Why Florida Probate Can Be Difficult

When deciding whether or not to do a Will package or a Revocable Trust package, many of my Boca Raton, Florida clients will ask why choose one over the other.  Among the many benefits that a Revocable Trust has over a Will is the ability to minimize or even avoid probate.  This leads to the obvious question of:

Why should I avoid probate in Florida?

The reason many people wish to avoid probate in Florida because it can bypass the restrictions on who can serve as the person in charge of your affairs, make things more simple for the person in charge of your affairs, keeps costs down, speeds up the process of getting money to your intended beneficiaries, and allows you to have greater privacy.

How does avoiding probate avoid the restrictions in Florida with respect to who can manage your affairs?

Avoiding probate makes it easier for the person you want to manage your affairs after death to qualify as the person in charge because not everyone can serve as an Executor of Administrator in Florida.  For example, a nonresident person may not serve as an executor unless they are related to you by blood, marriage, or adoption (See FL Statute Section 733.304)  So, if you want to name a family friend to be an executor, they are not permitted to serve as executor unless that friend lives in Florida.

Additionally, there is often a bonding requirement for anyone who wants to serve as an administrator of an estate when the decedent died without a Will.  If the proposed administrator does not have good credit, they likely will not qualify for a bond, and therefore would be ineligible to serve as administrator.

How does avoiding probate in Florida make things more simple?

Avoiding probate in Florida makes things more simple because instead of the person in charge of your affairs having to go through a three step process to transfer your assets, he or she only has to do a two step process.  Specifically, if you die in a manner that requires probate, then your Executor or Administrator (if you die without a Will), needs to file a Petition with the Court to be officially named in charge of the estate.  (This is step one)

Once your executor or administrator qualifies, he or she must gather up the estate assets, set up an estate account, and pay the bills and taxes.  (This second step is often the longest step.)

The third step is to pay the beneficiaries and close down the estate.  When you use a revocable trust (which is fully and properly funded before death), the first step can be avoided.  Needless to say, when you don't have to go to Court and file a Petition, that speeds up the estate administration process and reduces the overall costs.

Other reasons to avoid probate.

I would also like to point out that another benefit to avoiding probate is that some counties have a routine practice of requiring executors and administrators to put all of the funds of an estate into a restricted depository account that can only be released by Court order.  This also has the negative effect of making the administration process take longer and more expensive (because you need another Court order).  However, I do understand that this practice is being challenged.  If you would like to learn more about that, Boca Raton, Florida Attorney Chuck Rubin has written a nice piece called: Mandatory Restricted Depository Arrangements in Probate Questioned.


Kevin A. Pollock, Esq., LL.M. is an attorney licensed to practice in NJ, NY, PA and FL.  Kevin meets with clients in Boca Raton, FL office located at 5499 N. Federal Highway, Suite K, Boca Raton, FL 33487 by appointment only.  Kevin may be reached at (561) 247-1557.

Elizabeth Ketterson named as Partner to The Pollock Firm LLC

We are Pleased to announce

Elizabeth C. Ketterson, Esq.

has been named Partner to our firm and

Director of the estate administration department.

&

Our firm name has changed from:

Law Office of Kevin A. Pollock LLC 

to:

The Pollock Firm LLC

What is the first thing an executor of a Will should do?

I am happy to announce that we have finally finished creating a series of short videos regarding the estate planning and estate administration process.  Here is our second video in which Elizabeth Ketterson, Esq., the Director of our estate administration department, is being interviewed by Kevin A. Pollock, Esq., LL.M. regarding the first things a person who is in charge of an estate should do.

If the person is named under a Will, that person is known as the executor.  If there is no Will, that person can apply to the court to be appointed as an administrator of the estate.

We recommend that you meet with an attorney that your are comfortable with to help you prepare the paperwork necessary to be appointed as Executor or Administrator.  The Court will then give you the necessary paperwork to speak with banks, set up an account, and make any claim for funds owed to the estate.  Once you have started collecting assets, then you can arrange to pay the estate's bills.

We strongly recommend that you do NOT distribute money to any beneficiaries until all the bills have been paid and you have received a waiver or release from the beneficiaries stating that they approve of your actions as executor.

To learn more about estate administration or hiring a probate Attorney, please visit us at: https://pollockfirm.com/estate-administration-2/

7 Simple Ways to Minimize the Pennsylvania Inheritance Tax

It's been a little while since I have written an article on the Pennsylvania inheritance tax.  However, before I discuss ways to minimize the PA inheritance tax, it is important to understand that the tax rate is affected by who receives money upon your death.

As a refresher, Pennsylvania has an inheritance tax on most assets that are transferred at the time of your death if they are going to anyone besides a spouse or a charity.  There is also no inheritance tax if a child under age 21 dies and leaves their estate to their parent or step-parent.

Pennsylvania Inheritance Tax on Assets Passing to your Children, Grandchildren, Parents and Grandparents

• There is a flat 4.5% inheritance tax on most assets that pass down to your children, grandchildren, great-grand children or your other descendants.
• There is a flat 4.5% inheritance tax on most assets that pass up to your parents, grandparents or your other lineal ascendants. (Exception if the decedent is under age 21.)
• Pennsylvania treats a son-in-law or daughter-in-law as if they are a child for purposes of the inheritance tax.  As a result, there is a flat 4.5% PA inheritance tax on assets that pass to the wife or widow and husband or widower of the decedent's child. 

Pennsylvania Inheritance Tax on Assets Passing to your Brothers, Sisters, Nieces, Nephews, Friends and Others

• There is a flat 12% inheritance tax on most assets that pass to a sibling (brother or sister).  
• There is a flat 15% inheritance tax on most assets that pass up to nieces, nephews, friends and other beneficiaries. (This means there will be 15% tax on money you leave to your dog, cat or horse.)

