • Finding professional assistance
  • Click here to see the full list.

New Book – After the Death of Your Spouse: Next Financial Steps for Surviving Spouses

As of today, my latest book is available: After the Death of Your Spouse: Next Financial Steps for Surviving Spouses.

Many surviving spouses find themselves overwhelmed by all the administrative and financial to-do items that have to be handled in the months after their spouse’s death. There’s a lot to do, and they’re supposed to get it all done while grieving. And in many cases, the situation is made more difficult by the fact that the surviving spouse is not the one who regularly handled the household finances.

I wrote this book to walk people through it, in plain language. It’s the book I want my spouse to have, in case something happens to me.

Fortunately, some of these to-do items for surviving spouses are important but not urgent. And in fact, for some of these items, it’s best to wait. Many people report experiencing “brain fog” in the weeks or months following their spouse’s death. They find that they have difficulty concentrating and difficulty performing tasks that would normally be easy. Major, irrevocable decisions are best put off until this period is over, in cases in which it’s practical to do so.

That’s why the book is broken down into two parts: immediate next steps and intermediate next steps.

The book’s table of contents is as follows:

Part One: Immediate Next Steps

1. Learn the Terms (The Estate Administration Process)
2. Getting Organized
3. Notifying Necessary Parties
4. Initial Responsibilities as Personal Representative
5. Updating Your Own Estate Plan

Part Two: Intermediate Next Steps

6. Social Security Planning
7. Further Responsibilities as Personal Representative
8. Handling Inherited Retirement Accounts
9. Additional Options as a Beneficiary and Surviving Spouse
10. Tax Returns
11. Reassessing Your Own Finances
12. Reassess Your Portfolio
13. Finding Professional Assistance

Conclusion: What’s Next?

Appendix A: Does an Inheritance Create Taxable Income?

Appendix B: Social Security Widow(er) Benefit Math Details

Appendix C: Dealing with Trusts

My sincere gratitude goes to three attorneys who generously contributed their time and expertise: Lee Aronson of Shreveport, Louisiana; Randi Grassgreen of Boulder, Colorado; and Matthew Sullivan of Waltham, Massachusetts. Bogleheads forum members “LadyGeek” and “dodecahedron” also very kindly gave their time and shared their knowledge and experiences as surviving spouses.

If you think the book would be helpful to you or to a loved one, I would encourage you to pick up a copy. (Print version here, Kindle version here.)

Are you (or a loved one) a surviving spouse?

After the Death of Your Spouse: Next Financial Steps for Surviving Spouses

Topics Covered in the Book:
  • The estate administration process
  • Responsibilities as personal representative (executor)
  • Social Security planning
  • Handling inherited retirement accounts
  • Reassessing your own finances
  • Finding professional assistance
  • Click here to see the full list.

Tax Returns Necessary After Somebody’s Death

A reader writes in, asking:

“A family member appears to be in his final days. I have not seen his will, but I have been told that I am named as executor. I have never been an executor before, so I am doing some research on what my responsibilities will be. Could you perhaps discuss what tax filings will be necessary?”

Firstly, one thing you should know if you choose to accept the role of executor is that you are allowed to hire assistance (e.g., an attorney to guide you through the process and/or a tax professional to prepare the necessary returns).

And as far as basic tax information, IRS Publication 559: Survivors, Executors, and Administrators will be very helpful.

Background Information (Basic Definitions)

What exactly is an estate? An estate is a legal entity that comes into being when a person dies. The purpose of the estate is to gather the decedent’s assets, pay the decedent’s debts and expenses, and distribute the remaining assets. The estate exists until all of the assets have been distributed to heirs or other beneficiaries.

The executor is the person named in the will to administer the estate. (If no will exists, if no executor is named in the will, or if the named party refuses to serve as executor, the court will appoint an administrator to perform the same functions.)

