Terry Pratchett's Executor Destroys Unpublished Work of Author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  One of his last wishes was that all of his unpublished works be destroyed by a steamroller.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  Comerica Bank and Trust, as Trustee of Prince's estate, is slowly analyzing all of Prince's unpublished works and the plan is to release an album shortly to maximize the value of the estate.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).

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.

Estate Administration and Bad Credit

Everybody knows that good credit is important for receiving favorable financing terms when buying a car or a house. Let me give you another reason to keep your credit up: the ability to act as administrator of the estate of parent or loved one.

When a person passes away without a Will, the closest next of kin can petition the Court to act as Administrator for the decedent's estate. The Court will usually agree to let the next of kin act as Administrator provided that they agree to pay for a Probate Bond. A Probate Bond is basically an insurance policy that insures provides the intestate beneficiaries and creditors of the estate with a way to receive some money in the event the Adminstrator absconds with the funds.

The Court will require a probate bond in almost all situations in which the decedent dies without a Will. A person can only qualify for a Probate Bond if he or she has good credit or significant assets to their name.

Obviously, the way to avoid this situation is to make sure your parents and loved ones prepare a Will which states that no bond is required. However, you find that you are involved in an estate administration in which the decedent did not prepare a Will, before you spend a lot of money trying to qualify as an Administrator, Executor or Trustee, make sure you have good credit.

The Mystery of Calculating Executor's Fees in Pennsylvania

The issue of calculating fees for an executor, executrix, administrator or personal representative in Pennsylvania estate cases is interesting because there is in fact no hard and fast rule about how such fees are to be calculated. Therefore no sure way to know what you can expect to see in the accounting if you are a beneficiary.

While executors’ fees are set by statute in many states, the “PEF” Code (the Pennsylvania Probate, Estates and Fiduciaries Code) provides only that a personal representative’s compensation shall be “reasonable and just” – based upon the specifics of each estate - and that it “may” be calculated on a graduated percentage. (20 Pa.C.S. §3537) The executor then has several options available, including charging (i) a flat fee or (ii) an hourly fee.

Though a "reasonable and just" standard may appear to be a very loose, wishy-washy standard, anyone acting as an executor or administrator should be aware that the executor’s commission will ultimately be subject to review on many levels: first and foremost, by the Orphan’s Court, to determine the reasonableness of the fee based upon the size of the estate, particularly if a beneficiary has objected to the accounting; second, by the Attorney General’s office, to review the fees’ effect upon the pay out of a charitable gift if a charity is a beneficiary of the estate; and third, by the Department of Revenue, to ensure against fraudulent deductions for fees claimed on the Inheritance Tax Return.

To guard against the prospect of an unfavorable audit, the Pennsylvania personal representative should take careful note of the percentage guidelines established by the court in Johnson Estate, 4 Fid.Rep.2d 6,8 (1983). In actuality, although the schedule established in Johnson was only included as an attachment to the judge’s written opinion, it has served as the unofficial guideline for gauging executor commissions and attorney fees ever since, with countless other judges adopting it as their own benchmark for review of accountings in subsequent cases.

Typically, if the ultimate commission is not more than what is provided on the Johnson schedule (below), and is calculated based upon standards of financial reason and fairness, it is likely that it will likely be met with approval all around.

EXECUTOR COMMISSIONS
						Per Col.	Per Total
	$	00.01	to	100,000.00	5%	5,000.00	5,000.00
	$	100,000.01	to	200,000.00	4%	4,000.00	9,000.00
Executor or	$	200,000.01	to	1,000,000.00	3%	24,000.00	33,000.00
Administrator	$	1,000,000.01	to	2,000,000.00	2%	20,000.00	53,000.00
	$	2,000,000.01	to	3,000,000.00	1½%	15,000.00	68,000.00
	$	3,000,000.01	to	4,000,000.00	1%	10,000.00	78,000.00
	$	4,000,000.01	to	5,000,000.00	½%	5,000.00	83,000.00

1%	Joint Accounts	1%	P.O.D. Bonds	1%	Trust Funds
3%	Real Estate Converted with Aid of Broker	5%	Real Estate: Non-Converted	1%	Real Estate: Specific Devise

Reasonableness, however, always reigns: While the percentage method appeals to judges of the Orphans' Court, keep in mind the Pennsylvania Superior Court has criticized the practice in their own opinions in Sonovick Estate, 373 Pa. Super 396 (1988), and Preston Estate, 560 A.2d 160 (1989).

An Executor should also consider that money received as compensation for any fiduciary duties is taxable for federal income tax purposes and usually for state income tax purposes as well. Accordingly, the executor may want to elect NOT take a commission after all as he or she may receive more by just receiving his or her distributive share of the estate.