7 Simple Ways to Minimize the Pennsylvania Inheritance Tax

1. Set up joint accounts with the people you wish to benefit.  Pennsylvania will only tax the percentage of assets owned by the decedent, not the full amount.  
• This is a particularly useful strategy if you have one child that you trust completely as only one-half of the jointly owned assets will be taxed.  However, if you have more than one child, it is possible that you and all the children are joint owners of the account, so if you have three children, only 1/4 of the account will be subject to the PA inheritance tax.
• If you have more than one child, be careful of setting up a joint account with just one person (because you may accidentally cut your other children out)
• Be sure that you don't have any concerns that your child will take your money and it won't be available for you to use.
• Transfers must occur more than one year before death to achieve the maximum tax benefit.
2. Gift your assets to your children.  This can be a very dangerous strategy, so I strongly recommend consulting with a tax attorney or accountant before making the gift.
• Dangers include giving away an asset that has a low basis resulting in a capital gains tax which could be far more expensive than simply paying the PA inheritance tax.
• If you give away too much, you could be subject to federal gift taxes or generation skipping transfer taxes.
• This could potentially cause problems if you wish to qualify for Medicaid.
3. Buy extra life insurance.  Life insurance is not subject to the Pennsylvania inheritance tax, so converting non-life insurance assets to life insurance will reduce the tax.
• An interesting planning opportunity is to by a long term care insurance policy that has a life insurance rider.  This way if you don't use up the LTC policy, it can pass tax free to your heirs.  
4. Utilize life insurance to give money to beneficiaries who are taxed at the highest tax rates.  So let's say you have total assets of $1.1 million dollars including a life insurance policy worth $100,000, and you want to leave $100,000 to your nieces and nephews and you want to leave the rest of your estate to your children.  
• If you have name your nieces and nephews the beneficiary of the life insurance and give the rest of your assets to your children, there will be a total PA inheritance tax of $45,000 (4.5% x $1M).  
• If you give the children the life insurance money, and have a will leaving your nieces and nephews $100,000 from your Will with the rest to the children, the total PA inheritance tax will be $55,500 (15% x $100,000 + 4.5% x $900,000). 
5. Buy real estate outside of Pennsylvania.  OK, maybe this isn't very simple, but Pennsylvania only taxes assets located in Pennsylvania, so a shore property in New Jersey will pass free of the PA inheritance tax.
• Beware of taxes in other states
• Don't put the real estate in an entity such as an LLC - Pennsylvania reserves the right to tax an interest in business.  (The legal theory is that you no longer own real estate, but the LLC, which is subject to a PA inheritance tax.)
6. Pay the PA inheritance tax early.  If you pay the Pennsylvania inheritance tax within 3 months from date of death, you are entitled to a 5% discount.
7. Convert your IRA to a Roth IRA.  The conversion will come at a cost to your current non-retirement assets, thereby reducing your PA taxable estate for inheritance tax purposes.
• This strategy works best when you have enough funds outside your retirement account to pay for the income taxes on the conversion.
• This strategy is especially valuable if your children are high income earners, this way they can receive distributions from the ROTH, after your death, free of income tax.
• I strongly recommend consulting with a tax attorney or accountant though before doing the conversion.  

Other Not-So-Simple Ways to Minimize the PA Inheritance Tax

1. Move to another state.  Again, this may not be simple for many people, but if you already have a property in another jurisdiction, consider whether you should change your domicile for tax purposes.  (Obviously you must actually meet the requirements of changing your domicile.)
2. Invest in farmland or a family business.  Pennsylvania exempts certain farmland and small businesses from the inheritance tax.  The problem with this may be getting your money back out of the business.
3. Setting up a GRAT or GRUT (setting up a special type of trust that creates an annuity back to you and gives excess investments to your heirs).
4. Setting up a CLAT or CLUT (setting up a special type of trust that creates an annuity to charity and leaves the rest to your heirs).
5. Setting up a CRAT or CRUT (setting up a special type of trust that creates an annuity to your heirs and leaves the rest to charity).
6. Setting up a spousal access trust.  These are typically over-funded life insurance trusts.  Money can be used for your spouse and children while your alive and then it goes completely tax free to your children.  This is a fantastic way to minimize the federal estate tax as well as minimizing the PA inheritance tax.

Simple is Never Simple

As always, be very careful that any changes you make to beneficiary designations or joint ownership of accounts could dramatically alter your overall plan.  So it never hurts to run what might seem like a simple change by an estate planning attorney.

Terry Pratchett's Executor Destroys Unpublished Work of Author

As a fan of the works of Author Terry Pratchett, in particular Going Postal and Making Money, I got a chuckle out of this story in the New York Times.  As some of you are aware, Terry Pratchett died in 2015.  One of his last wishes was that all of his unpublished works be destroyed by a steamroller.  A few days ago, Rob Wilkins, his estate manager posted a picture of a steamroller running over a hard drive.

Compare what Terry Pratchett did with what the Administrator of Prince's estate is doing.  Comerica Bank and Trust, as Trustee of Prince's estate, is slowly analyzing all of Prince's unpublished works and the plan is to release an album shortly to maximize the value of the estate.  Whether or not Prince would have wanted the works to be released is debatable, but because he did not leave clear instructions, an Administrator is obligating to exploit the assets as best it can so that his heirs receive the most money possible.

Remember, if you have written any books or have any other intellectual property where you wish to control of their disposition after you pass away, you must leave specific instructions for what you want done in your last Will and Testament (or other estate planning documents).  You may also name a separate executor or agent to manage your intellectual property (who may be distinct from the person managing the rest of your financial affairs).

Will the New Jersey Estate Tax Repeal Become Permanent?

