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Tuesday, January 8, 2013

Probate In New Jersey - When There Is A Will

One of the questions I frequently get is: What is involved with probate in New Jersey?

In some jurisdictions, I know attorneys go out of their way to help their clients avoid the probate process by creating trusts and titling assets so that they can be transferred automatically on death.  In New Jersey, probate usually is not that costly or difficult - at least compared to places like California, New York, Pennsylvania and Florida.

Part of the reason for this is that New Jersey requires attorneys to charge a reasonable fee, and not a percentage of the estate.  Additionally, the New Jersey does not charge much for filing a Will or for any other administration fees.  Moreover, in almost every county that I've had to deal with, the local Surrogate has been tremendously helpful in trying to assist us through the process.  I know I frequently call the Mercer County Surrogate's Office, which is a wealth of information.

So, going back to what is involved, each estate is highly unique.  However, here are some good steps to take:

1)  Deal with the family and make funeral arrangements.  An executor does not have to pay for the funeral.  Whoever pays can be reimbursed by the Estate later on.

2)  Identify valuable assets and the Will and secure them for safe keeping.  (This may include searching the house and possibly even changing locks if you think that someone may access the property unlawfully.)

3)  Identify the decedent's next of kin and obtain contact information for them.  You will need this when applying to be executor.

4)  After the Original Will has been found, identify who the Executor is. If the Executor is not alive or not willing to serve, steps must be taken so that a backup can be named.  If the Original Will cannot be found, there is a process for a having a copy approved by the Court.

5)  Take the Will to the Surrogate in the County where the Decedent resided.  Be aware that no Will can be probated in New Jersey until ten (10) days have passed since the Testator has died.  An Executor can go down to the Surrogate with all the paperwork within the first ten days, but the Letters Testamentary won't be released until that time frame has expired.

6)  Once the Executor receives Letters Testamentary (also known as Short Certificates), he can transfer assets from the name of the Decedent into estate accounts for the Decedent.  New Jersey automatically puts a lien on a Decedent's bank accounts, brokerage assets and real estate when a person passes away.  Banks will only release 50% of the assets to pay bills of the estate until they receive a tax waiver from the New Jersey Division of Tax.

7)  Shortly after qualifying as Executor, you must mail out a notice of probate to all people named in the Will AND all immediate next of kin, regardless of whether they are named in the Will or not.  This can be problematic if you wish to cut an heir out or cannot locate an heir.  I would also be a good reason to create an estate plan that will avoid probate.  If a charity is named as a beneficiary, then a notice must be sent to the Attorney General's office.

8) If the Executor did not already have access to a safe deposit box, he can do so at this point. 

9)  Within eight (8) month of the Decedent's date of death, the Executor must file a New Jersey Inheritance Tax Return and pay any taxes due.  Typically an inheritance tax return must be filed if assets are transferred to someone other than a spouse, civil union partner, child, grandchild, parent or charity.  There is a 3 year lookback.

10)  Within nine (9) months of the Decedent's date of death, the Executor must file a New Jersey Estate Tax Return and pay any taxes due.  A New Jersey Estate Tax Return must be filed if the TAXABLE estate is in excess of $675,000.  Note, the taxable estate can be different from the probate estate because the taxble estate may also include life insurance, retirement benefits, and joint accounts.  If the taxable estate is above $5,000,000 (indexed for inflation), a federal estate tax return must also be filed.  (It might be advisable to file this return in most situations on the death of the first spouse to pass on the Deceased Spouses unused tax exemption.) 

11)  The Executor must arrange for income tax returns to be filed and pay any taxes due. 

12)  The house must be cleaned and potentially sold or transferred.

13)  If there is real estate located in other jurisdictions, the Executor must do an ancillary probate.

14)  Other duties could include dealing with any business interests or intellectual property rights, assisting beneficiaries with any claims they might have for life insurance or retirement benefits, investigating the validity of claims against the estate and researching the proper title to assets.

15)  The executor should prepare an accounting for the estate.  This includes what the assets of the estate are, income, expenditures and distributions.  Unless the matter is contested, an informal accounting will usually suffice.

16)  Conduct child support searches on all beneficiaries.