For purposes of this article, I have used the titles "executor", "executrix", "administrator" or "personal representative" interchangeably. All refer to the person or entity that is in charge of administering a decedent's estate. In fact, an executor or executrix is a party that is appointed by a Will; an administrator is a party that is not appointed by Will, but is approved by the Court; and a personal representative can be either a party named in a Will or appointed by the Court.

NOTE: Special thanks to Elizabeth Carter for helping to prepare this article.

A Comparison of the Pennsylvania and New Jersey Inheritance Tax Laws

Some states, including New Jersey and Pennsylvania, have an inheritance tax. Other states, like Florida and New York, do not have an inheritance tax. An inheritance tax is a tax on the person who receives money from a decedent.

The inheritance tax rate itself depends upon the relationship between the person receiving the money and decedent. For example:

1. In both New Jersey and Pennsylvania, if the person receiving the money is a spouse (or a charity), there is no tax.
2. If the person receiving money is a sibling, there is a flat 12% tax in PA. In NJ it is a bit more complicated - the first $25,000 is exempt; beyond that there is a tax of 11-16% depending upon on the amount of the bequest.
3. Generally, if the person receiving money is anyone else (besides a child, parent or same sex partner), then there is a 15% flat Pennsylvania inheritance tax and a 15 or 16% New Jersey inheritance tax depending upon the amount of the bequest.
4. The first BIG DIFFERENCE is that Pennsylvania taxes bequests to all lineal descendants and certain lineal ascendants at 4.5%. New Jersey does not charge an inheritance tax to any lineal descendants or ascendants. (Note: Pennsylvania does not charge a tax on the bequest to a parent if the decedent was under 22 years of age.)
5. The second BIG DIFFERENCE is that Pennsylvania has a 15% inheritance tax on bequests to a same sex partner. In New Jersey, as long as the partners are in a civil union or domestic partnership, there is zero inheritance tax. If the partners are not in a civil union or domestic partnership, then there is a 15 or 16% tax, depending upon the amount of the bequest. For more information, see my blog on Estate Planning for Same Sex Couples.
6. In NJ, a bequest to a son-in-law or a daughter-in-law is taxed at the same rate as a bequest to a sibling. N.J.S.A. Section 54:34-2c. In PA, such transfers are taxed at the same rate as a bequest to a child. 72 PS 9116 (Note: If the son-in-law or daughter-in-law later remarries, this does not apply.)
7. In both NJ and PA, step children and adopted children are taxed in the same manner as natural children. New Jersey also allows inheritance tax free transfers to mutually acknowledged children in certain circumstances. N.J.S.A. Section 54:34-2a.
8. The only other significant difference in the rates is that New Jersey exempts transfers that are less than $500. Pennsylvania exempts certain transfers of up to $3,000.

New Jersey and Pennsylvania also have similarities and differences between the types of assets that they will tax. This is not a complete list, but as an example:

1. Neither state taxes life insurance, real property located outside of the state or business interests located outside of the state;
2. Both states will fully tax cash and brokerage assets of individuals who died while domiciled in their state.
3. Both states will fully tax real estate and business interests located inside the state of resident and non-resident domiciliaries.
4. Joint property held with rights of survivorship are fully taxed in New Jersey unless the recipient can prove he or she contributed to the joint property. In Pennsylvania, only the portion of the property owned by the decedent is taxed.
5. IRAs, Annuities, 401(k)s, 403(b)s and other retirement assets are taxed in New Jersey, but not in Pennsylvania, provided the account owner passes away before having the right to withdraw the money free of penalty (generally before retirement age of 59.5) AND provided that a person was named as beneficiary of the retirement plan. In PA, if the owner of the 401(k) has the right to close down the account it will also be subject to a tax, this is generally age 62 or 65.
6. Retirement plans, annuities and other benefits payable by the federal government to a beneficiary are not subject to an inheritance tax in NJ or PA.
7. In Pennsylvania, transfers made within one year of death are taxable, but each such transfer is subject to a credit of up to $3,000 per recipient. In New Jersey, transfers "made in contemplation of death" are taxable for inheritance tax purposes. There is a presumption that transfers made within three years of death are made "in contemplation of death".

Note: An inheritance tax is not to be confused with an estate tax. A state can have either an inheritance or an estate tax, both, or neither. Additionally, many of the assets that are exempt from inheritance tax (such as life insurance) are subject to an estate tax.

The NJ inheritance tax is due within 8 months from the date of death. In PA, the inheritance tax is due within 9 months of the date of death, but there is a 5% discount if the tax is paid within 3 months from the date of death.

The NJ Inheritance tax statute can be found at N.J.S.A Section 54:34-1, et. seq. The PA Inheritance tax statute can be found at 72 PS 9101, et. seq.

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Edited on January 20, 2011 thanks to input from Patricia Picardi.

