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.

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/

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.

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. 

Dangers of Specific Bequests and General Bequests

WHAT ARE SPECIFIC GIFTS AND GENERAL GIFTS?
A specific bequest is a gift of a specific piece of property to a specific person. Three examples of this are:

1. I give my real estate, located at 1 Main Street, Anytown, State, to my son, Jake Smith.


2. I give my 500 shares of stock of XYZ Corporation to my nephew, Jordan Smith.


3. I give all of my money in Bank Account number #1 at Big Bank, to my daughter, Samantha Smith.

A general bequest is a gift of a specific amount, made to a specific person. This is considered a general bequest because only the value of the property is relevant, not its source. An example of a general bequest is: I leave $10,000 to my niece, Jody Smith. (It is not important from where the $10,000 comes from.)

If the testator states the source of the funds, this is a general bequest known as a demonstrative gift. An example of this is: I give $10,000 to my cousin, Jamie Smith, from my account number #1 at Big Bank. The gift amount is general, but the source of the funds is specific.

If you just leave everything to a specific person or persons, this is known as a residuary gift. I will not be discussing them in detail here.

HOW CAN THERE BE A DANGER IN MAKING A GIFT?
Some of the dangers that can arise from an improperly drafted specific bequest include ademption, confusion, an unequal sharing of taxes and an unequal sharing of expenses.

ADEMPTION
Ademption is the term used when the decedent no longer owns the property that he or she is giving away. For example, if the decedent in the example above sold 1 Main Street shortly before his death and purchased 2 Main Street, then Jake Smith will get nothing. Because the decedent does not own 1 Main Street at the time of his death, he cannot possibly give it to Jake and the property is considered to be adeemed.

Another huge problem with ademption occurs when an agent under a power of attorney sells the property. Then, it will depend upon the state whether the beneficiary gets something or not as some states require that the beneficiary receive an amount equal to the fair market value of the property. I prefer not to specifically name anyone as the beneficiary of real estate or other large ticket items, and if the client insists, I require that they tell me what they would want to do if the property is sold before they die.

CONFUSION
Confusion can result in a number of different ways. One way it can result is if one of the people named as beneficiaries dies - what happens to the bequest? It may depend upon the state. Some states say that the gift goes to the children of the deceased beneficiary. Some states say that the gift lapses. I prefer to explain what happens in all cases and not rely on state law. I will add one of the following in every case: "If Jody Smith does not survive me, this gift shall lapse." or ""If Jody Smith does not survive me, this gift shall be distributed to..."

Another cause of confusion can arise from gifts of stock. What happens if the stock splits or the company creates a subsidiary or is bought out? The answer to this can vary by state. Unless the testator is the owner of a small business and we are engaged in business succession planning, I usually advise clients not to make specific gifts of stock.

AN UNEQUAL SHARING OF TAXES
Making a specific or a general gift can result in an unequal tax burden because in many states, like New Jersey and Pennsylvania, there is an inheritance tax. Beneficiaries will be taxed differently depending upon their relationship to the decedent. So, if a New Jersey decedent left $10,000 to his son and $10,000 to his nephew, the nephew's gift would result in a 15% tax, but there would not be any tax on the bequest to his son.

If a Pennsylvania decedent left $10,000 to his daughter and $10,000 to his brother, the bequest to his daughter would result in a 4.5% tax and the bequest to his brother would result in an 12% inheritance tax. For a full range of all the different tax rates, please review this inheritance tax chart.

So, who should pay the tax in these situations? You can have three results:

1. Each person who receives money pays their own taxes at their own rate.


2. They split the taxes equally.


3. The residuary beneficiaries (possible a third party) can be required to pay the taxes.

Each state has a different requirement, but the testator can override state law by stating who should pay the taxes. A good attorney will help you identify when this might be an issue and help you decide how the taxes should be paid.

AN UNEQUAL SHARING OF EXPENSES
A similar analysis can be made for the unequal sharing of expenses. If you leave $90,000 to your daughter in a specific bequest and leave everything else to your son, most Wills require that the expenses of the estate administration be paid out of the residuary. This may be fine if your son is getting more than your daughter, but what if it's the same or less? These kind of issues must be dealt with in the estate planning stage, not after a person's death.

Estate Administration can be a bit complex, so make sure you contact an an experienced probate attorney if you even have the slightest doubt about how to handle any of these issues.

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.

Choosing an Attorney to Help Probate an Estate

Did you know that if you are an executor or personal representative of an estate that you do not have to hire the attorney that drafted the Will to handle the probate of the estate?

Many times, attorneys will do a simple will as a favor to a neighbor or relative. This is all fine and dandy as long as all that is needed is a simply Will. However, frequently, many tax forms must be filed when administering an estate and clients need advise on when NOT to accept money. A good attorney should also be able to act as the "bad guy" when an executor must deliver bad news to the beneficiaries. An attorney that does not focus on estate administration may not be able to help.

