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AN OVERVIEW OF THE ESTATE ADMINISTRATION PROCESS
By: Dana E. Bookbinder, Esq.
Loss of a loved
one is too often complicated by the onerous set of legal and financial steps
that must be taken to administer an estate. Estate administration involves not
only probate of the Last Will and Testament, but typically, an inventory of
assets, assessment of liabilities, management of accounts, transfers of
securities, liquidation or transfer of real estate, consolidation of assets,
establishments of trusts, and preparation of state and federal tax returns to
address income, estate, inheritance or generation-skipping tax reporting
requirements. Knowing the proper steps and obtaining the necessary professional
support to complete those steps will make the administration process much easier
while minimizing exposure to litigation for the executor.
The estate
administration process begins when the executor brings the Will and death
certificate to the Surrogate’s office in the county in which the decedent
resided to probate the Will. The executor must wait at least ten days after the
death to probate the Will. In New Jersey, probate is relatively easy. The cost
is approximately $70.00. At the probate office, the executor can expect to be
asked how many “short” certificates will be necessary. The executor should
obtain as many short certificates as there are financial institutions holding
money of the decedent. Of course, we recommend obtaining additional
certificates since new accounts may be located.
Once the will
has been probated, the executor must send a Notice of Probate to the
beneficiaries. This advises the beneficiaries that the will has indeed been
probated and that they have been named as beneficiaries. The executor also may
choose to file an Order to Bar Creditors. This will impose a six month deadline
on creditors who seek payment from the estate. Once appropriate notice has been
given to potential creditors, a creditor may not approach the estate after the
six month period has passed with a collection matter.
Since a power
of attorney is no longer effective once the principal has passed away, to gain
access to the decedent’s assets, the executor must present a short certificate
to each financial institution where the decedent owned an account. The
executor must also present a tax identification number obtained from the IRS so
that an estate account may be opened. The assets from the decedent’s name are
to be re-titled into the estate account, and any claims against the estate are
to be paid from this account. The tax identification number is necessary
because an individual’s social security number becomes invalid upon death. It
is also advised that the executor file several forms with the Internal Revenue
Service to gain authorization to communicate with the IRS on behalf of the
estate. These forms include IRS Form 5494, 56, SS-4, and 2848.
In New Jersey,
there are now 5 different taxes which the executor should be aware of in
administering the estate:
A.
The Federal Estate Tax
B.
New Jersey State Estate Tax
C.
New Jersey State Transfer Inheritance Tax
D.
Federal Income Tax
E.
State Income Tax
Before July
2002, no estate tax would be due if the estate did not exceed $1,000,000.
However, in July 2002, New Jersey enacted new estate tax laws which have
resulted in a requirement for the executor to file both federal and state estate
tax forms with the State of New Jersey if the estate exceeds $675,000. In
calculating the value of the estate, the executor must include all life
insurance policies, joint accounts, certain interests in trusts, real property,
and a variety of other types of assets. A final IRS Form 1040 must be filed to
report the income earned by the decedent from the beginning of the tax year
through the date of death. An IRS Form 1041 must be filed to report income
generated on the estate assets between the time of the decedent’s date of death
and the date of distribution of the assets to the beneficiaries.
Often, the
executor will require assistance in managing the estate checking account and
preparing formal or informal accountings of the administration expenses,
including calculations of executor or trustee commissions. A date of death
balance for each account owned by the decedent must be obtained for purposes of
filing an estate or inheritance tax return.
Once all
expenses and debts of the decedent have been paid, the assets are re-titled and
transferred to the beneficiaries, or sometimes, sold, and the proceeds
transferred to the beneficiaries. Prior to receiving a share from the estate,
however, each beneficiary must sign a form acknowledging the imminent receipt of
a share of the estate. This form will also discharge the executor from further
obligation to the estate and bind the beneficiary to contribute to the payment
to any debts imposed upon the estate after the time of distribution of the
assets. The State of New Jersey, through its new estate tax law, has recently
placed many beneficiaries in the position of having to pay back portions of
their inheritances. This is because the New Jersey estate tax, while made
effective in July 2002, applies retroactively to all estates in which the
decedent has died after January 1, 2002. Therefore, estates which had not been
considered taxable now must pay estate tax.
Because an
executor can be held liable for certain errors, misfilings, or mismanagement of
assets concerned with the administration of an estate, it is crucial for
executors to obtain competent legal assistance. Each tax return must be
supported by documentation, and executors must maintain accurate records of all
assets, income, and expenses. For those who seek assistance in estate
administration or management of assets held in an estate account, please contact
our office.
