After many months (maybe years), the estate is finally nearly finished. What are the final steps to close probate? We’ll explain the accounting, receipt and releases, and the reserve.

What is the estate accounting?

The estate accounting are the full books and records of everything that has transpired during the executor’s duty of administering the estate. It accounts for every dollar in and out, every asset collected and sold, and what is left over.

Sometimes preparing the accounting can take a while because:

1. It takes time to get all bank statements, records, and identify missing transactions.
2. The documentation has to be compiled into a court-specified format, so you need a specific type of accountant or lawyer to prepare the accounting. We’re not talking about the guy who prepares your 1040 or the lawyer who drafted your LLC.
3. Unfortunately, the court requires a very niche type of format, and you must account for and balance every penny. The accounting often spans more than 1-2 years with complex transactions (stock sales, real estate closings, business sale, etc.). It is a thick stack of paper!

This is the executor’s opportunity to show everything he has done for the estate. This is also the opportunity for the heirs to either object to or accept the accounting.

Why must heirs sign a receipt, release and refunding agreement?

The heirs have the chance to review the accounting, and they can hire their own attorney to help them understand it, if they wish. If there are no objections, the heirs are asked to sign a s receipt, release, and refunding agreement. Here, we’ll discuss the three elements of the agreement.

1. Receipt

The heir acknowledges receipt of the money. This seems a bit odd, since the heirs sign this BEFORE actually receiving the check. It’s understandable for heirs to be nervous, but the only alternative is to hold a closing to coordinate simultaneous exchange and court filing. Otherwise, we deliver the signed receipt and release to the court and await the court’s approval before distributing the money.

In some contested estates, we have done closings. However, there really shouldn’t be a lack of trust, because the executor is bound to the court. The court will know if the money isn’t distributed as agreed upon. Also, a closing would be hard to do it the heirs do not live close by.

2. Release

The heirs agree to release the executor from any future and past liability. The heirs agree that the executor did a good enough job, and they won’t sue. This is what the executor really wants; he’s probably ready to put the estate behind him and move on!

3. Refunding

If any unexpected tax, debt, or bill comes up after the estate is closed, the heir agrees to pay back a portion of his inheritance, pro-rata, to cover that debt. Usually, a refund is needed due to taxes, an unpaid medical bill, or a creditor.

What is a probate reserve?

A probate reserve is a “rainy day fund.” Though the estate is technically closed, and the heirs agreed to refund money if needed, it’s unrealistic to believe that the heirs will actually refund the estate.

Say an unexpected expense comes up a year later, and every heir is supposed to return $10,000. Most heirs are going to ignore the executor’s calls (yes, there will be some honorable folks).

For that reason, it’s better to have cash on hand (a reserve) to pay anything that pops up. Even if it seems that all the bills have been paid, it could still take a year or more for something to pop up. The reserve amount depends on how complicated the estate is, the size of the estate, and the risks involved. Usually, it’s good to have at least $10,000. If the reserve is even $1,000 short of the unexpected bill, you’d still have to contact the heirs for the extra money. I’ve seen reserves as high as $100,000 in 7-figure estates.

The reserve should be held at least a year, but even up to three years to be safe. One reason is that the IRS takes a long time to get through their backlog, so it’s better to be prepared. Even if the heirs don’t want to pay, the IRS bills MUST be paid.

Again, the executor wouldn’t close an estate if there was a large lingering liability out there. The executor works hard to get to the point where he thinks it’s safe to close.

Once the executor is done holding the reserve, that money gets distributed proportionately like the rest of the inheritance. Distributing the reserve is much less formal, as it is a smaller amount. Plus, the heirs may be excited to receive a little more later on.

A lot of people don’t know what the finish line looks like in the estate process, so hopefully this helps to better understand it. If you want to learn more, check out my book, “How Probate Works,” available on Amazon.

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