As most of my estate planning clients are aware, I have been very cautious regarding whether or not New Jersey will keep a $2,000,000 estate tax exemption beyond 2017 or allow for a full repeal. However, it is worth noting that the front-runner for Governor, Phil Murphy, released part of his tax and spending plan today.  See this article on NJ.com: http://www.nj.com/politics/index.ssf/2017/08/murphy_tax_plan_would_raise_13_billion_heres_whod.html

As part of the plan, he stated that he has NO intentions of re-introducing the estate tax.  Accordingly, there is probably a good chance that the repeal of the NJ Estate Tax does become permanent.  Only time will tell though.

NJ Has Finally Released 2017 Estate Tax Return and Calculator

As I know many of you have been waiting anxiously, I wanted to make sure that you are aware that the New Jersey Division of Taxation has finally released the 2017 Estate Tax Return form.  They have also released an estate tax calculator so that we can accurately prepare the return.  The NJ 2017 Estate Tax Calculator can be downloaded from the NJ Department of Treasury website.

The New Jersey Estate Tax Calculator is important because the new estate tax law was crafted with a slight flaw in it because it has a circular calculation.  (This means the tax can't be calculated without reference to the tax, which in effect, changes the tax, over and over again.) For example, if you were to look at the statute, you may think that if you had an estate of $2,001,000, the estate would be taxed at 7.2% on the $1,000 that you were over the $2M threshhold.  This is not true.  According to the calculator, the tax is $66.82, not $72.  As the numbers get higher, this obviously becomes more important.

Anyway, the good news is that if you are an executor, administrator or involved in an estate of someone who passed away in 2017, you can now start the process of filing a New Jersey estate tax return.

New Jersey Has Yet To Create An Estate Tax Return Form For People Dying In 2017

As many of you know, New Jersey recently revised its estate tax law.  Effective January 1, 2017, people who die in the year 2017 will have a New Jersey estate tax exemption of $2,000,000.  Since the law was enacted towards the end of 2016, the division of tax needs some time to prepare a new estate tax return form.

Unfortunately, if you are the executor or an administrator of an estate, and the estate is in excess of $2,000,000, you will not be able to file an estate tax return until the State of New Jersey provides guidance on the type of information they will need in order to issue Tax Waivers.  Inevitably, this will lead to a delay in getting access to funds.

If you are an executor trying to access funds from a financial institution, remember, the financial institution is required to release one-half of the funds.  We have heard a few horror stories recently about banks not doing this.  If this happens to you, please refer them to this notice from New Jersey. You will see in the section titled "Blanket waiver" that the bank may release 50% of the funds without a tax waiver.

Note, New Jersey has released Form L-8 and Form L-9 so that decedents who are leaving everything to Class A beneficiaries and charities and who have a taxable estate under $2,000,000 can access their accounts completely and apply for a tax waiver for any real estate owned.  (Thanks to the head of my estate administration department, Elizabeth Ketterson, for the reminder.)

This can be tricky when a decedent wants to give a token gift to a niece, nephew, godchild, step-grandchildren or friend.  Any bequest of more than $500 means that the Executor of the estate cannot use Form L-9 or L-8 to have more than 50% of the funds released as an inheritance tax will result and New Jersey will have an automatic lien on all New Jersey accounts and property.

Social Security After Death

One of the first questions we are asked is “do I have to do anything about Social Security”? Here are some important things to know if a decedent was receiving SSA benefits at the time of passing:

Reporting

Normally the funeral director will contact Social Security to report a person’s death if you give them the decedent’s social security number, but family members and personal representatives can also report the information directly to the SSA by calling 1-800-772-1213. The most important thing is to make sure SSA records reflect the correct information. Check out SSA Death Master File and familysearch.org

FYI - Reporting cannot be done online.

Survivor Benefits

Surviving spouses (and in some cases ex-spouses) and children are entitled to different types of survivor benefits:

1) If you are already receiving social security benefits on behalf of decedent, you are eligible for:
     a) A one-time survivor benefit of $255 (surviving spouse or children), which can be automatically processed;
     b) Continuation of benefits – Payments should be automatically be changed to survivor benefits;

No new application is required for benefits and you do not need to go to a local Social Security office.

2) If you are not receiving social security benefits on behalf of decedent AND/OR you are receiving your own benefits, you are eligible for:
     a) A one-time survivor benefit of $255 (surviving spouse or children), which must be applied for within 2 years of death and is NOT retroactive to DOD(*);
     b) New survivor benefits – You need to submit an application to the local SSA office

You will need to go to the local SSA office and take with you a certified copy of the death certificate as well as proof of your relation to the decedent (e.g. your birth certificate, marriage certificate). You might be able to make the application over the phone but this can be a long, slow process; SSA calls are often answered by volunteers who pass along your contact information to a representative for call back later. Whether you apply in person or over the phone, be sure to have your banking information available if you want the benefits direct deposited.See "How to Find Your Local Office" service at www.ssa.gov, or call the SSA, toll-free, at 800-772-1213

FYI – Application for benefits cannot be done online.

IMPORTANT: Don’t wait to apply for benefits! With limited exception, the SSA won’t pay you for the period prior to the date you made the application. i.e. if you waited 6 months after the date of death to apply, you won’t likely be able to recoup the benefits that could have been paid during that 6 month period.

Decedent Benefits and Reclamation

It’s just one week after your mom’s passing - you’re looking at the bank statement for her checking account and notice that her direct deposit social security payment was auto-deducted after she died. Now what?

