A. FINAL ACCOUNTING
Pursuant to N.J.S.A. 3B:10-23, the Executor under a Will or the Administrator of an intestate estate is obligated to settle and distribute a decedent’s estate “as expeditiously and efficiently as is consistent with the best interest of the estate”. After marshaling the estate assets, paying the decedent’s debts and paying an unnecessary death taxes, the Executor or Administrator should take prompt action to close the estate. In order to do so, the Executor or Administrator typically accounts to the estate beneficiaries.
An estate can be closed in one of four fashions: (1) the mere release of funds by the Executor or Administrator to estate beneficiaries; (2) the release of estate distributions to estate beneficiaries after the execution of a Release and Refunding Bond upon which there is a waiver of any form of accounting; (3) distribution to estate beneficiaries after said estate beneficiaries execute a Refunding Bond and Release upon submission of an informal accounting; and (4) an Order obtained by a Court of competent jurisdiction after a Verified Complaint and Order to Show Cause are filed for approval of an Executor’s or Administrator’s account.
Theoretically, it is possible for an Executor or Administrator merely to make distributions to estate beneficiaries with no paperwork whatsoever. However, an Administrator would typically not be discharged by the Surrogate’s Court unless Refunding Bonds and Releases are signed and filed. (A copy of this form is attached in the Appendix). The requirement of bond may continue to be imposed and costs of discharging the bond would be borne by the Executor who would subsequently have to obtain Refunding Bonds and Releases or a Court Order discharging the requirement of bond at his/her own expense. Although an Executor typically doesn’t not usually have to concern himself/herself regarding the requirement of bond, an Executor constructively waives the protection of a Refunding Bond and Release by not having such bond(s) executed prior to distribution. No competent professional would ever allow a client to close an estate in this manner.
It is theoretically possible for beneficiaries of an estate to execute Refunding Bonds and Releases without requesting any accounting or information from the Executor or Administrator. In doing so, the beneficiaries of an estate are exhibiting, to a degree, blind faith. However, the execution and filing of said bonds effectively closes out the estate and discharges the Executor or Administrator from his/her position without further liability.
Although it is possible to resolve the closing of an estate without an accounting, the case law of the state clearly details its right to an accounting and the expectations of estate beneficiaries regarding the handling of an estate. (A copy of an accounting is attached in the Appendix). Specifically, the courts of this state have described the duty of an Executor or Administrator as follows:
“It is elementary that the Executor is under a peremptory duty to account for the assets of the estate coming to his possession or knowledge; and if, through failure of the fiduciary duty, he is unable to do so, he is chargeable with their full value. It is a primary duty of one exercising such trust functions to gather in the assets of the estate; and while it is incumbent upon him, in the discharge of this duty, to use only such care, skill, diligence, and caution as a man of ordinary prudence would practice in like matters of his own, it is also held to the upmost good faith.” In re Brueck’s Estate, 124 N.J. Eq. 62, 63 (E&A 1938).
In fulfilling a fiduciary relationship, the fiduciary, at all times, should be governed by a “prudent person” standard.Id.@63; In re Accounting of Koretzky, 8 N.J. 506, 524 (1951). Where the fiduciary fails to fulfill his/her obligation, “the parties of interest, may, by an exception, challenge the account in respect of the sufficiency of the charges made, and the Executor may be surcharged with the reasonable consequences of his failure of duty.” Brueck, supra at 63.
An accounting may be filed in an “informal” or “formal” manner. An informal accounting is a general summary of the assets obtained by the Executor/Administrator, as well as income received and spent by the estate, disbursements made by the estate, distributions made by the estate, and proposed final distributions. In many instances, an informal accounting will summarize classes of expenditures rather than make line-by-line itemizations.
A formal accounting is typically generated in one of three circumstances: (1) a complex estate in which the beneficiaries as well as the Executor or Administrator agree upon the production of same; (2) where required by the Charitable Trust Section of the Attorney General’s Office; and (3) when agreement cannot be reached upon an informal account by estate beneficiaries and the Executor or Administrator thereby can only be discharged by an Order by a court of competent jurisdiction.
In complicated estates, it is frequently necessary to generate a formal accounting to ensure that all parties feel that there has been proper disclosure regarding the handling of an estate. Theoretically, a formal accounting can be generated for even the smallest estate. However, may estates resolve without a formal accounting for the cost of the preparation of same. If all parties agree, the formal accounting can be used to close out an estate. In this instance, a Court Order is not necessary. Refunding Bonds and Releases will suffice.
In many instances, the Charitable Trust Section of the Attorney General’s Office may require a formal accounting in order to conclude an estate. By statute, Notice of Probate must be sent to the Charitable Trust Section whenever a charity is a beneficiary under aWill. If there is a specific bequest, the Charitable Trust Section does not require an accounting, however, when a charity or charities are remainder beneficiaries under an estate, the State can require a formal accounting. When the State requests a formal accounting, the State also requests that the attorney, representing the estate, submit an Affidavit of Services for fees and costs incurred.
