After someone passes away, their estate must be administered. This is true whether the person was worth $10,000 or $10 million. The process of administering the estate is often the same regardless of its value. This article discusses the basic process of estate administration and the duties of the executor, who is the person or persons responsible for the process.
Appointment to act on behalf of the estate
The first step for an executor (or administrator, if there is no Will) is to be appointed by the local Surrogate’s Court as executor. In New Jersey, this is a simple process where the Will and death certificate are presented to the court, along with the names and addresses of the next-of-kin and beneficiaries named in the Will. Assuming everything is in order, the Surrogate will admit the Will to probate and issue a Certificate of Letters Testamentary to the executor, which serves as his or her official appointment to act on behalf of the estate. The executor is then responsible for notifying all heirs and beneficiaries that probate has been completed.
The executor or administrator (once appointed, the responsibilities are the same) must then collect, or marshal, all of the decedent’s assets. Typical assets include bank and brokerage accounts, real estate, business interests, tangible personal property (such as cars), life insurance policies and retirement assets. The latter two often have “designated beneficiaries” listed on the accounts, in which case those assets pass directly to those beneficiaries and the executor does not need to collect them as part of the estate. Likewise, assets that are owned jointly often pass directly to the surviving owner without having to pass through the estate.
Finding and collecting all of these assets can range from being very simple to incredibly complex, depending on how organized the decedent’s finances were (and how involved the executor was prior to death). Often the executor must monitor the decedent’s mail for bank statements, review prior years’ tax returns, and write to various financial institutions asking if the decedent had any accounts there.
The executor will need to open an estate bank account and transfer the decedent’s individual bank and brokerage accounts into the estate account in order for the executor to access those funds. The estate account is also where any refund checks payable to the decedent or estate (for example, an income tax refund), or the proceeds from the sale of assets, such as real estate, can be deposited.
Paying debts and administration expenses
The executor and estate beneficiaries are not personally liable for any debts of the decedent, but they must be paid from estate assets, to the extent that the estate has sufficient assets, before any amounts can be distributed to the beneficiaries. Thus, the executor must identify all debts and creditors of the estate and pay those debts, or negotiate payment, within a reasonable time after death. Debts include medical expenses from the decedent’s last illness, credit card payments, taxes, and any expense relating to their personal residence.
Estate expenses include items such as the funeral and burial expenses, professional fees to administer the estate (e.g., attorney’s fees, accountant’s fees, appraisal fees), and death taxes.
The executor is responsible for filing the decedent’s final income tax return. We recommend that a final income tax return always be filed even when no tax is due to put the taxing authorities on notice of the decedent’s death. The estate may also be liable for income taxes if the estate assets have generated income after the decedent’s death, for example, interest or dividends earned or realized gains from the sale of securities.
The executor may also be responsible for filing estate and inheritance tax returns and paying any tax that is due. Estate tax returns are due if the estate exceeds the exemption amount at the time of the decedent’s death, which currently is $12.92 million for federal estate taxes. In addition, estates that are under the threshold may decide to file a return to elect “portability” if there is a surviving spouse. New Jersey abolished its estate tax in 2018, but other states have state estate tax, which applies to residents of those states and may also apply to nonresidents who own property in those states. New Jersey still has an inheritance tax, which is imposed on bequests to anyone other than a surviving spouse, direct ancestor or descendant of the decedent, or a charity.
The executor should work with an attorney to determine the tax liabilities of the estate to ensure that they are properly met, as an executor may be personally liable for unpaid taxes.
Any debts and expenses that have been paid by someone personally – which is usually the case with the funeral and burial expenses – can be reimbursed from estate assets once the executor has collected the assets.
Distributions to beneficiaries
Once all of the estate assets have been collected, and debts and expenses have been satisfied, the executor is ready to distribute the estate to the beneficiaries in accordance with the terms of the Will. However, first the executor should provide an accounting to the beneficiaries to inform them of what occurred during the estate administration. In its simplest form, this could be bank account statements, or it can be a formal accounting presented to the Surrogate for approval. Because the executor must account, it is imperative that he or she keep detailed records during the estate administration. Once the accounting has been approved by the beneficiaries, and they have signed a refunding bond, the executor can distribute the remaining assets and close the estate.
The entire estate administration process often takes at least 12-18 months to complete, depending on the complexity of the assets and whether any estate or inheritance tax returns are due (and if they are audited). An executor may make interim distributions to beneficiaries during the process, if the executor determines that doing so is prudent.
Because administering an estate can be a complex process, executors should consider engaging an attorney to assist them. Executors, like all fiduciaries, are held to strict standards because they are responsible for assets that belong to others. Working with professionals will ensure that executors are not in breach of these duties.