Social Security payments are:

· Retroactive i.e. a payment made in August represents the benefit due for July

· Paid on specific days of the month according to a person’s birthdate and/or the types of benefits received. Click here to see the Schedule for Social Security Benefit payments

· Not pro-rated. In other words, a person is only entitled the monthly benefit only if she was alive for the full month.
· Subject to automatic reclaim. Monthly benefits that are direct-deposited to a decedent’s bank account will be automatically reclaimed if the Treasury Department determines the decedent was ineligible for the benefit. (Direct deposit is required for all SSA applicants after March 1, 2013, and for anyone receiving benefits as of that date. Direct Express card is another payment option)

Example #1:
Mom died July 15, 2016. Social security payment was deposited August 2, 2016. Mom did not live for the full month of July, so the payment will be auto-reclaimed. (If by chance you’ve acted quickly enough to close the account and withdraw the funds prior to the Treasury reclaiming the benefit, you cannot keep the money; Mom was not entitled to the benefit and the government will absolutely want it back. You will need to reimburse the government via check sent to your local Social Security office. ) 

Example #2:

Mom died August 10, 2016. Social security payment was deposited August 2, 2016. Mom lived for the full month of July so payment can be kept. If a deposit is made in September (representing the August benefit), the September payment will be reclaimed because Mom did not live for the full month of August.

Example #3:

Same scenario as Example #2, Mom died August 10, 2016 and Social security payment was deposited August 2, 2016. However, even though your mom was eligible for the benefit, it is later auto-deducted on August 15, 2016 which you believe to be in error. A family member or personal representative of Mom’s estate can apply for payment using Form SSA-1724

Example #4:

Mom died August 10, 2016 and her checking account was closed on August 20, 2016. Mom lived for the full month of July and is entitled to the July benefit, but the Social security payment which should have been deposited Wednesday, August 23, 2016 (DOB April 27) was not received. A family member or personal representative of Mom’s estate can apply for payment using Form SSA-1724.

Example #5:

Mom died July 15, 2016, a deposit was made August 10, 2016 and it is now December and no reclamation has occurred.

120-day Rule: It’s possible that the bank itself properly contested the reclaim. SSA has 120 days to submit a request for reclaim from the date it receives notification of date of death and sends a “death notification entry”. While this is the rule, it’s best to double-check with the bank directly to confirm that is the case – it could be that the bank simply hasn’t responded to the request and is sitting on money that should be returned.

Written by Elizabeth C. Ketterson, Esq. Elizabeth is a Senior Associate at the Law Office of Kevin A. Pollock LLC and helps to run the Estate and Probate Administration Department at the firm.

Requirement of Executors to Report Basis of Assets When Administering an Estate - FollowUp

The IRS has released new regulations that have extended the due date for filing Form 8971 to March 31, 2016.  Executors and administrators of estates that are required to file a federal Form 706 Estate Tax Return are now also required to file Form 8971 and report the basis of the assets included in the estate to the beneficiaries of the estate.

As discussed in my post on February 7, 2016, the IRS is trying to consistently tax assets for estate tax and capital gains tax purposes.  Requiring executors to supply this information to beneficiaries and the government is their attempt to better track this information.  

Additionally, there was an open question as to whether all estates had to file the Form 8971 or just those that were over the federal estate tax exemption threshold.  According to this publication from Bessemer Trust, the IRS has issued regulations that state that if you are filing a form 706 merely to elect portability, you do not also need to file form 8971. 

Thanks again to Abby Moller for bringing this to my attention 

IRS Releases Form 8971 - Executors Now Required to Report Basis of Assets When Administering Estate

For many years the IRS and beneficiaries of estates had a problem figuring out how much gain should be imposed on an inherited asset because the beneficiaries did not know the basis.  The IRS did not like the fact that frequently the value reported by an Executor was not the value reported by a beneficiary when an inherited asset was sold.   

Accordingly, the government enacted Internal Revenue Code Section 1014(f) and is requiring that any estate which is required to file an estate tax return (Form 706) also file Form 8971 (including all attached Schedule(s) A), retro-active to decedents who died after July 2015. The executor must also provide Schedule A to each beneficiary receiving assets from the estate. Both requirements must be met within 30 days after the date on which Form 706 is required to be filed with the IRS, or the date that is 30 days after the date Form 706 is filed with the IRS, whichever is earlier. 

Notice 2015-57 has made February 29, 2016 the due date for all Forms 8971 (including all attached Schedule(s) A) required to be filed with the IRS after July 31, 2015, and before February 29, 2016. Penalties may be imposed for failure to comply with this new filing requirement.

If an estate is not required to file a Form 706, then there is no corresponding requirement to file a Form 8971.  However, it is probably good practice for the executor to advise the beneficiaries of the value of assets as determined on a decedent's date of death so that everyone knows what the new basis is in the inherited assets. 

Instructions for Form 8971 can be found here: https://www.irs.gov/instructions/i8971/ch01.html

I note that there are a number of important items that are not clear:
1)  Does Form 8971 need to be filed when an estate files Form 706 for purposes of porting the DSUE of a deceased spouse. Accordingly, until we receive clarification, it would probably be best practice to do so.

2) Which beneficiaries should actually receive a copy of the Form?  For example, it would make sense to give the form to the beneficiaries of a trust.  It would make more sense to give it to the trustee of a trust.

3) Form 8971 asks "Did this asset increase the estate tax liability?"  I am a little unclear on what this actually means.  I would think that you should pretty much always answer yes to this question.  However, I have heard one commentator state that this really muddies the waters because theoretically assets that qualify for the Marital Deduction, Charitable Deduction, or other similar deductions do not increase the estate tax liability.  Nevertheless, I do not believe the IRS now saying we don't get a step up in basis for those assets.  I believe this is primarily to identify non-qualified preferred stock options and potentially negative value assets.  After all, it would be shocking for the IRS to say that assets passing to a spouse do not receive a step up under the normal 1014 basis rules.  If I here otherwise, I will be sure to let you know... and join in the revolt against the politicians!

