by Richard T. DeCou , Esq.
What happens after a family member has died?
Hopefully, the decedent will have left funeral instructions. If not, New Jersey statute indicates that the next of kin is the person with authority to make funeral and burial arrangements. If the next of kin is not also the executor, this leaves the next of kin making the decisions and the executor responsible to pay the bill from the decedent’s estate. Fortunately, actual conflicts seem to be rare.
After the funeral, it is time to probate the will. This requires the original Will, a death certificate, the executor, and a trip to the office of the Surrogate in the county where the decedent resided. (The executor will be permitted to enter the decedent’s safe deposit box, accompanied by a bank officer, to remove the Will.) If the Will is not “self-proving,” it will also be necessary for a witness of the will to appear. If the witness lives at a distance, the necessary papers can be sent to the Surrogate where the witness lives, but this will delay matters for a few weeks. If the decedent left no Will, the next of kin should apply to be appointed “administrator” (rather than executor) and New Jersey Statute (rather than a Will) will determine who receives the estate.
During the visit to the Surrogate’s office, the person named as executor or administrator will be asked to provide the names, addresses and (if known) the social security numbers of himself, the spouse, and the children or other next of kin. The executor also signs an application to admit the Will to probate, an authorization for the Surrogate to accept service of process (claims) against the estate, and a qualification whereby the executor agrees to collect the assets, pay the bills, pay the death taxes, and make distribution as required by the Will. (In some states, such as Florida, the executor is called a “personal representative.”)
An administrator will be required to post bond, to guarantee that he or she will properly administer the estate. The bonding company agrees to pay for the completion of the task if the administrator fails to do so, or for the errors, omissions or thefts of the administrator; and if such occurs the bonding company will also seek reimbursement from the administrator. Wills normally waive the requirement that an executor post bond, thereby saving an annual premium of $5 per $1000 of assets.
There will be a ten day wait from date of death before the Surrogate will issue the “short certificate” indicating appointment of the executor or administrator. This waiting period allows time for someone to challenge the validity of the Will. Again, this rarely happens. (If it does happen, no one is authorized to administer the estate until a court considers the dispute and appoints a provisional administrator.)
The executor’s or administrator’s short certificate is a half-page paper, with a seal at the bottom, signed by the Surrogate saying that John Doe has been appointed executor of the decedent’s estate. In effect, the executor or administrator stands in place of the decedent. This certificate must be provided to each bank, stockbroker or other person when collecting or transferring property of the decedent.
If the executor is a bank trust department, a trust officer will be assigned to oversee the estate administration, with the assistance of an investment committee, a real estate department and a tax department. An individual executor faces the same tasks and the same responsibilities, but without the same experience or staff. The individual executor should not hesitate to hire the needed help, particularly if there are other beneficiaries in addition to the executor. What follows is a description of what is expected of an individual executor; a bank executor will do essentially the same thing, but the family may be less involved. (An administrator performs the same functions for an intestate estate; hereafter we will use the term “executor.”)
With the short certificate in hand, the executor will open a bank account or brokerage account in the name of the estate. All receipts and all disbursements will pass to or from this account. From these records the executor will be required to prepare income tax returns for the estate, and a final summary of receipts and disbursements so that the residuary beneficiaries can see that they have received what is due to them. When the estate bank account is opened, the bank will ask for a federal tax identification number (TIN) for the estate. The TIN can be obtained by filing form SS-4 with IRS: if we fax the SS-4 for you, we will also need power of attorney to do so (form 2848).
As attorneys, we have found that record keeping is often easier if we make the deposits and prepare the checks for signature by the individual executor. We have copiers, a bookkeeping system and familiarity with estates. It is much easier to set up the records correctly in the first place than to try to sort it out weeks or months later. It puts us in a much better position to give advice when decisions are being made. The executor retains ultimate control as the only person with check signing power. However, with small estates or if there is a surviving spouse, this may not be necessary, and some clients prefer to use their own accountants for records.
The executor must promptly make an inventory of the assets in the estate. In New Jersey, the inventory need not be filed with the Surrogate, but it will be important for preparing death tax returns and preparing the final accounting to beneficiaries. It will also reveal particular assets requiring transfer, sale or appraisal. The decedent’s last federal income tax return provides a good start, and for this reason New Jersey requires a copy of it to accompany the inheritance tax return.
The furniture, jewelry and other tangible personal property should not be distributed until it has been appraised. The appraisal will be needed for any required death tax returns, and for determining the shares of beneficiaries.