Most frequently, a formal accounting is filed when the Executor or Administrator is unable to obtain Refunding Bonds and Releases from all beneficiaries notwithstanding good faith attempts to obtain same through the use of an informal accounting. In this event, the only way in which an Executor or Administrator can be discharged from his/her duty is to obtain a Court Order. In order to do so, the Executor or Administrator must file an Order to Show Cause along with a Verified Complaint for approval of accounting. At the very least, the Verified Complaint will seek an Order from the Superior Court (Chancery Division/Probate Part) (a) approving the Executor’s or Administrator’s account, (b) approving the legal fees and costs incurred; (c) approving the Executor’s or Administrator’s commissions; and (d) discharging the Executor or Administrator from any further liability from the estate or its beneficiaries. In the case of intestate administration, the Complaint should also see that any surety bond be discharged upon distribution to the estate beneficiaries.
Upon approval of a final account, the surety bond can be discharged in one of two fashions. First, the beneficiaries will be given one final opportunity to execute a Refunding Bond and Release. If any Refunding Bonds and Releases remain unexecuted, an application can be made to the court to have said beneficiary’s share paid into the court and acquire an Order discharging the bond upon doing so.
An Order to Show Cause and formal accounting may be filed by an Executor or Administrator at any time once the estate is ready to be distributed. However, a beneficiary of an estate may not compel an Executor or Administrator to account until after the expiration of one year after the appointment of the Executor or Administrator unless special cause is shown before the Superior Court.
A formal accounting generally includes information in the following areas: (1) a general statement made as to corpus, income, and balance on hand; (2) receipts of principal or corpus by the beneficiary; (3) gains and losses on sales or other dispositions of capital assets; (4) disbursements of principal or corpus; (5) distributions of principal or corpus to estate beneficiaries; (6) principal balance on hand; (7) receipts of income; (8) disbursements of income; (9) distribution of income to estate beneficiaries; and (10) reserves held and proposed schedule of distribution.
When an account is filed in court, a representative from the Surrogate’s Office will review the account in detail. The Surrogate’s Office will assess a fee for the audit of the account. After this audit is made, a memorandum is written to the probate judge as well as, in many instances, to the attorney who prepared the account as to any questions or concerns the Surrogate has regarding the account itself. In some jurisdictions, if the account has considerable questions or does not comply with the before stated format, the Complaint and Order to Show Cause may be returned for correction. Nevertheless, after the correction Order, at times even without, an Order to Show Cause will be executed whereafter notice must be given to all interested parties regarding the hearing date. The Order to Show Cause will contain language which sets forth the date by which exceptions to the account and answers to the Complaint must be filed by any protesting party.
On the return date of the Order to Show Cause , the Court theoretically can hear arguments regarding the accounting and exceptions and take testimony. At the Court’s discretion, a discovery schedule can be set regarding interrogatories and depositions by the fiduciary and/or contesting estate beneficiaries. After the plenary hearing, the probate judge can either accept the account in its entirety or agree to alter the account as to certain exceptions.
In making a final determining regarding the account, the probate judge will make a determination as to the appropriateness of the fiduciary commissions as well as legal fees and costs incurred on behalf of the fiduciary. Although such fees are typically paid by the estate, the Court does have some discretion. First, a Court can modify the Executor’s fees. Second, the Court can take two sets of action as to legal fees. First, the Court can adjudicate the appropriateness of legal fees and costs requested.
Additionally, the Court can determine which party should be responsible for the payment of such fees and costs. Although such fees and costs would typically be paid by an estate, the Court can surcharge the Executor or Administrator if there exists evidence of gross negligence or fraud. On the other hand, the Court can surcharge the accepting party for the fees and costs incurred in filing an accounting if the Court finds that requirement of an accounting and cost of the proceeding were generated in bad faith.
B. DISTRIBUTION OF ESTATE TO BENEFICIARIES
Distribution of an estate typically takes four forms: (1) distribution of non-probate assets, (2) distribution of specific pecuniary bequests, (3) distribution of specific (but illiquid) bequests, and (4) residuary distributions.
In general, non-probate assets are not even handled by the Executor or Administrator of the estate. Such assets cannot be counted in the Executor’s or Administrator’s commission structure. However, if an Executor or Administrator has knowledge of the existence of non-probate assets, information regarding said assets should be distributed to the beneficiaries of same.
Non-probate assets typically take three forms. First, non-probate assets could be contract assets such as life insurance, annuities, individual retirement accounts, and other forms of retirement plans. Such assets are paid to the named beneficiaries of said accounts or policies. Said accounts or policies are only paid to the estate if there is no named beneficiary. Assuming that there is a named beneficiary, the Executor or Administrator should supply a certified copy of a death certificate to the beneficiary so that he/she may claim the proceeds from said accounts or policies. If no beneficiary is named, the Executor or Administrator shall provide not only a certified copy of the death certificate but a short certificate of the Letters Testamentary to the financial institution holding said asset and will refer that asset to be retitled or paid over to the estate.