Form 1040 (Final Individual Tax Return)

The executor must file the final income tax return for the decedent for the year of death as well as any returns from prior years that have not yet been filed. (For example, if you die in February of a given year without yet having filed your return for the prior year, your executor will have to file your return for that prior year as well as the return for the year of death.)

The final tax return is due on the same date it would have been due if the death had not occurred (i.e., typically April 15 of the following year).

For the final return and any returns for prior years not yet filed, the executor may choose to file a joint return with the decedent’s surviving spouse, if applicable.

Form 1041 (Income Tax Return for the Estate)

The executor also must file an income tax return (Form 1041) for the estate for each year that the estate remains open. Broadly speaking, the estate has to pay tax each year on any income it earns that is not distributed to beneficiaries. Form 1041 is where all such income and distributions are reported and where the resulting income tax is calculated.

For calendar year estates, Form 1041 for each year is due April 15 of the following year.

Form 706 (Estate Tax Return)

Form 706 is the estate tax return. That is, it’s the return relating to the federal estate tax (filed once), whereas Form 1041 discussed above is the income tax return for the estate (filed every year until the estate is closed).

Form 706 is also used to report and calculate the tax on generation-skipping transfers.

Form 706 generally only has to be filed if one of two things is true:

  1. The gross estate, plus taxable gifts made during the person’s lifetime (i.e., gifts beyond the annual gift tax exclusion amount) exceed the applicable threshold ($12,060,000 for 2022), or
  2. The executor elects to transfer the deceased spousal unused exclusion amount to the surviving spouse.

If Form 706 must be filed, the executor must file by 9 months from the date of death, with a 6-month extension possible.

State Returns

In addition to the above, there will generally be forms to file at the state level as well (e.g., income tax return for the decedent, income tax return for the estate, and potentially an estate tax return if the state has an estate tax).

Are you (or a loved one) a surviving spouse?

After the Death of Your Spouse: Next Financial Steps for Surviving Spouses

Topics Covered in the Book:
  • The estate administration process
  • Responsibilities as personal representative (executor)
  • Social Security planning
  • Handling inherited retirement accounts
  • Reassessing your own finances
  • Finding professional assistance
  • Click here to see the full list.

Financial Planning for the Possibility of Cognitive Decline/Dementia

A reader writes in, asking:

“Would you consider writing a column on options for protecting oneself from being taken advantage of in dotage if there are no children to take over the finances? We’ve done wills and named beneficiaries for all accounts. Is there a document or trust or process to hire a trustworthy professional when the time comes?”

Simplify and Automate

Firstly, while this is not exactly an estate planning tool, simplifying your finances (e.g., consolidating accounts, minimizing the number of investment holdings, automating payment of bills, etc.) can help minimize the impact of minor cognitive decline. It also makes things easier for anybody who might take over control of your finances, as discussed below.

Increasing the portion of your spending that is satisfied by automatic, guaranteed sources of income (i.e., Social Security and/or lifetime annuities) is also helpful for similar reasons. That is, once such sources of income are in place, they require no further decision-making — a marked contrast from the ongoing process of selling investment holdings to satisfy living expenses.

Durable Power of Attorney for Finances

A useful tool for planning for the possibility of dementia or other forms of cognitive decline is the durable power of attorney for finances. (Of note: I’m sticking specifically to financial concerns for the sake of this article, but a durable power of attorney for healthcare may be useful as well.) A power of attorney for finances is a document that appoints someone as your “agent” (sometimes referred to as an attorney-in-fact), and this person will have the authority to make financial transactions on your behalf.

A key point is that, in this context, it is critical that it is a durable power of attorney. A non-durable power of attorney automatically expires if you become mentally incapacitated, which is obviously a problem when mental incapacitation is precisely the concern we’re trying to address.

When drafting the power of attorney, it can be an immediate power of attorney (which grants the applicable authority to your agent immediately), or it can be a springing power of attorney (which only “springs” into effect if/when you become unable to manage your affairs due to disability or mental incapacitation). A springing power of attorney is safer in one sense (because it doesn’t grant anybody any authority until it’s necessary), but in some cases it can actually create problems.