4) What about situations where a beneficiary is actually allowed to have a basis higher than a decedent's date of death value?  Examples of this potentially include:  situations where a beneficiary gifted away an asset within one (1) year of death, where a decedent dies owning an interest in a partnership or limited liability company subject to a debt, or real estate subject to a non-recourse debt. 

The American Bar Association Taxation Section has submitted a letter to the IRS requesting clarification of many of these items.  I hope we will all hear a response soon.

-----------
Updated 3/23/16 - Thanks to Abby Moller for finding a few typos in this article. Additionally, she has advised me that apparently you do not need to file Form 8971 just for purposes of portability.  I will try to find additional support for this.

Trouble with Probate

Sometimes probate can be a simple process.  Sometimes it can be a royal nightmare... and sometimes it can be an expensive royal nightmare.

I'm not sure if it is a sign of the times or just a coincidence, but our office has had numerous estates where the probate has not been very easy.  To give an example of some of the problems we have run into recently:
1) An estate where even though there was a Will, the beneficiaries were not the next of kin.  While there was nothing untowards going on as the next of kin were very remote, we had to spend a lot of time and money tracking them down because state law required us to give notice to all next of kin, regardless of whether they are a beneficiary in the Will or not.
2) An estate where the decedent owned worthless land in another state.  This was an estate that was otherwise taxable, so we needed to get a valuation for this property and figure out how to dispose of it because no one wanted the headache.
3) Preparing a last minute amended estate tax return before the time to amend lapsed.  A bad return was prepared by an accountant and when the client came to us to review it, we had to stop all other work to prepare a revised return in order to save our client over $100,000.
4) An estate where the original Will could not be found, so we requested that the Court probate a copy of the Will.
5) An estate where the Will is unclear and requires judicial interpretation on who the beneficiaries are.
6) An estate where the client had many different types of assets and assets located in more than one country.
7) An estate where the executor is unable to travel, so our office is handling all the affairs of the estate and assisting in finding other professionals to value and sell local assets at a fair value.
8) An estate where the beneficiary has contacted us to obtain information from an executor who is refusing to disclose information.
9) An estate where the decedent, rather than formally update his Will, wrote a side letter saying where he wanted some of his assets to go - begging the question of how to handle that letter.

In most of these situations, considerable time and expense could have been saved if the decedent had consulted with an estate planning attorney on a regular basis.  While having a Will and trust can certainly make the estate administration process easier and less expensive, the benefit of hiring an experienced professional is not just that we can draft the routine paperwork.  An attorney that focuses on tax and estate planning can also make sure that you title assets in such a way as to make things smoother and more cost efficient.

The Difficulty of Porting a Deceased Spouse's Unused Exemption Amount in Second Marriage Situations

Many estate planning commentators have joked that estate tax portability will lead to rich individuals marrying others simply to make use of their estate tax exemption.  I have found, in practice, that planning can be far more complicated.

Let me take you through a common situation that I am dealing with:
1) I represent a wealthy person (let's say $10M+) who is married to someone not as well off, but not poor (about $1M);
2) Each spouse has children from a previous marriage; and
3) The spouse who has less money has no real desire to give money to the surviving spouse and wants everything to go to his/her children.

I'll call the wealthy person Wendy and the less wealthy spouse Harry.  In a situation like this, if Harry dies first, and leaves his entire $1M to his children, then he will only have used up $1M of his $5.43M federal estate tax exemption.  Wendy is entitled to receive the Deceased Spouse's Unused Exemption Amount (DSUEA) of $4.43M.  This concept is known as portability and would increase what she can pass on to her children tax free from $5.43M to $9.86M - an estate tax savings of $1,772,000.

Now, if Harry is leaving everything to his children, it is likely that one of them is the Executor, and not Wendy.  This is important because the only way for Wendy to receive the DSUEA is for the Executor of Harry's estate to file a federal estate tax return.  Harry's executor might not want to incur the trouble or expense of filing a return that does not benefit them in any way.  After all, there is no need to file the federal estate tax return if the estate is less than $5.43M.

If Wendy gets along well with the Executor, she can agree to pay for the return, but that is no guarantee.  The safest approach to ensure that Wendy has access to Harry's DSUEA is to get Harry to redo his Will and make a specific bequest of his DSUEA to Wendy AND require the executor to file the federal estate tax return (or do whatever is necessary to ensure that the wealthier spouse actually gets to port his unused estate tax exemption amount).

Harry can of course require that Wendy pay for all costs associated with such return, which I would imagine she would be happy to do.  After all, a federal estate tax return, even on the expensive side, is likely to save Wendy's heirs millions of dollars.

Update to Executor's Commissions in NJ

Back in March of 2014, I wrote a lengthy post about how to Calculate an Executor's Commissions in New Jersey.  Frankly, most of the executors I work with don't want a commission.  However, I recently came across an interesting situation where an executor wanted a commission and the decedent had substantial joint survivorship accounts with the executor.

Normally, a survivorship account is not subject to an executor's commission on the theory that the executor doesn't have to do any work with respect to those accounts.  In this situation though, the survivorship accounts were actually convenience accounts.  A convenience account is a type of account that goes to the surviving account holder, primarily to pay bills, but based upon the intent of those involved, the balance of the funds will be disposed of with the rest of the Decedent's estate.  In other words, the money does not legally belong to the surviving joint account holder, it belongs to the estate of the Decedent.

In my situation, even though the money passed to the executor, in his individual capacity, on the death of the decedent, the money will ultimately be processed through the estate's accounts and go to the beneficiaries under the Decedent's Will. Accordingly, the executor CAN take a commission on these joint accounts.  More importantly, this commission is tax deductible for purposes of calculating the New Jersey estate tax.