I'm often amazed at the number of times that I meet with a client who was unhappy with the attorney that administered a parent's estate. I ask why they didn't switch and I am told that they did not realize they could. Remember this - you always have the choice of who you wish to represent you. It may not be cost efficient to change if you are too far along, but you always have the right to change.

My best advise is that before you start the process of estate planning or estate administration, make sure you hire someone who practices frequently in the field. You are far less likely to encounter problems.

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.

Time to Start Expecting Congress Will Do Nothing on the Estate Tax

Having an estate plan in place gives you control over your assets, but only if it is up to date. It is important to review your estate planning documents every few years due to changes in personal circumstances and also due to the frequent changes in the tax and probate laws.

As you may be aware, in 2001 there was a major change in the federal estate tax law eliminating the estate tax for the 2010 calendar year. Most professionals, myself included, thought that Congress would modify this law before the estate tax was actually repealed. I guess we should never be surprised though when our government does not behave the way we expect.

It is still unclear what will happen with federal estate tax, but unless Congress acts, by the terms of that same 2001 law, the federal estate tax will be reinstated on January 1, 2011 with an exemption amount of only $1,000,000 per person (indexed for inflation). Moreover, the federal estate tax rate will return to a graduated rate, generally between 41% - 55% depending upon the amount of your assets.

Additionally, the change in the federal estate tax law in 2001 caused New Jersey, and many other states, to modify their respective state estate tax laws. New Jersey, in particular, decided to lock in a state estate tax exemption amount of $675,000.

Accordingly, if your Will contains a formula provision to fund certain trusts or bequests, the change in the tax laws could greatly affect where your money goes upon your death and may result in unnecessary taxes being owed.

My recommendation is that anyone who has assets in excess of $650,000 have their Will reviewed. If necessary, they should be revised to build in maximum flexibility to take into account as many reasonably foreseeable outcomes that we might have if the Congress decides to pass a new law or decides not to do anything.

Pennsylvania Intestacy Law - When a Pennsylvania Resident Dies Without a Will

If a Pennsylvania resident dies without a Will, that person is said to have died "intestate". The Pennsylvania intestacy scheme is governed by statute (20 Pa.Cons.Stat. 2101 et. seq.). Where the money goes depends in large part who survives the decedent.

Many people think that as soon as they get married that if they die, everything that they own will go to their surviving spouse. THIS IS NOT TRUE!1) Scenario 1: A person is only survived by a spouse - If the decedent is survived by a spouse and does not have any surviving parents or issue (children or other lineal decedents) then the surviving spouse receives the entire estate.

2) Scenario 2: A person is survived by a spouse and parent(s) - If the decedent is survived by a spouse and at least one parent, but no issue, then the surviving spouse receives the first $30,000 and one-half of the balance of the probate estate. The balance would go to the surviving parent(s).

3) Scenario 3: A person is survived by a spouse and children from the marriage to the spouse - If the decedent is survived by a spouse and only children from their marriage, then the surviving spouse receives the first $30,000 and one-half of the balance of the probate estate. The balance would go to the surviving issue of the decedent. In most cases, the distribution will be made equally to a person's children, but if a child is not then living, then that deceased child's share shall go equally to that deceased child's children.

For example, let's assume Joey died with $300,000 and he is survived by his wife and one son. He also had one daughter, who died before him, but she had two children of her own. The widow would get $180,000 ($30,000+$150,000), the son would get $60,000 (1/2 of ($300K-$180K)) and each of the grandchildren would get $30,000 (1/4 of ($300K-$180K). 4) Scenario 4: A person is survived by a spouse and at least one child from another relationship - If the decedent is survived by a spouse and at least one children from another relationship, then the surviving spouse receives only one-half of the balance of the probate estate. The balance would go to the surviving issue of the decedent.

5) Scenario 5: Person is not survived by a spouse - If the decedent does not have a spouse, then his or her probate estate will first go to surviving issue, if any; then to surviving parents, if any; then to surviving siblings (or their issue), if any; then to surviving grandparents, if any; then to surviving aunts, uncles (or their children); if any. If none of these individuals survive the decedent, then the decedent's assets go to the Commonwealth of Pennsylvania.
You may have noticed that I used the term "probate estate" over and over in this entry. That is because the probate estate does not cover life insurance, retirement benefits, annuities, joint accounts, pay on death accounts or other moneys that are payable as a result of a contract. These assets are called "non-probate" assets and they do not pass according to the instructions of a Will nor do they pass via the intestacy laws. You must look to the terms of those documents to see who is entitled to what. Accordingly, when administering an estate, one must consider all assets - probate and non probate. If no beneficiary is named, then they do pass through the probate estate.