There will generally be a specific event that must occur in order for a springing power of attorney to spring into effect (e.g., your physician must sign a document stating that you can no longer manage your own affairs). With dementia, there’s a big hazy area between “clearly mentally capable” and “clearly not mentally capable.” There’s often a stage at which a person is pretty “with it” on some days and much less so on other days. In short, there could be a point at which you could really use help, but your physician is not yet willing to sign that document — so your chosen agent cannot yet step in.

Another important point here is that some financial institutions will require their own power of attorney document to be filled out. (That is, they may not honor the power of attorney document that you and your attorney have prepared.) So be sure to check with your bank(s), brokerage firm(s), and so on in advance to see what they specifically require.

Develop Relationships Now

If you do not have a family member or friend whom you trust sufficiently to appoint to to be your agent, you can appoint a paid professional (e.g., an attorney, CPA, or CFP whom you trust).

Be aware, however, that most attorneys, CPAs, and CFPs do not provide such services, because a) doing so is quite a bit different from the typical services offered by such professionals, and b) taking on the role of being somebody’s agent comes with a considerable list of liability concerns. So don’t just expect your current attorney/CPA/CFP to be willing to take on that role when the time comes.

Instead, you will probably have to find a professional who specializes in this sort of work. Fortunately, such people/firms do exist. For instance, if you live in Chicago, you may want to begin with a search for: “eldercare CPA Chicago” or “professional fiduciary Chicago” (without the quotes).

A Few Final Notes

With regard to planning for potential dementia, if you have a living trust, it’s important to appoint a successor trustee, who can take over in the event of your incapacitation. It’s also important to note that a living trust is not a replacement for a durable power of attorney for finances, because the trustee’s authority is strictly limited to the assets within the trust. And some assets (most notably your retirement accounts while you are still alive) cannot be put in the trust.

Finally, with regard to everything above I would add that:

  1. It’s important to address these matters well in advance (i.e., while it is still quite clear to you and everybody else involved that you are still of sound mind), and
  2. It’s important to discuss these matters with an attorney who has expertise in estate planning.

Are you (or a loved one) a surviving spouse?

After the Death of Your Spouse: Next Financial Steps for Surviving Spouses

Topics Covered in the Book:
  • The estate administration process
  • Responsibilities as personal representative (executor)
  • Social Security planning
  • Handling inherited retirement accounts
  • Reassessing your own finances
  • Finding professional assistance
  • Click here to see the full list.

Inherited IRA Rules (Updated for 2020 to Reflect SECURE Act and CARES Act)

As a result of the SECURE Act that was passed in late 2019, there are now essentially two sets of rules for inherited IRAs. Which rules to use depends on a) when the original account owner died and b) who is listed as the beneficiary of the account.

Also, as a result of the CARES Act that was passed in March 2020, there are no required distributions for 2020 from IRAs — whether inherited or not.

Death in 2020 or Later

If the IRA owner dies in 2020 or later, we first have to determine whether the beneficiary is an “eligible beneficiary.”

Eligible beneficiaries include:

  • the surviving spouse of the original account owner,
  • a minor child of the original account owner,
  • anybody who is disabled or chronically-ill (per the definition found in IRC 7702B(c)(2)), or
  • any designated beneficiary who is not more than 10 years younger than the original account owner.

If the beneficiary is an eligible beneficiary, then the old rules apply (see below).

If the beneficiary is not an eligible beneficiary, the new rule applies. And the new rule simply says that the account must be completely distributed within 10 years of the original owner’s death. The distributions do not, however, have to occur evenly over those 10 years. (For instance, if you wanted to do so, you could take no distributions for the first 9 years, then distribute everything in year 10.)

Deaths in 2019 or Earlier, As Well as Eligible Beneficiaries

The “old rules” discussed in the remainder of this article apply in situations in which either:

  • The IRA owner died in 2019 or earlier, or
  • The beneficiary is an “eligible beneficiary” as described above, and therefore able to use the (more favorable) old rules.