I had trouble finding legal authority for this position, so I called up the New Jersey Division of Tax, Estate and Inheritance Department, and they confirmed this result.

Duty of Executor to Defend a Will Against a Will Contest in Pennsylvania

In most states, when a person is named as an executor in the Will, the executor has an affirmative duty to defend the Will from Will contests.  For example, if mom dies testate leaving her entire estate to child one, cutting out child number two, and child number two sues to say the Will is result of undue influence, the executor would be obligated to defend the validity of the Will and could hire an attorney using estate assets to aid in the defense.  Unless the executor caused the undue influence, he would not be personally liable to the estate for the cost in defending the validity of the Will.

Pennsylvania law is quite different from most other states in that while an executor is a necessary party to a contest involving the Will, the executor is generally not a party in interest who has standing to instigate a contest or to appeal a decree of distribution. (In re Estate of Fleigle, 664 A.2d 612, 444 Pa Super. 632 (1995))  An executor who has not been surcharged or is not required to distribute an amount larger than the total assets of the estate has no standing to except to an adjudication of the auditing judge regarding payment of claims against an estate unless the executor is also a residuary beneficiary of the estate.  (Appeal of Gannon, 428 Pa. Super. 349, 360-61, 631 A. 2d 176, 181 (1993))  The executor is entitled to notice and may then elect whether to become a party (Royer’s Ap. 13 Pa. 569; Yardley v. Cuthbertson, 108 Pa. 395, 445-448), although if he does become a party his costs and counsel fees must be paid by him or those who authorize him, not by the estate.  (Faust Estate, 364 Pa. 529 (1950))

The Faust case is extremely important because it shifts the burden for payment of legal fees from the estate to the executor personally if the executor decides to insert himself or herself into a Will contest.  Additionally, if executors engage in an act that is beyond their scope as representatives of an estate, they risk losing their executor's commission.

Pennsylvania law does have a few exceptions for when an executor can get involved in a Will contest.  An exception exists where a testator directs or imposes a duty on the executor to defend the Will against contests.  (Bennett Estate, 366 Pa. 232 (1951); See also:  Tutelea Estate, 4 Pa. D. & C. 3d 199 (1974))  Another exception to the Pennsylvania rule is where the executor is also a trustee and is required to defend the trust.  (Fetter's Est., 151 Pa.Super. 32, 29 A.2d 361 (1942)).

We also need to differentiate cases where an executor is being sued for his services as executor.  (Browarsky Estate, 437 Pa. 282 (1970))  Because the executor is placed in the position to be sued because of duties he had performs for the estate, it would be unjust to require him personally to bear the reasonable costs of the defense of suits brought against them solely by reason of their positions as executors. "It is well established that whenever there is an unsuccessful attempt by a beneficiary to surcharge a fiduciary, the latter is entitled to an allowance out of the estate to pay for counsel fees and necessary expenditures in defending himself against the attack [citing cases]." Wormley Estate, 359 Pa. 295, 300-01, 59 A.2d 98, 100 (1948). Accord: Coulter Estate, 379 Pa. 209, 108 A.2d 681 (1954).

Finally, there is very old case that stands for the proposition that: “The executor propounding a Will for probate, acting in good faith, is entitled to costs out of the estate, whether probate is granted or refused.”  (Ammon’s Appeal, 31 Pa. 311).  I note that I can’t find the case, only a cite in a treatise, but I believe this to still be good law if the executor does not get involved in a Will contest.

If an executor uses estate assets to pay for legal fees related to a lawsuit against himself or because the executor impermissibly got himself involved in a Will contest, a judge can surcharge counsel of an estate or counsel for an executor. (Faust)

The rationale behind the Pennsylvania case law is that a Will contest is between the testamentary beneficiary and the heirs or next of kin, therefore the executor should not waste estate assets on their dispute.  The rationale behind the rules in most other states presumes that the testator wrote the Will the way he or she wanted it and the executor should try to uphold the testator's intent.

From a practical point of view of estate administration attorneys, we need to consider three things.  One, we need to understand the source of the money from which we are getting paid and keep track of it. If we are paid from the estate for a Will contest or for an objection to an accounting, we may be required to give the money back to the estate.  Personally, we always ask for a retainer from a proposed executor before they have qualified executor.  Accordingly, they are paying me with their own money and getting reimbursed from the estate later.  Also, attorneys should put language in their retainer agreements stating that the proposed executor is personally liable for the legal work if he cannot qualify as executor or if we wind up doing work for the executor in an individual capacity.

Second, in the event of a Will contest or an objection to an accounting, attorneys should track their time separately.  Time spent on the Will contest or an objection to an accounting should be differentiated from time spent administering the estate.

Finally, attorneys should consider whether they want to draft their estate planning documents in a way to change the default rules regarding an executor's duty to defend the Will.  Personally, I think that it makes more sense for an executor to use estate assets to defend the integrity of a Will and that the executor shouldn't be personally liable absent gross negligence, willful misconduct or bad faith. After all, some beneficiaries might not have the resources or the mental capacity to act in their own best interests.
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Thanks to Pierson W. Backes, Esq. for his help with this article.

Calculating NJ Executor Commissions

From time to time, people ask me about executor's commissions and trustee's commissions in New Jersey.  Because it is a bit complex, I have broken it down into two posts and I will focus on commissions for executors and administrators today.

To start, a Will can specifically provide for an executor's commission.  In that absence of expressly authorizing a commission an executor will be entitled to take an executor's fee as provided in New Jersey Statutes 3B:18-12 through 3B:18-17. These same statutes also provide that if a person dies intestate (dies without a Will), the administrator of the estate may also take a fee.  Since the fees for an executor and administrator are the same, I will use the term interchangeably for purposes of this post.

