Understanding Estate Administration – Special Report
by: Begley Law Group
What Is Estate Administration?
Estate administration is the process by which the assets of a deceased individual are transferred to beneficiaries. If the decedent has a will, the assets are transferred in accordance with the terms of that will. If the decedent has no will, the assets pass under the intestate statute of the State of New Jersey.
Who Is Responsible for Estate Administration?
When a decedent leaves a will, estate administration is the responsibility of the person named as Executor in that will. If the decedent does not have a will, someone, usually a family member of the deceased, serves as “Administrator.” The individual named as Executor or Administrator must qualify for the role, as described below, and should retain an attorney to assist with estate administration.
What Are the Responsibilities of an Executor or Administrator?
The Executor or Administrator is responsible for carrying out the estate administration process in a prudent manner. He or she must deal with the interests of the beneficiaries impartially and administer the estate solely with regard to their interests, not his or her own interests. The Executor or Administrator must comply with the Prudent Investor Act and the Principal and Income Act. The Executor or Administrator must not enter into any transactions with the estate in which he or she has a personal interest, absent a court order or the informed consent of affected, competent adult beneficiaries.
What Is the Estate Administration Process?
The estate administration process begins with the analysis of the decedent’s will. It then requires gathering the decedent’s assets, paying bills, filing any tax returns that are due, providing an accounting to all beneficiaries, and making final distributions.
Estate administration generally includes the following steps:
1. Analysis of the situation. This involves:
- Analysis of the will by the attorney to determine the beneficiaries as well as conditions applying to any bequests. The Executor or Administrator also must be identified at this time.
- Gathering of assets. The Executor or Administrator is responsible for compiling an inventory of estate assets and gathering them into an estate checking and /or brokerage account.
- Resolution of key questions regarding:
Elective share. Will the spouse file for an elective share of the estate? Generally, in New Jersey, it is impossible to disinherit a spouse. A surviving spouse has a right to file for an elective share, usually equal to approximately one-third of the estate assets. This is true unless certain conditions exist precluding the spouse’s right to file for an elective share.
Citizenship. Are all beneficiaries U.S. citizens? If a spouse is not a U.S. citizen, he or she is not entitled to a marital deduction for federal or New Jersey estate taxes unless certain conditions are met.Divorce. Was the decedent divorced after drafting the will? If so, the divorce terminates the rights of the former spouse under the will.
Prenuptial agreements. Is there a prenuptial agreement? If so, that agreement generally will either void the surviving spouse’s right to an elective share or clearly define the assets or share of the estate to which the surviving spouse is entitled.
Disclaimers. Will any beneficiaries disclaim their rights to receive the inheritance? From a tax standpoint, it sometimes makes sense forna beneficiary to file a disclaimer in order to avoid accepting all or a portion of the assets being transferred under the will. If a beneficiary chooses to file a disclaimer, he or she must direct the disclaimed assets to the person who would have received them if the beneficiary were deceased.
Medicaid. Is any beneficiary receiving Medicaid? If so, receipt of an inheritance will render him or her ineligible for those benefits. Certain strategies should be explored to preserve Medicaid eligibility.
Disability. Is any beneficiary disabled? If a beneficiary is disabled and receives SSI, certain DDD benefits, or other means-tested benefits, receipt of an inheritance will render him or her ineligible for those benefits. Strategies must be explored to preserve benefits eligibility.
Litigation. Is there any pending litigation? It is important for the Executor or Administrator to know if the decedent was involved in litigation. If the decedent was involved as a defendant, funds may be required to pay claims. If he or she was involved as a plaintiff, certain actions may be necessary in order to preserve a claim.
Environmental issues. Are there any environmental issues? If contaminated real estate is passed to beneficiaries under a will, the beneficiaries become responsible for the clean up. The beneficiaries may want to elect not to accept the contaminated real estate.
Fiduciary resignation. Will the Executor or Administrator and /or the trustee named in the will agree to serve? An individual may find it necessary to resign this right because of ill health or age, or if he or she lives at a significant distance from the location where the probate will take place. This type of decision should be discussed before the individual qualifies to serve as Executor, Administrator, or trustee.