New Jersey Estate Tax

New Jersey has many different types of taxes, including two different taxes on death: the NJ Estate Tax and the NJ inheritance tax. The New Jersey estate tax is a tax on transfers at death and certain transfers in contemplation of death.

Transfers to charities, a surviving spouse or a surviving Civil Union partner are exempt from the NJ estate tax. Transfers to anyone else are taxable to the extent that the transfer exceeds $675,000. New Jersey never does anything in a simple manner, and it does not technically offer a $675,000 exemption from the estate tax. NJ actually exempts the first $60,000 of transfer and then taxes the next $615,000 at 0%. The effect of this is that the first $675,000 can almost always pass to whomever you want tax free.

Each New Jersey resident is entitled to the NJ estate tax exemption. Accordingly, married couples and Civil Union couples can double the amount that they pass on to their children with proper planning. (This usually involves setting up a bypass trust for the surviving partner or spouse rather than leaving them money outright.)

The New Jersey estate tax is a progressive tax, meaning that the more you pass on, the higher the tax rate. The NJ estate tax rate generally varies from 0% to 16% depending upon the amount of the transfer. The major exception is that for the first $52,175 over $675,000, there is a 37% tax. For a detailed breakdown of the tax rates, see page 10 of the NJ Estate Tax Return.

New Jersey offers two different method of calculating the state estate tax on the NJ Estate Tax Return: the 706 method and the so called "Simplified Method". The Simplified Method allows the executor or administrator of the estate to avoid filing a 2001 version of the federal estate return, but it often results in a higher tax. For this reason, it is often advisable to hire a competent estate planning attorney to minimize this tax liability.

A decedent's estate can be subject to both the NJ estate and inheritance taxes. New Jersey does offer some relief if an estate is subject to both taxes. For example, if a person with $1,000,000 dies and leaves the entire amount to her nephew, this transfer would be subject to both taxes. A transfer of one million dollars in normally subject to a $33,200 New Jersey estate tax. A transfer of this amount though is also subject to a $150,000 New Jersey inheritance tax. In such an instance, New Jersey would only collect only the higher tax, the 15% inheritance tax in this case.

The NJ estate tax is due within 9 months from the date of the decedent's death. This is different than the NJ inheritance tax, which is due within 8 months from the date of the decedent's death.

The NJ estate tax should not be confused with the federal estate tax. Unless Congress acts to extend the repeal of the federal estate tax (which I think to be highly unlikely), the United States will have a separate and additional tax on death.

How to Avoid Estate Litigation - Communication

Sometimes there is no preventing an estate litigation. When a family member steals items from the estate, or when the Will is poorly drafting making it confusing, litigation is sure to follow.

However, most good estate attorneys will tell you, one of the biggest reasons that unnecessary litigation results is due to family members not communicating with each other. Lack of communication by the person in charge of the estate leads the other family members to believe that the executor (or administrator) is hiding something. More often than not, the person in charge is just too busy or overwhelmed. Things get said which are better left unsaid, and then the worst of all situations arises - it no longer is about getting what you are entitled to under the Will, but about how Mom or Dad always loved the other one more.

Once the administration of an estate is no longer about getting through the difficult administration process, but about opening old family wounds, people seem more than happy to hire aggressive litigators to settle the score. In the long run, this ALWAYS costs the estate far more. It costs the estate more money in attorneys' fees and it costs the family any semblance of family unity. It is rare that siblings, or cousins, will ever get along again after there has been an estate litigation.

Many times, you do not need to hire an attorney to handle the probate and administration of a loved one's estate. However, if you find yourself overwhelmed, you must not just sit and wait. It will cost you far more than money. A qualified estate administration attorney can guide you through the process. Moreover, the person named as executor is not individually responsible for paying for the fees - it comes from the estate off the top. After all, it is in everyone's interest to make sure Mom and Dad's wishes are carried out.

Top Ten Reasons to Have a Will

1. To determine who gets your money (Naming beneficiaries)

2. To determine guardianship (Saying who will take care of you children)

3. To determine who controls the money (Naming of executors and trustees)

4. To minimize estate or inheritance taxes

5. To avoid the cost of an insurance bond (If you do not allow for an executor or administrator to serve without paying for an insurance bond, the court will require one. In New Jersey, this can cost your heirs $500 for each $100,000 of assets you leave them)

6. To develop a trust for your heirs (This controls the timing of payout to beneficiaries)

7. To specify the authority of the Executor and Trustees (E.g. should they run a business, sell your property, or keep certain stocks?)

8. To determine who pays estate taxes (you can actually specify this and frequently should)

9. It provides for a quicker probate process

10. It clarifies your living intentions after your death (in other words, it maximizes the chance that your heirs will respect your wishes)