New Jersey statutes are very difficult to interpret because they use the term fiduciary to apply to executors, administrators, trustees, guardians and conservators.  This would not be a problem if the fees were calculated the same, but they are not. 

So how is the executor's fee actually calculated?

First, an executor is entitled to annual income commissions of 6% without prior court approval. (N.J.S.A. 3B:18-13)

Second is the calculation of the corpus (or principal) commission.  This is a bit more of a complicated formula. Normally an executor will take a one time commission as follows:

1. 5% on the first $200,000 of all corpus received by the executor;
2. 3.5% on the excess over $200,000 up to $1,000,000;
3. 2% on the excess over $1,000,000;
4. and 1% of all corpus for each additional executor provided that no one executor shall be entitled to any greater commission than that which would be allowed if there were but one executor involved.   (N.J.S.A. 3B:18-14)

Sometimes an estate administration goes on for a lengthy period of time.  Under such circumstances, an executor can also receive an annual commission equal to 1/5 of 1% (or 0.2%) of the corpus.  However, this commission is not that frequently taken and a court may disallow it if it is in excess of  N.J.S.A. 3B:18-14.

What assets are part of the corpus when determining the executor's commission?
The corpus of an estate is generally defined to mean any asset that has come into the hands of the executor.

Examples of assets that come into the hands of the executor are:  Bank accounts, automobiles, tax refunds, business interests, an interest in a lawsuit or litigation, life insurance payable to the estate, retirement accounts with no beneficiary and real estate that were owned by the decedent. 

Examples of assets that do not come into the hands of the executor and are not subject to the commission include: Life insurance (if there is a beneficiary other than the estate), retirement accounts where a beneficiary other than the estate is named, property that is held as joint tenancy by the entirety or joint tenants with rights of survivorship.

What about mortgaged property - do I use the net value or the gross value?

While it may be unfair if the estate is heavily leveraged, the commission is taken on the gross estate, not the net.  If the result is too onerous, a beneficiary may wish to seek judicial relief.

An illustration of how to calculate the executor commission
Let's presume the following facts:  Decedent owned a vacation house worth $500,000 and a mortgage of $100,000, a primary residence owned with his wife as tenancy by the entirety worth $1,000,000 and a mortgage of $300,000, a $400,000 IRA payable to his wife, $200,000 in stocks and bonds, a $200,000 life insurance policy payable to his children, and $100,000 worth of insurance with no beneficiary. 

Let's also presume that there is only one executor and during the administration, the $200,000 of stocks and bonds gave off $5000 of income. 

Included for purposes of calculating the commission are:  the $500,000 house, the $200,000 in stocks and bonds and the $100,000 life insurance policy with no beneficiary (for a total of $800,000).  There is no deduction for the the $100,000 mortgage.  The primary residence, the IRA and the $200,000 life insurance policy are excluded.

5% on the first $200,000 would be $10,000
3.5% on the next $600,000 would be $21,000
6% on the $5000 of income would be $300
So the executor would be entitled to a total commission of $31,300.


Final thoughts about executors commissions

Any commission that an executor takes will be subject to an income tax.  As a result, if the executor is also a beneficiary, he or she may not want to take a commission.  Additionally, many times relatives do not appreciate the amount of work involved and will become upset at an executor if he or she takes a commission. You should think about the dynamics of your family before taking one.

An executor that does extraordinary work can apply to the court for a commission in excess of the statutory fee.  An executor that behaves badly can be removed by the court.  If an executor or administrator is removed from office, he or she may be required by a judge to forfeit his commissions.  This is not automatic though.

Finally, as discussed in back in May of 2013, an attorney who is serving as an executor may be entitled to a fee for legal services AND a commission.

One Does Not Simply Inherit Assets in New York

I am in the midst of one my of my more difficult estate administrations in New York, and I thought it would be worthwhile to remind everyone how important it can be to set up a revocable trust in situations where you are leaving your estate to someone other than your next of kin.

In the matter I am working on now, the decedent (let's call her Jane) passed away leaving everything to her long time boyfriend and one other person.  Jane was not married and had no children, but she did have many siblings and nieces and nephews.  Even though Jane had a Will, the State of New York is requiring that we get each of Jane's surviving siblings to sign an affidavit approving of the probate of the Will. (This is known as a Waiver of Process; Consent to Probate Form.) 

Jane also had one sibling (Fred) who died before her.  So we have to get this form signed by all of Fred's children as well.  Should I bother mentioning that everyone has lost contact with one of Fred's sons?

Unless EVERY one of Jane's next of kin signs this form, the proposed executor has to go through extra steps to start his or her job.  This means the bills don't get paid, real estate can't get sold, and money can't be transferred to the people named in Jane's Will.

The need to have this form signed will wind up costing the estate a lot of time and money as the Executor must make diligent effort to track down this missing nephew.  It will also complicate matters if any of Jane's siblings or Fred's children does not sign and notarize the form required by New York.  Other than doing the right thing, none of Jane's relatives has any incentive to sign this form.  In fact, if any of Jane's relatives believe that Jane's boyfriend shouldn't inherit, they can certainly make it a difficult and expensive process.

If Jane had properly titled her assets in the name of a revocable trust and named beneficiaries on her IRA and life insurance policies, she could have helped her loved ones avoid the probate process.  By avoiding probate, all of these steps become unnecessary and would have saved everyone time, trouble and money.

Right to Name Guardian for Minor Children When Parents are Separated or Divorced

I was discussing the affect of a divorcee naming a guardian for minor children in a Will with a few colleagues the other day and I thought I would share some of our findings. 

When there is a custody dispute between a natural parent and a third party, the law regarding who has custody of the child is governed by the case:Watkins v. Nelson, 163 N.J. 235 (2000).