Unless you wish your assets to go according to the Pennsylvania intestacy scheme, you should draft a will so that your money can be distributed the way that you want when you pass.

Why Should I Hire an Estate Planning Attorney?

The short answer is: control. Proper estate planning is essential to controlling how much of your estate you pass on, to whom you pass it on, and when it is passed on. Back in March, I listed the Top 10 Reasons to Have a Will. However, not only should you have a Will, but in most instances it should be drafted by a qualified estate planning attorney.

“Do it yourself” will kits seem easy enough, but they can’t advise you. If you have children and will be naming guardians or setting up trusts, you need the advice of someone who knows the intricacies of estate planning laws. While providing for your children's protection, you need to consider how your money will be transferred to them. Who will control the money until the kids are old enough to take care of it themselves? Will they get staggered amounts as they hit certain milestone birthdays, or get it all at once? What if one of your children is a spendthrift (i.e. a reckless spender)? In this day and age, the issue of blended families can make drafting a will for your loved ones even more complicated. However, an estate planning attorney can not only draft a Will to provide for your wishes, but can also serve as a counselor, suggesting customized trusts that can be used to provide for your spouse and children on various levels. An estate planning attorney can even set up trusts that direct assets to someone other than family in a way that ensures your family has access to the money when that non-family member no longer needs it.

Moreover, tax and trust planning go hand in hand and should be considered simultaneously. In order to maximize how much of your estate stays intact and is passed to your family, you need to minimize the amount paid to the government and maximize the investments held in trust. This requires a considerable amount of coordination among your assets. In order for the trusts to work as intended, all assets must be accounted for, both at the time the trust is established and moving forward. I’ve written before about tax exemptions, but the short version is that if your estate is properly planned, you (and your heirs) can potentially avoid tax liability altogether.

So - pardon the pun, but if there is anything even remotely complicated about your plan, then a do it yourself Will will not do. Finally, this area has become some complex due to the ever changing tax laws, you really do want to have someone who does this work frequently, otherwise you really are just paying an attorney to fill out a Will kit for you.

Written by: Nancy McMillin & Kevin Pollock

Everything You Ever Wanted to Know About Ancillary Probate in NJ

If you have a loved one who dies owning real property in New Jersey, what do you do? The answer is - an ancillary probate. Generally, this means you will conduct a second probate action in New Jersey after you have done one in the state where the Decedent was domiciled. (If there is no reason to conduct a probate proceeding in the state where the Decedent was domiciled, you can contact the Surrogate on ways to skip steps 1 and 2.)

For most, the process is as follows:

1) If the Decedent had a Will, the named Personal Representative probates the Will in the jurisdiction where the Decedent was domiciled (if there was no Will, someone will likely have to file a complaint to declare an intestacy and request to become Administrator for the estate).

2) The Personal Representative obtains an "Exemplified Copy" of the Will and Letters Testamentary (or Letters of Administration for an intestacy action). Letters Testamentary and Letters of Administration are the documents that the Surrogate gives you to show that you have legal authority to act on behalf of the Estate.

3) You take these documents to the Surrogate of each county where the Decedent owned property and tell them that you want to conduct an ancillary probate. (The fee is nominal, currently only about $5 per page plus $5 for the backing page.)

4) The local NJ Surrogate then gives you Letters Testamentary for NJ, and you can transfer this property legally to the new owner according to the county.

5) BUT WAIT, don't transfer the property yet! You have to know who the property is going to. If all or a part the property (or money from the sale of the property) goes to someone other than a spouse, lineal descendant or lineal ascendant, it is subject to a NJ Inheritance tax! That's right, there is a 11-16% tax on this property which must be paid within 8 months from the date of the Decedent's passing. Failure to do so will result in very large interest and penalty charges which you, as the Personal Representative, may be responsible for. At least there is no NJ Estate tax on the estate of a non-resident.

6) Once the Personal Representative has determined what is owed to the State of New Jersey, he or she should pay the tax, if any, and obtain an inheritance tax waiver from the Estate and Inheritance Bureau. Forms can be found here: http://www.state.nj.us/treasury/taxation/index.html?estatetax.htm~mainFrame

7) Now can the Personal Representative can transfer the property? Probably. Again, if the property was devised to a specific party, it should either be transferred to such party or sold with the explicit consent of that party. If the property was part of the residuary of the estate, then the Personal Representative generally will have the power to transfer the property unless it is denied by the language in the Will - so make sure you check this. Few Wills that I have run into ever limit this, but frequently you do see a right of first refusal which must be honored.

Obviously a knowledgeable probate attorney can help you through these steps.

Business Succession Planning

Some of you may have seen these scary statistics:

According to the U.S. Small Business Administration, 90 percent of the 21 million small businesses in the U.S. are family-owned, but less than one-third of family-run companies succeed into the second generation, while only half of that make it to the third. Most often, the lack of a proper succession planning is to blame.