The house and car should be kept insured. The car, if it is in the decedent’s name alone, should not be driven because of problems with insurance coverage. Sell or transfer the car as soon as possible. Insurance companies do not like to insure empty houses, so if the house is to be sold it is best to proceed promptly.
Real estate and family businesses will have to be appraised. This will require some time. If the estate will be subject to death taxes, the appraisal can be very important in determining the amount of death tax liability; it will need to stand up to IRS review. Even if there are no death taxes, appraisal may be needed to establish the “stepped-up” basis of the property for computing gain or loss upon sale in future years.
Some assets are subject to death taxes, but are not “probate assets” under the control of the executor and forming part of the estate. Such “non-probate assets” include joint property, life insurance, pensions and trusts. Non-probate property must be valued and appraised and is subject to tax, but the executor has no control over it, nor any responsibility to transfer it to the new owner. Some cooperation and coordination between the new owner and the executor is needed.
A federal estate tax return is required if the gross estate (probate and non-probate assets) is $675,000 or more. This is so even if no taxes are due. Bequests to the surviving spouse and charity are deductible.
New Jersey has two types of death taxes: an inheritance tax and an estate tax. The inheritance tax is based upon the identity of the beneficiary: since 1988 it no longer applies to bequests to the surviving spouse or to lineal ancestors and lineal descendants. In most cases the beneficiaries are spouse and/or children, so the tax does not apply. In other cases the tax ranges from 11% to 16%. The New Jersey estate tax applies only to estates of $675,000 1 or more where federal estate tax is also due. The New Jersey estate tax soaks up the amount of the credit allowed against the federal estate tax for state death taxes paid. If there is no federal estate tax, there is no New Jersey estate tax.
New Jersey imposes a lien on New Jersey real estate, stocks of New Jersey corporations, and New Jersey bank accounts, as security for the payment of taxes. The stocks and half of each bank account are frozen in place until the state reviews the inheritance tax return and issues “tax waivers.” A spouse or lineal ancestor or lineal descendant can avoid the lien (because no tax is due) by presenting a form “L-8” and a copy of the Will, to show that no tax is due. In such cases the property can be sold or transferred without a tax waiver. In cases where there are beneficiaries other than spouse, lineal descendants and lineal ancestors, an inheritance tax return must be filed in order to obtain the tax waiver. Real estate passing to an exempt beneficiary requires an L-9 form to obtain the tax waiver. Real estate can be sold before the waiver is obtained by leaving the sales proceeds on deposit in an interest bearing escrow account with the title company. “Frozen” bank accounts and proceeds from real estate may be used to pay inheritance taxes.
Real estate is also subject to a lien, for one year after death, for payment of decedent’s debts; again the title company may require an escrow account, and will certainly require an indemnity from the executor. Real estate outside of New Jersey will be subject to death taxes and title requirements of the state where it is located.
Death taxes are not the only taxes of concern to the executor or administrator. An estate is an income taxpayer. Income received or accrued prior to the death is reportable on a final form 1040 which the executor files on behalf of the decedent. If there is a surviving spouse, a joint return can be filed, showing decedent’s income to date of death, plus the surviving spouse’s income for the entire calendar year.
The estate files its income tax on form 1041, beginning with the date of death. The estate may adopt a fiscal (rather than calendar) tax year, but there is no longer much advantage to doing so. The estate will report much the same way that an individual does, with one large difference. The estate will deduct income which is distributed to beneficiaries during the tax year. Any distribution, except a specific bequest or satisfaction of a cash bequest, will carry out the “distributable net income” to the beneficiaries. The beneficiaries must then report this income on their own tax returns, form 1040. The executor will provide each beneficiary with a K-1 form which indicates what income must be reported. Because distribution may be part income and part non-taxable principal (the inheritance itself is normally not income), the K-1 figures are usually very different (and less than) the dollars actually received by the beneficiary. If you are beneficiary of an estate, be sure to wait for or ask for the K-1 before preparing your income tax return. For estimated tax purposes, income received from an estate is deemed received on the last day of the estate’s tax year, regardless of when it was actually received.
Administration expenses can be deducted on either the federal death tax return or the federal income tax return, but not both. The choice will depend upon whether the estate is subject to federal estate tax or not, and the time at which expenses are incurred. Knowing such things is one of the ways that the professional executor or the attorney can help earn his keep.
After the bills are paid and the taxes are paid, the remaining assets can be distributed. Usually this is done only after the tax auditors have reviewed the return and indicated approval. Any earlier distribution requires confidence that the death tax returns can’t be challenged and a reserve against unexpected claims.