Second, an individual may own transfer-on-death (TOD) or paid-on-death (POD) accounts. These are accounts historically held with banks. However, they have also been utilized on government savings bonds as well. Over the past decade, many brokerage house offices have employedTODdesignations. In order to claim such assets, theTODor POD beneficiary needs to supply a certified copy of the death certificate. An Executor or Administrator should provide a copy to said beneficiary, although they have no legal obligation to do so. Such beneficiary can certainly obtain a copy of the death certificate at the municipality where the decedent resided at the time of his/her death.
Third, assets can pass by right of survivorship. In financial accounts, there is a designation of joint tenants with right of survivorship. With such accounts, death certificates are produced by a surviving account holder and, thereby, assets are passed from one party to another.
In the case of real property, it is not necessary to transfer the ownership of property by deed from the estate of the deceased owner to the surviving owner. When the property is later sold or otherwise conveyed, the incident of the deceased party’s death merely needs to be noted in the deed recital.
Notwithstanding the foregoing, many financial institutions will only release one-half of the aforementioned assets until a waiver is obtained by the State ofNew Jersey. If the beneficiaries are Class A beneficiaries (i.e., spouse, parent, children, or other lineal descendants), the assets are typically released immediately if a Form L-8 is executed at the financial institution which, in turn, will request the waiver from the State. If more remote relatives, friends, other individuals or entities are named as beneficiaries, the entirety of the asset will not be released to the beneficiary or surviving account holder until a waiver is received by the State ofNew Jerseysubsequent to the filing of a New Jersey Transfer Inheritance Tax Return.
For distribution purposes, two forms of bequests are handled by the Executor or Administrator. Specific pecuniary bequests are precise distributions of cash. Those bequests should be paid as soon as is feasible after death. Typically, such bequests should be paid once the Executor has sufficient cash to handle such bequests along with any typical liabilities of the estate, including funeral expenses, administration expenses, debts and taxes. Pursuant to N.J.3B 23-11, “General pecuniary devises shall bear interest beginning one year after the first appointment of a personal representative until payment, unless a contrary intent is indicated by theWill, or unless the Court, for good cause, raises the imposition of interest. The annual rate of interest on general pecuniary devises shall equal the average rate of return, to the nearest whole or one-half percent, for the corresponding proceeding fiscal year terminating on June 30th, of the State of New Jersey Cash Management Fund (State accounts).” Notwithstanding the foregoing, an Executor or Administrator should forego payment of such a devise if it appears that there are significant liabilities pending against the estate especially if such claims are subject to litigation.
All other bequests, including residuary bequests, should be made as promptly as possible. However, neither an Executor nor an Administrator need to distribute any such bequest until he/she receives a closing letter from the Internal Revenue Service and the New Jersey Transfer Inheritance Tax division releases its closing letter and waivers. In general, complete distributions are not made until such closing letters and waivers are received. On the other hand, an Executor or Administrator may make partial distributions before he/she receives the closing letter and waiver if he/she determines that sufficient funds exist to pay any contingent liabilities.
One of the benefits of making partial distributions is the shift of income from the estate to the beneficiaries. In making a partial distribution, the Executor or Administrator of the Estate can send a Form K-1 to the beneficiaries who, in turn, can claim estate income on their own individual Form 1040. This option is almost always preferable to having the estate income taxed by the estate at significantly higher estate tax rates. In determining whether or not such partial distribution should be made, the Executor or Administrator should weigh the following factors: (a) the needs of the beneficiaries, (b) potential deterioration or loss of value of estate property, and (c) income tax ramifications from shifting estate income. If the Executor or Administrator decides to make a partial distribution, he/she should treat all beneficiaries impartially by making pro-rata distribution of their shares under the intestacy statute.
In general, there is no set time by which an Executor or Administrator must close an estate and distribute the estate assets. It must be done pursuant to the reasonable person standard. If an estate is taxable, the Executor or Administrator should wait until the federal closing letter and/or state closing letter are received. In the event an estate is subject to both federal and state tax, the Transfer Inheritance Tax Branch will not release a state closing letter until the federal closing letter is received by its office.
After the aforementioned steps are taken, the Executor or Administrator shall ensure that all final estate expenses are paid including Executor’s commissions and professional fees.
Occasionally, an aggregate estate is not expected to cover the decedent’s debts, administration expenses, taxes and bequests. In that situation, the shares of estate beneficiaries must be abated. Pursuant to N.J.3B:23-12, shares should abate in the following order: (1) property passing by intestacy, (2) residuary devises, (3) general devises and (4) specific devises. N.J.3B:23-12 further states that abatement within each classification is in proportion to the amount of property each of the beneficiaries would have received if full distribution of the property had been made in accordance with the terms of theWill.
C. DISCHARGE OF FIDUCIARY
An Executor or Administrator can be discharged in one of two fashions. First, Refunding Bonds and Releases, as discussed heretofore, are executed by all estate beneficiaries and filed with the Surrogate. By doing so, the fiduciary ensures that he/she has been released by any further liability by the estate beneficiaries and exacts the recognition of pro-rata distribution to any liabilities that may be discovered or presented to the estate at a later date. If such Refunding Bonds and Releases cannot be obtained, a Court Order will suffice. If a surety bond has been required, it can be discharged by the Order, Judgment, or evidence of filed Refunding Bonds and Releases.