The basics of inheriting an estate, what does one need to know

[farmerEd]

This is all new to me, so looking for some basic "quick hits" type of advice when dealing with an inheritance.

The facts: A relative passed away two months ago leaving a modest estate behind - if I had to guess the total estate is worth over 500K, but less than $1M - A modest paid-off house in Massachusetts, a small amount of 'after-tax' money and 'stuff', and a larger (but still modest) amount of money in a combination of retirement plans. The estate is to be divided 6 ways to the 6 heirs equally - so nobody is really going to have their lives changed much by this.

What I am looking for, what are the basic things one needs to know? There is no inheritance tax in effect currently, correct? but I assume there are lots of things that need to know in order to make good decisions (i.e. do retirement accounts get cashed out and the distributed, or do you actually inherit 1/6th of a stock portfolio, do you inherit an IRA or does the IRA pay get cashed out, taxes paid and then you inherit 'after-tax' money etc. If there is an option to 'cash out' the IRA and pay taxes due, does each heir decide for themselves, or can some folks take their 1/6 IRA and other folks can take theirs as after tax money?

I am not an executor, two other heirs are (one of whom is very trustworthy), but neither of which has much financial credentials.

I want to educate myself, and be available to answer questions if asked, but have no intentions of forcing myself into a situation where I have no legal standing (not being an executor), but if there are things that I can decide for myself, I want to have the knowledge to decide wisely.

Other very basic questions that I don't understand: do you actually inherit 1/6 of a house? or do the executors have the power to force a sale and distribute the proceeds? What happens if 5/6 want to keep it, but 1/6 does not - can the others be forced to buy the 1/6 out? Who calls the shots? Does the majority rule or do the executors rule? Can you actually sell 1/6th of a house to an outside party?

I'll probably have some followup questions, but right now I am just trying to understand the "big picture" on how things work.

 

[braumeister]

You should be able to get some good general guidance from your local probate court. Every state is different, and this is kind of a legal specialty.

 

[kaudrey]

farmerEd - I am sorry for your loss. Instead of trying to list everything, here is a good summary article for you to read:

Probate Estate - How to Probate an Estate, How to Settle an Estate, Steps to Probating an Estate

Note that IRAs/401(k)s have beneficiaries, so all 6 of you would have to be listed on the Designation of Beneficiaries form for you all to get a piece. As for the house, it partly depends on what was written in the will, and then the executors have the ability to divide things as needed to satisfy the will's contents. If the will says 1/6 of the house goes to each, generally you could sell the house and split the money, or divvy up the total "value" of the estate in a different way so everyone gets their share in various forms (some get house ownership valued $X, others get cash valued $X etc.

 

[Martha]

Ed! Its been a long time. Nice to see you!

This is all new to me, so looking for some basic "quick hits" type of advice when dealing with an inheritance.

The facts: A relative passed away two months ago leaving a modest estate behind - if I had to guess the total estate is worth over 500K, but less than $1M - A modest paid-off house in Massachusetts, a small amount of 'after-tax' money and 'stuff', and a larger (but still modest) amount of money in a combination of retirement plans. The estate is to be divided 6 ways to the 6 heirs equally - so nobody is really going to have their lives changed much by this.

What I am looking for, what are the basic things one needs to know? There is no inheritance tax in effect currently, correct?

Massachusetts place of death and residence? Massachusetts has an estate tax and I believe the exemption is a million dollars.

but I assume there are lots of things that need to know in order to make good decisions (i.e. do retirement accounts get cashed out and the distributed, or do you actually inherit 1/6th of a stock portfolio, do you inherit an IRA or does the IRA pay get cashed out, taxes paid and then you inherit 'after-tax' money etc. If there is an option to 'cash out' the IRA and pay taxes due, does each heir decide for themselves, or can some folks take their 1/6 IRA and other folks can take theirs as after tax money?