Under the “old rules,” there are still actually two sets of rules: one set of rules that applies if the deceased owner was your spouse, and another set for any other designated beneficiary. We’ll cover spouse beneficiaries first, then non-spouse beneficiaries, then situations in which there are multiple beneficiaries.

Inherited IRA: Spouse Beneficiary

As a spouse beneficiary, you have two primary options:

  1. Do a spousal rollover — rolling the account into your own IRA, or
  2. Continue to own the account as a beneficiary.

Note: there’s no deadline on a spousal rollover. Should you want to, you can own the account as a spousal beneficiary for several years, then elect to do a spousal rollover.

If you do a spousal rollover, from that point forward it’s just a normal IRA (i.e., it’s just like any other IRA that was yours to begin with), so all the normal IRA rules apply, whether Roth or traditional.

If you continue to own the account as a spousal beneficiary, the rules will be similar to normal IRA rules, but with a few important exceptions.

No 10% Penalty
First, you can take distributions from the account without being subject to the 10% penalty, regardless of your age. So if you expect to need the money prior to age 59.5, this is a good reason not to go the spousal rollover route — at least not yet. (As mentioned above, there’s no deadline on a spousal rollover.)

Withdrawals from Inherited Roth IRA
Second, if the inherited account was a Roth IRA, any withdrawals of earnings taken prior to the point at which the original owner would have satisfied the 5-year rule will be subject to income tax (though not the 10% penalty).

Spouse Beneficiary RMDs
Third, you’ll have to start taking required minimum distributions (RMDs) in the year in which the deceased account owner would have been required to take them. (If the original owner — your spouse — was required to take an RMD in the year in which he/she died, but he/she had not yet taken it, you’re required to take it for him/her, calculated in the same way it would be if he/she were still alive.)

Your RMD from the account will be calculated each year based on your own remaining life expectancy from the “Single Life” table in IRS Publication 590-B.**

Inherited IRA: Non-Spouse Beneficiary

When you inherit an IRA as a non-spouse beneficiary, the account works much like a typical IRA, with three important exceptions.

No 10% Penalty
Distributions from the account are not subject to the 10% penalty, regardless of your age. (This is the same as for a spouse beneficiary.)

Withdrawals from Inherited Roth IRA
If the inherited account was a Roth IRA, any withdrawals of earnings taken prior to the point at which the original owner would have satisfied the 5-year rule will be subject to income tax, though not the 10% penalty. (This is also the same as for a spouse beneficiary.)

Non-Spouse Beneficiary RMDs
Each year, beginning in the year after the death of the account owner, you’ll have to take a required minimum distribution from the account. (If the account owner was required to take an RMD in the year of his death but he had not yet taken one, you’ll be required to take his RMD for him, calculated in the same way it would be if he were still alive.)

The rules for calculating your RMD are similar (but not quite identical) to the rules for a spousal beneficiary. Again, your first RMD from the account will be calculated based on your own remaining life expectancy from the “Single Life” table in IRS Publication 590-B. However, in following years, instead of looking up your remaining life expectancy again (as a spousal beneficiary would), you simply subtract 1 year from whatever your life expectancy was last year.**

For example, imagine that your father passed away in 2018 at age 65, leaving you his entire IRA. For 2018 (the year of death), you have no RMD. On your birthday in 2019, you turn 30 years old. According to the Single Life table, your remaining life expectancy at age 30 is 53.3 years. As a result, your RMD for 2019 would have been equal to the account balance as of 12/31/2018, divided by 53.3.

For 2020, if it weren’t for the CARES Act eliminating RMDs for 2020, your RMD would have been equal to the account balance at the end of 2019, divided by 52.3. (But because of the CARES Act, the RMD for 2020 would be zero.) In 2021, the RMD will be the 12/31/2020 balance, divided by 51.3.