2. Analysis and preparation of a critical date form. The Executor or Administrator must analyze and prepare a critical date form, including the dates for all tax filings. Note that:
- Federal estate tax returns must be filed within nine months of the date of death.
- State estate tax returns must be filed within nine months of the date of death.
- New Jersey inheritance tax returns must be filed within eight months of the date of death.
- Federal income tax returns must be filed by April 15 of the year following the date of death.
- State income tax returns must be filed by April 15 of the year following the date of death.
- Estate income tax returns must be filed on a fiscal or calendar-year basis.
- State tax return filing dates vary according to state law.
- Alternate valuations may be made six months after the date of death.
- Disclaimers must be filed within nine months of the date of death.
- Claims for elective shares must be filed within six months of the appointment of a personal representative.
- All of these dates should be clearly outlined and met. There are significant penalties for late tax filings, and there is a significant potential loss for failing to file disclaimers or claims for the elective share on time.
3. Preparation for probate. The Executor or Administrator must:
- Estimate the number of death certificates.
- Estimate the number of short certificates.
4. Probate of the will. The Executor or Administrator must take the following documents to the Surrogate’s office in the county where the decedent resided at the time of death:
- Original will.
- Death certificate.
- Check to cover the processing fee. (typically between $125 and $200)
- The Executor or Administrator must complete the necessary paperwork to obtain short certificates evidencing his or her appointment. These short certificates are evidence of the person’s authority to act with respect to the assets of the decedent.
5. Handling of post-probate responsibilities. The Executor or Administrator is responsible for handling the following:
- Prepare and sign IRS Form 56 Notice of Fiduciary
- Relationship, which advises the IRS of his or her fiduciary relationship in limiting liability.
- Prepare and sign Form SS-4 to obtain a taxpayer identification number.
- Prepare and sign Form 8821 Power of Attorney to authorize communications with the IRS.
- Complete an Asset Tracking Form listing all of the assets in the estate and all of the steps that need to be taken with respect to each asset.
- Estimate the number of financial release authorization forms.
- Determine if there is a safe deposit box and whether it should be closed.
- Determine who will manage the checkbook: the Executor /Administrator or the law firm.
- Determine who will file the final income tax return for the decedent.
- Determine if there is real estate outside New Jersey that will require ancillary proceedings.
- Notice of probate. The Executor or Administrator must file a Notice of Probate with all beneficiaries, heirs-at-law, and next-of-kin. The Notice of Probate advises beneficiaries that the will has been probated and that the Executor or Administrator has been qualified. Any person wishing to challenge the estate must do so after receiving the Notice of Probate.
- Proof of mailing or proof of service. The Executor/ Administrator or lawyer must send the Surrogate proof of mailing or proof of service of the Notice of Probate. This is required by law.
- Social Security notification. The Executor or Administrator is responsible for advising Social Security of the decedent’s death. Social Security is payable in arrears. It must be repaid for benefits received by an individual during the month in which he or she died. In the case of direct deposits, Social Security will simply withdraw the funds from the account. Many funeral directors are no notifying Social Security, so it is important to determine whether or not they have already done so.
- Veteran’s Administration notification. The Executor or Administrator must send a letter to the Veteran’s Administration, if appropriate, advising of the decedent’s death. Veterans are entitled to certain benefits, such as a plot in a Veteran’s cemetery and a grave marker.
- Post office change of address form. The Executor or Administrator must file a change of address form with the post office, if required. If the Executor or Administrator does not live at the decedent’s address, it is often convenient to simply have the mail forwarded to his or her own address.
6. Valuation of all estate assets as follows:
- Real estate: Appraisals are required.
- Bank accounts: Letters from banks are required.
- Brokerage accounts: Letters from brokers are required.
- Stocks and bonds held by the decedent: Begley Law Group can assist in the valuation.
- Government bonds: Begley Law Group can assist in the valuation.
- Mutual funds: Letters from mutual fund
- IRAs: Letters from plan administrators are required.