Here is the IRA publication from the IRS which discusses inherited IRAs: Publication 590 (2009), Individual Retirement Arrangements (IRAs)
Because income tax is owed on these plans the issue is primarily when will the tax get paid. There are several options and they are complicated when there is more than one beneficiary. The terms of the IRA may effect the options as well. You may have to take out the money within roughly 5 years (by December 31 of the 5th year after death). You may be able to extend it over your life expectancy, but if the account is not separated and transferred into your own beneficiary IRA the life expectancy will be that of the beneficiary with the shortest life expectancy. There are time deadlines to separate out the money and roll it into your own beneficiary IRA. Here is a nice guide that explains the options better than the IRS publication: http://www.bankofkc.com/personal/Inherited%20IRA%20Guide.pdf

Are there 401ks too?

I am not an executor, two other heirs are (one of whom is very trustworthy), but neither of which has much financial credentials.

I want to educate myself, and be available to answer questions if asked, but have no intentions of forcing myself into a situation where I have no legal standing (not being an executor), but if there are things that I can decide for myself, I want to have the knowledge to decide wisely.

Other very basic questions that I don't understand: do you actually inherit 1/6 of a house? or do the executors have the power to force a sale and distribute the proceeds? What happens if 5/6 want to keep it, but 1/6 does not - can the others be forced to buy the 1/6 out? Who calls the shots? Does the majority rule or do the executors rule? Can you actually sell 1/6th of a house to an outside party?

The executor generally has the power to sell the home, unless the will provides otherwise as the previous poster discusses. There is no majority rule. If for some reason the house is not sold by the executor and each end up owning 1/6th, if one wants out and there isn't cooperation from the others that person could sell their share or could start a partition lawsuit to force a sale of the entire property.

Keep in mind this is general information and the state at issue may have its own rules that effect all of this. And see my signature.

 

[farmerEd]

Thanks Martha, that is some helpful stuff to get me started. More I read, the more I realize I don't know much about this...

Yes, Mass is the state of death and residence, so I'll need to look into the mass inheritance tax laws.

 

[calmloki]

Ed! Its been a long time. Nice to see you!




Massachusetts place of death and residence? Massachusetts has an estate tax and I believe the exemption is a million dollars.

Here is the IRA publication from the IRS which discusses inherited IRAs: Publication 590 (2009), Individual Retirement Arrangements (IRAs)
Because income tax is owed on these plans the issue is primarily when will the tax get paid. There are several options and they are complicated when there is more than one beneficiary. The terms of the IRA may effect the options as well. You may have to take out the money within roughly 5 years (by December 31 of the 5th year after death). You may be able to extend it over your life expectancy, but if the account is not separated and transferred into your own beneficiary IRA the life expectancy will be that of the beneficiary with the shortest life expectancy. There are time deadlines to separate out the money and roll it into your own beneficiary IRA. Here is a nice guide that explains the options better than the IRS publication: http://www.bankofkc.com/personal/Inherited IRA Guide.pdf

Are there 401ks too?

The executor generally has the power to sell the home, unless the will provides otherwise as the previous poster discusses. There is no majority rule. If for some reason the house is not sold by the executor and each end up owning 1/6th, if one wants out and there isn't cooperation from the others that person could sell their share or could start a partition lawsuit to force a sale of the entire property.

Keep in mind this is general information and the state at issue may have its own rules that effect all of this. And see my signature.

My gal's just-shy-of-95YO Mom passed away about six weeks ago. The gal is sole beneficiary of the IRA. Am chewing on the link Martha has posted and my first reading indicates that the gal can take annual distributions based on her life expectancy or a lump sum payment. My gal is 61, the IRA has less than $9000 in it, and I'm thinking it isn't worth messing with - just take the lump sum, pay tax on the portion of the IRA that hasn't been taxed yet, and move on. Should be fun figuring what that amount is.... The gal has diddly for earned income but somewhere around $80k in interest,dividend, and rental income on her taxes. I have no IRA, so this is all new to me - anyone have some input? And where is that Martha, anyway?

 

[REWahoo]

And where is that Martha, anyway?

Gone to the birds, I think.