Transfer of assets, whether at the time of inventory and consolidation, or at time of sale, or at time of distribution, will require certain documents. Probate property requires an executor’s short certificate to document the authority of the executor to act. A death certificate may or may not be requested. Non-probate property will require a death certificate and identification of the claimant (who may be the surviving joint owner or the designated beneficiary); life insurance involves a proof of claim form from the company. All New Jersey securities, bank accounts and real estate (whether probate property or joint property) will also require an inheritance tax waiver, or L-8 or L-9 form with copy of the will attached. Securities are usually transferred through a broker, which requires opening an account (contract, W-9). Each security will require a stock power and affidavit of domicile.
At or prior to final distribution the executor is entitled to be paid. Individuals do the same tasks that bank executors perform, so they are usually paid the same sort of compensation. A typical rate of compensation is 5% of the first $200,000 of gross assets, plus 3½% of the next $400,000, plus 2½% of the next $400,000, plus 6% of all income received, plus reimbursement of out of pocket expenses. Add 1% of assets for each additional executor. An executor who is also sole beneficiary will normally decline payment if the income tax rate exceeds the death tax rate. Recently the IRS has taken the position that individual executors are not entitled to be paid as much as a bank executor would be paid. IRS is also demanding that individual executors keep a record of time spent and tasks performed. The IRS position does not preclude payment, but it makes it difficult to deduct the payment.
The estate is “wound up” by the executor presenting his “accounting” to the beneficiaries, and the beneficiaries approving the accounting. At a minimum the accounting will show all receipts and disbursements. More elaborate accountings may contain sub-accounts of specific receipts or expenditures, schedules of investments, gains and losses, assets on hand, and a schedule of proposed distribution.
If any beneficiary has a question about why an asset was not collected, whether it was sold for the right price, why certain expenses were incurred, or how the executor or attorney was compensated, then the executor should be prepared to provide explanation and substantiation. If the beneficiary and executor cannot agree then the account must be filed in the Superior Court and a judge, after review by and advice from the Surrogate, will rule on the dispute. This will involve several months time and substantial expense. Such procedure, time, and expense may also be required if any beneficiary is a minor or incompetent, or a charity. The Deputy Attorney General represents charities, whether or not they have their own counsel, and must be notified and satisfied.
Assuming no disagreement between the executor and the beneficiaries and that all are adult and competent, there is no need to expend the time and money for court accounting. The beneficiaries can sign documents indicating their approval and releasing the executor from claims. It is also customary for the beneficiaries to sign “Releases and Refunding Bonds.” This is a two page paper whereby each beneficiary acknowledges receipt of the inheritance, releases all claims against the executor and agrees to refund all or a portion of what has been received should a valid claim be made against the estate at a later date. The executor then files these papers with the Surrogate, signifying that the estate is closed.
The executor will normally require that the beneficiary sign the Release and Refunding Bond before handing over the money, because after a beneficiary has received his money it will be difficult to obtain his attention or cooperation. It is also customary to require a Release and Refunding Bond when making a partial distribution before estate administration is ready for winding up.
After final distribution the executor still has work to do; someone must file a final estate income tax return. There will be no tax due, as the distribution will have carried the income out to the beneficiaries. Nevertheless, the IRS will want to know this and the beneficiaries need to know what to report. For the next three years the executor will hope that IRS does not audit an earlier year and claim additional taxes, for the executor is now without assets and would have to rely on the refunding bonds of the beneficiaries. This illustrates the desirability of trying to distribute income currently, to shift the risk to the beneficiaries (who have the funds). It also illustrates one reason why executors are paid a percentage (reflecting risk) rather than by the hour.
Clearly, some estates are more complicated than others. The decedent will have made an initial decision about the level of professional help needed to settle it, in his choice of executor and attorneys. The executor also faces a choice in selecting help–attorney, investment advisor, custodian, accountant, realtor, appraiser. Some or all of these may be needed. The executor, particularly if he or she is also the beneficiary, may decide to do without one or more of these to reduce costs. The proper decision depends on the complexity of the estate, the risks, the talents of the individual executor, the time available, the degree of family cohesiveness. If the executor is the surviving spouse or a child, emotion or sense of loss may interfere with judgment or even simple willingness to approach the task.
Hopefully, this explanation will help you, as planner, as individual executor, or as beneficiary, to understand the process of estate administration and to make better decisions about what you need and what you want to see accomplished.
Should you have questions regarding this publication or will, estate or trust related matters, please contact Capehart & Scatchard, PA.