Important exception: if you want, you can elect to distribute the account over 5 years rather than over your remaining life expectancy. If you elect to do that, you can take the distributions however you’d like over those five years — for example, no distributions in years 1-3 and everything in year 4.

Successor Beneficiary RMDs
If a beneficiary dies before the account has been fully distributed, the new inheriting beneficiary is known as a successor beneficiary.

If the original account owner died in 2020 or later and the original beneficiary (i.e., the first person to inherit the IRA) was a “non-eligible” beneficiary, then the successor beneficiary will have to keep using the same distribution schedule. That is, the successor beneficiary will have to distribute the account within 10 years of the original owner’s death.

Conversely, if the original account owner died before 2019 and/or the original beneficiary was an “eligible” beneficiary, then the successor beneficiary will have to distribute the account over 10 years, but it’s a new 10-year period, beginning with the date of the original beneficiary’s death (rather than beginning with the date of the original owner’s death).

Tips for Non-Spouse Beneficiaries

  1. When you retitle the account, be sure to include both your name and the name of the original owner.
  2. Name new beneficiaries for the account ASAP.
  3. If you decide to move the account to another custodian (to Vanguard from Edward Jones, for instance), do a direct transfer only. If you attempt to execute a regular rollover and you end up in possession of the funds, it will count as if you’d distributed the entire account.

Inherited IRA: Multiple Beneficiaries

If multiple beneficiaries inherit an IRA, they’re each treated as if they were non-spouse beneficiaries, and they each have to use the life expectancy of the oldest beneficiary when calculating RMDs. This is not a good thing, as it means less ability to “stretch” the IRA.

However, if the beneficiaries split the IRA into separate inherited IRAs by the end of the year following the year of the original owner’s death, then each beneficiary gets to treat his own inherited portion as if he were the sole beneficiary of an IRA of that size. This is a good thing, because it means that:

  • A spouse beneficiary will be treated as a spouse beneficiary rather than as a non-spouse beneficiary (thereby allowing for more distribution options), and
  • Each non-spouse beneficiary will get to use his or her own life expectancy for calculating RMDs.

Note: if the original owner dies in 2020 or later and at least one beneficiary is a “non-eligible beneficiary” (per the definition from the beginning in this article), then the whole account will have to be distributed within 10 years, unless the IRA agreement has a provision that immediately divides the IRA into separate IRAs for each beneficiary.

To split an inherited IRA into separate inherited IRAs:

  1. Create a separate account for each beneficiary, titled to include both the name of the deceased owner as well as the beneficiary.
  2. Use direct, trustee-to-trustee transfers to move the assets from the original IRA to each of the separate inherited IRA accounts.
  3. Change the SSN on each account to be that of the applicable beneficiary.

A Few Last Words

When you inherit an IRA, you absolutely must take the time to learn the applicable rules before you do anything. Don’t move the money at all until you understand what’s going on, because simple administrative mistakes can be very costly.

Also, should you elect to get help with the decision — a good idea, in my opinion — don’t assume that somebody knows the specifics of inherited IRA rules just because he or she is a financial advisor. In these circumstances, I’d suggest looking for someone with CPA or CFP certification.

**If a) the inherited IRA is a traditional IRA, b) you are older than the deceased IRA owner, and c) the deceased IRA owner had reached his “required beginning date” by the time he died, your RMD could actually be smaller than the amount calculated above, as you can calculate it based on what would be the deceased owner’s remaining life expectancy (from the “Single Life” table) using the owner’s age as of his birthday in the year of death (and reducing by one for each following year).

Are you (or a loved one) a surviving spouse?

After the Death of Your Spouse: Next Financial Steps for Surviving Spouses

Topics Covered in the Book:
  • The estate administration process
  • Responsibilities as personal representative (executor)
  • Social Security planning
  • Handling inherited retirement accounts
  • Reassessing your own finances
  • Finding professional assistance
  • Click here to see the full list.
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