- 401(k)s: Letters from plan administrators are required.
- Pension benefits: Letters from plan administrators are required.
- Annuities: Letters from insurance companies are required.
- Automobile wholesale value: Begley Law Group can assist in the valuation.
- Life insurance: The insurance company must provide a Form 712.
- Personal property: If there are collectibles or other valuable pieces, they must be valued.
- Business interests: A business valuation is required, where applicable.
- Refunds: The values of any refunds must be included in the estate.
7. Preservation of estate assets. The Executor or Administrator is responsible for taking steps to preserve estate assets, including maintaining proper insurance and securing the real estate.
8. Tax return preparation and filing. The Executor or Administrator is responsible for preparing and filing tax returns and forms, as appropriate. These may include:
- Final 1040 U.S. and state income tax returns. Final federal and state income tax returns must be filed for the year in which the decedent died. These tax returns are due by April 15 of the year following the year of death.
- Form 709, Gift Tax Returns. If the decedent made annual gifts in excess of $13,000 per person, a Federal Gift Tax Return, Form 709, must be filed. This tax return is due by April 15 of the year following the year of death.
- NJITR (New Jersey Inheritance Tax Return). This return must be filed regardless of the amount of the estate if the beneficiaries are persons other than the spouse of the decedent or his or her lineal ascendants or descendants, such as parents, grandparents, children or grandchildren.
- Form 706, Federal Estate Tax Return. There is no federal estate tax due unless the gross estate exceeds $5,120,000. If the estate does exceed $5,120,000, the Federal Estate Tax Return must be Filed, and any tax due must be paid within nine months of the date of death.
- Form NJET, NJ Estate Tax Return. Once the estate exceeds $675,000, a New Jersey Estate Tax Return must be filed, and the tax must be paid within nine months of the date of death.
- Form 1041 Estate Income Tax Return. Federal and state Form 1041 Estate Income Tax Returns are required if the income of the estate exceeds $600. The Executor or Administrator may elect to file the State Income Tax Return on a calendar-year basis, i.e., April 15 of the year following the decedent’s death, or on a fiscal-year basis, i.e., any period of time elected by the Executor or Administrator, not to exceed 12 months following the decedent’s death.
- Tax returns for other states. These may be required if the decedent owned assets, such as real estate, in other states. The time for filing varies from state to state; some states offer a discount if the estate is filed quickly.
Note on alternate valuation dates: For estate-tax purposes, assets of the estate may be valued as of the date of death or six months after the date of death. For inheritance tax purposes, the date of death value must be used.
9. Determination of basis. The decedent’s death establishes a new, “stepped up” cost basis for certain estate assets that have appreciated in value. A beneficiary of real estate, stocks, and similar assets receives a step up in cost basis. Individuals who inherit such assets save significant capital gains tax when the assets are sold. Annuities and government bonds, such as E, EE, H, and I bonds, do not receive a step up in basis.
10. Responsibilities related to a trust. If the will contains a trust and appoints a trustee, the trustee should obtain short certificates from the Surrogate at the time the will is probated. If the will “pours over” into a living trust, the assets will go into a trust account.
11. Notification of creditors. After the nature and extent of any claims against the estate have been determined, the Executor or Administrator must pay or reject any bills. Creditors have nine months from the date of death to file their claims. The Executor or Administrator must be given actual written notice of any known or reasonably ascertainable creditors. Generally, a bill or statement for goods or services will suffice as a legal claim. It is important to note that unless a claim is disallowed within three months of receipt, it is deemed to have been approved by the Executor or Administrator. Under
New Jersey Court Rule 4:80-8, if a Notice to Creditors to Present a Claim has been filed under N.J.S.A. 3B:22-4, the Executor or Administrator must mail a notice, by regular mail, to the last known address of each estate creditor of which he or she is aware or that can be ascertained by reasonable inquiry. The notice will be published once in one or more newspapers in the state, as directed, within 20 days of the date of the order. Further notice will be given as the court directs.