The court found that there is a presumption in favor of the natural parent which arises from a parent’s fundamental liberty interest protected by the Due Process Clause of the Fourteenth Amendment to the United States Constitution and is rooted in the right to privacy.  However, a parent’s right to custody of his or her own child is not absolute. The presumption in favor of the natural parent.  This presumption can be rebutted by a showing of gross misconduct, unfitness, neglect, or exceptional circumstances affecting the welfare of the child.

When a third party seeks custody of a minor child (or an incapacitated individual), the court must engage in a two-step analysis. First, the court must determine whether the presumption in favor of the legal parent is overcome by either a showing of unfitness or exceptional circumstances. If either is satisfied, the court must then decide whether awarding custody to the third party would promote the best interests of the child.  So, at the end of the day, a court will decide who should have custody based upon what is in the best interests of the child.

In New Jersey, there also a statute on point as to the decedent's right to name a guardian and to what extent it will be honored.  The relavent statute is: N.J.S.A. § 9:2-5. Death of parent having custody; reversion of custody to surviving parent; appointment of guardian by superior court; removal
In case of the death of the parent to whom the care and custody of the minor children shall have been awarded by the Superior Court, or in the case of the death of the parent in whose custody the children actually are, when the parents have been living separate and no award as to the custody of such children has been made, the care and custody of such minor children shall not revert to the surviving parent without an order or judgment of the Superior Court to that effect. The Superior Court shall have the right, in an action brought by a guardian ad litem on behalf of the children, to appoint such friend or other suitable person, guardian of such minor children, and shall have the right to remove such guardian, and to appoint a new guardian or guardians, and to make such judgments and orders, from time to time, as the circumstances of the case and the benefit of the children shall require.

Even if the court does not honor your request for guardian, you can still set up a trust for your child, and you can name anyone you wish to act as trustee to manage your funds until the child is old enough to handle his or her own finances.  This is important because otherwise the guardian or surviving naturual parent will have complete authority over these funds.

To summarize, if you do not want the surviving parent of the child to receive legal custody of your child:
1) It is a good idea to create a Will;
2) You should name a guardian under your Will for your minor children and any incapacitated children because it gives that proposed guardian standing to sue the surviving natural parent for custody (I would also recommend giving reasons in the Will or elsewhere to estatablish why the person you are proposing as guardian would be better suited to care for the child than the surviving parent);
3) The courts do not have to honor your request as to whom you name as guardian, they will try to determine the best interests of the child; and
4) Regardless of custody issues, you should set up trusts for your children and name a trustee to manage the funds until the child is of age, otherwise the surviving parent will have authority as natural guardian to spend that money as he/she sees fit.

Choosing an Executor, Trustee and Guardian

Clients frequently ask me for advice on who they should name as Executor, Trustee or Guardian when creating their Last Will and Testament.  First, let me explain the difference between the three roles.

The Executor is the person who probates your Will, goes into your house and looks through all your things, safeguards your assets, gathers up your money, pays your bills, files any income tax, estate tax or inheritance tax returns that need to be filed, and then distributes the balance of your money according to the instructions in your Will.  One or more individuals or corporate fiduciaries can serve as Executor.

The Trustee is the person who takes the assets that the Executor (or Grantor) gives him, invests the money in a prudent fashion, and distributes the money to the beneficiary of the trust in accordance with its terms.  One or more individuals or corporate fiduciaries can serve as Trustee. 

The Guardian is the person who will raise your minor children until they are 18 (or longer for an incapicitated individual). 

The three main qualities that you want to look for in an Executor and Trustee are:

1. Someone that is trustworthy and won't steal the money;
2. Someone that will not be overwhelmed by the role, there is a lot of work involved; and
3. Someone that does not have a bad relationship with the beneficiaries and will be able to communicate with them.

You will notice that I did not say that the exeuctor or trustee must be good at investing money.  That is because I believe the other characteristics are much more important.  An honest person who is diligent can always hire an investment manager. They just need to keep an eye on the investment manager.

The three main qualities that you want to look for in a Guardian are:

1. Someone that will love and care for your children;
2. Someone that will raise your children in a manner that you wish (including religion, education, diet, etc.); and
3. Someone that will have a stable family household.

Frequently, clients will name one party as executor or trustee and another person as guardian.  Sometimes this can be a good idea as the two parties can then monitor each other.  Additionally, this is a way to get two parts of the family to interact.  However, if there is someone that you truly trust to serve in all three roles, it is usually best to name them and not divide the roles just for the sake of dividing the roles.

For all of these positions, age may be a factor as well as you may not want to name someone too young or too old.  It is a heavy burden to put on people.  I never, ever recommend naming people just so they won't feel excluded. 

Finally, an attorney can serve as an Executor or Trustee, but you can name whomever you wish.

Copyrights after Death of Author

If you are a writer, artist, musician, photographer or other professional who has created a copyrightable work, you should realize that you are creating an asset that should be carefully managed after you pass away.

The first thing that you should know is that if you have created a work after January 1, 1978, the copyright will generally last for another 70 years after you die.  This does not apply to works created under a pseudonym or published anonymously.  In those situations, the rule is that the copyright lasts for 120 years from creation or 95 years from first publication, whichever expires first. (Section 203 of Copyright Statute)

Under your Will, you may direct who inherits your copyrights.  Additionally, you may set up an "Intellectual Property Executor" to deal with such copyrights while a traditional executor handles your other affairs.  This may be important if management of your copyrights requires special business acumen.

Importantly, under the 1978 Act, the creater of a copyright who assigned the copyright has the right to rescind such assignment.  Additionally, if a loved one who has produced copyrighted material has passed away, the heirs or the executor may also have the right to rescind such assignment. 

If you are the heir to (or an executor of) an estate of someone who has produced any copyrighted works, please feel free to contact us so that we can help you determine what rights you may have.