17)  After the tax returns are filed and the estate receives tax waivers and all bills are paid, the Executor can transfer the assets of the estate as directed in the Will.

18)  Simultaneous with the transfers from the estate, an Executor should obtain a release and refunding bond.  This acts as a waiver to release the Executor from liability and a means by which the executor can retrieve the inheritance back in the event that new bills arise for the estate.

An executor is not required to hire an attorney to help out with an estate admistration, but it can make the process much smoother. 

Thursday, January 3, 2013

Estate Tax Portability Here to Stay

It occurs to me that other than a few minor modifications to the federal estate tax rate, very little has changed with respect to the law as it existed in 2012.  This means that estate tax portability is here to stay.  Portability is the term given when a surviving spouse receives a deceased spouse's unused estate tax exemption (also know as DSUE).  Whether or not portability would last under a new deal was a hotly debated topic. 

For anyone who has had a spouse die in 2012 and has been waiting to see what will happen with the law, it would be highly advisable to file a federal estate tax return (Form 706) to port your spouse's unused exemption amount.  Even if the surviving spouse does not have more than $5,000,000 in assets, it does not mean that his or her assets will not grow, that he or she will not win the lottery or inherit money from a wealthy relative before passing.

Additionally, as mentioned in an earlier post on same sex couples being entitled to the unlimited marital deduction, if you are in a same sex marriage, you should also considering filing a protective Form 706 as the state of the law is in flux right now.

Wednesday, January 2, 2013

Summary of Tax Law Changes 2013 (Fiscal Cliff Deal)

As you know by know, the Congress and the President have final agreed to a fiscal cliff deal.  While I haven't had a chance to read all 157 pages of the American Taxpayer Relief Act of 2012 yet, here is what I can gather from most major news sources:

1) The federal estate tax, gift tax and the federal generations skipping transfer (GST) tax will continue to have $5,000,000 exemptions, indexed for inflation.  The estate tax, gift tax and GST tax exemption amounts were $5,120,000 for 2012.  It will be $5,250,000 for 2013 after the most recent inflation adjustment.  The highest rate will go up from 35% to 40%.  This is a permanent change to the law.

  Note: Technically there are mulitiple rates for estates under $5,250,000.  This will not affect most people, but it can affect non-resident aliens with significant assets in the US or people who are otherwise not entitled to the full estate tax exemption.

2)  The income tax rates for 2013 are:
                              Married Filing Jointly        Single
     10% Bracket    $0 - 17,850                       $0 - 8,925
     15% Bracket    $17,850 - 72,500              $8,925 - 36,250
     25% Bracket    $72,500 - 146,400            $36,250 - 87,850
     28% Bracket    $146,400 - 233,050          $87,850 - 183,250
     33% Bracket    $233,050 - 398,350          $183,250 - 398,350
     35% Bracket    $398,350 - 450,000          $398,350 - 400,000
     39.6% Bracket $450,000 and up              $400,000 and up

    The change here was an increase in the top rate for married couples earning $450,000 or more and individuals earning $400,000.  For Head of Household, I believe it is $425,000.  The amounts here have been indexed for inflation for 2013.

3) Payroll taxes will increase to 6.2%, reverting back to the levels of 2010.

4) There will also be a phaseout of personal exemptions for individuals earning more than $250,000 and couples earning more than $300,000.  Head of Household limit is $275,000.  These appear to be indexed for inflation.

5)  Permanently indexes Alternative Minimum Tax (AMT) for inflation.

6)  Capital Gains Tax Rates for 2013 go from 15% to 20% for individuals earning $400,000 or more and couples earning $450,000 or more.  It will stay at 15% for everyone else.  (Caveat:  It is unclear to me at this stage whether the $400,000 & $450,000 threshhold refers to all earnings or simply earnings from dividends and capital gains.)

7) Extenstion for 5 years of the child tax credit and $2,500 tax credit for college tuition.

8) Extension for 1 year of the accelerated "bonus" depreciation on business investments.

9) Extension of tax free distributions from individual retirement plans for charitable purposes.

In other news, the 2503(b) annual exclusion amount was will increase from $13,000 to $14,000 as it was indexed for inflation.  This is not as part of the Fiscal Cliff deal.

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Revised on January 11, 2013. Indexing brackets for inflation.