12. Opening an estate bank account. Most assets first must be transferred to an estate account. In order to open an estate checking account, the Executor or Administrator must do the following:
- Provide a short certificate to the bank.
- Sign bank signature cards
- Make a deposit in the bank to open an account.
- Generally, the deposit must be for at least $1,000.
- Advise the bank of the taxpayer identification number.
13. Opening an estate brokerage account. If an estate brokerage account is being opened, the Executor or Administrator must do the following:
- Provide a short certificate to the brokerage firm.
- Sign the brokerage firm signature cards.
- Make a deposit in the brokerage firm to open an account. The deposit can be in cash or in kind.
- Individual stocks or stocks held in other brokerage accounts can be transferred into the account. Mutual funds can be transferred into the brokerage account.
- Advise the broker of the taxpayer identification number for the account.
14. Transfer of assets. At the conclusion of the estate administration process, the Executor or Administrator determines if the beneficiaries want the assets in cash or in kind. “In kind” means the assets themselves. If the beneficiaries want the assets in kind, the assets are transferred from the estate account to the beneficiary. If the beneficiaries want cash, the assets in the estate account are liquidated and cash is transferred to the beneficiaries.
In the case of life insurance, annuities, and retirement accounts, a claim form must be filed by the beneficiary. Special rules apply to retirement accounts. It often is possible for the surviving spouse to roll over retirement assets into a spousal IRA; this has significant tax advantages. Advice should be sought when dealing with retirement accounts.
15. Responsibilities regarding charities as beneficiaries. If a charity is receiving a percentage of the estate, the Attorney General must be notified and must receive an accounting of all assets in the estate and how they have been handled.
16. Accounting. Complete records must be kept of all cash and estate asset transactions. All receipts should be deposited into the estate checking or brokerage account, and all disbursements should be made by checks drawn on the estate checking account. At the conclusion of the estate administration process, a waiver of accounting, an informal accounting, or a formal accounting may be required. The purpose is to inform all beneficiaries of the initial assets comprising the estate, all income earned by those assets, all expenses paid by the estate, any increase or decrease in the capital value of assets during the course of the estate administration, the balance remaining in the estate, and the proposed distribution.
17. Responsibilities related to child support. Court judgments have a priority over inheritances. A beneficiary who receives more than $2,000 from an estate must satisfy any outstanding child support obligations prior to receiving the inheritance. The Executor or Administrator has an obligation to assure that such occurs.
18. Distributions. Specific distributions must be made within 18 months of probate. Partial distributions can be made as the administration of the estate progresses. Final distribution usually is not made until after all tax waivers, releases of tax liability and closing letters have been received from all taxing authorities and all outstanding claims of creditors have been paid.
What Else Should an Executor or Administrator Know?
Executors and Administrators are permitted, by regulation, to charge commissions as follows: 5% of the first $200,000 of an estate, 3 1/2% of the next $800,000, and 2% of the balance of the estate. The Executor’s or Administrator’s commissions apply only to the probate estate. The probate estate includes all assets except those passing outside the will through beneficiary designations on life insurance policies, annuities, or retirement accounts and jointly owned property.
The Executor’s or Administrator’s commissions are taxable income to the Executor or Administrator and are a deduction to the estate. Personal income tax rates usually are lower than estate income tax rates, so it is sometimes advisable to pay the Executor’s or Administrator’s commis-sions and take a deduction on the estate tax return. Generally, if the Executor or Administrator is receiving the money anyway, it is advisable to waive the commissions and avoid the income tax. This will vary from case to case.
What Does Begley Law Group Offer?
Administration of an estate is complex and exposes the Executor or Administrator to considerable liability. Retaining Begley Law Group can help an Executor or Administrator uphold his or her estate administration responsibilities and carry them out accurately and efficiently.
Begley Law Group has substantial expertise and experience in the area of estate administration. The firm charges fees in connection with estate administration on an hourly basis. At the initial client meeting, it is determined which work will be completed by the client and which work will be completed by the law firm. All deadlines are discussed. After the meeting, Begley Law Group will send the client a letter outlining who will be responsible for what tasks and when the work must be completed.