Proper business succession planning is particularly vital in the Northeast where taxes are so high.

Let's assume that an unmarried NJ decedent (Jane) has a company worth $5,000,000 at the time of her death. Without looking at Jane's other assets, I can tell you that her heirs have a potential federal estate tax liability of close to $1,350,000 plus a NJ Estate Tax liability of almost $400,000 for a total tax liability of close to $1,750,000. If she had no issue or parents living, this would also be subject to a $750,000 New Jersey inheritance tax. These taxes could decimate a small company at a time when the key person involved is not around.

The benefits of proper planning are countless.At a minimum, proper strategy will help you minimize taxes, maximize control and provide a clear path for continuity of the business. Planning an exit strategy is important as soon as you go into a business. This includes planning for death, divorce or a sale upon retirement.

Some popular planning techniques include:

1. Setting up an entity structure (LLC, C Corporation, S Corporation, Partnerships, etc.);
2. Purchasing Life Insurance (combined with Buy-Sell Agreements);
3. Creating agreements limiting control of potential takers to the business;
4. The use of promissory notes;
5. Selling or gifting ownership in the business to family members; and
6. Selling or gifting ownership in the business to other entities or trusts that will benefit family members.

Valuation Discounts

One of the most important aspects of proper planning is gaining the ability to maximize the amount that you can pass down to your heirs through the use of Valuation Discounts.

When a person has a small business, it is often difficult to sell. The IRS recognizes this lack of marketability. Additionally, as many small business owners get on in years, they are not as involved in running the business. The IRS also recognizes this lack of control.

It is not uncommon to have restrictive agreements in place that will allow an owner to pass on his or her interest with a one-third discount for lack of marketability PLUS another one-third discount for lack of control. Discounts are very specific to each business and a proper appraisal is a MUST.

So how does it work?

Let's go back to our example above. Let's assume that Jane has one child, Dave, who is 35 years old and has shown some interest in the business. Ten years ago, Jane sets up an entity, let's say an LLC, with a restrictive operating agreement. As a result, the appraisal comes back and states that there is a 1/3 discount for lack of marketability. Jane can transfer Dave $1,012,000 of this company without any out of pocket gift tax consequences. Without the appraisal, this would result in a transfer of 20% of the company. With the appraisal, Jane could transfer as much as $1,518,000 of the LLC (a little over 30%) without gift taxes. Additionally, Dave could buy another 20% of the company with a promissory note at the lowest rate available for tax purposes. Let's say a ten year note of $666,666 at 6% interest. Finally, Jane is in good health, so for the next 10 years she uses her annual exclusion amount to gift Dave another $12,000 worth of the company annually. (Since annual appraisals would be expensive, let's assume we don't discount this.)

The result is that upon Jane's death 10 years later, her 100% interest in the company, which started at $5,000,000 company, has been reduced as follows:
1) Through the lifetime gift to Dave, her interest is reduced to a 70% interest, worth $3,500,000;
2) Through the promissory note, her interest is reduced just under 50%, with a value of just under $2,500,000.
3) Through the annual gifting, her interest in the business is reduced to $2,380,000.

Upon Jane's death her $2,380,000 interest will receive a 1/3 discount for lack of marketability and another 1/3 discount for lack of control. This will result in a tax valuation of approximately $1,060,000. After we add back in the $666,666 that she received for the 20 interest plus another $220,000 for interest payments, she will pass with a taxable estate of about $1,950,000.

Accordingly, upon Jane's death, her estate will not be subject to any federal estate tax liability. Additionally, the NJ Estate tax liability will be reduced to $96,000. This is a tax savings of over $1,600,000 - which far outweighs the costs involved in such preparation.

Obviously, there are many different ways to structure this type of transaction, but they are usually based upon the same methodology. The numbers and techniques involved will depend upon the individual needs of the client. For example, if Dave were not responsible or had no interest in running the business, Jane could give him his shares in trust. If Jane had a business partner, this structure could be done for each partner and combined with a buy-sell agreement funded by life insurance.

Animal/Pet Trusts

New Jersey passed legislation a short while ago permitting the creation of a Pet Trust under: N.J. Stat. Ann. § 3B:11-38.

1. The new law states:

a. A trust for the care of a domesticated animal is valid. The intended use of the principal or income may be enforced by a person designated for that purpose in the trust instrument, a person appointed by the court, or a trustee. The trust shall terminate when no living animal is covered by the trust, or at the end of 21 years, whichever occurs earlier.

b. Except as expressly provided otherwise in the trust instrument, no portion of the trust's principal or income may be converted to the use of the trustee or to any use other than for the benefit of the animal designated in the trust.

c. Upon termination of the trust, the trustee shall transfer the unexpended trust property as directed in the trust instrument. If no directions for such transfer exist, the property shall pass to the estate of the creator of the trust.

d. The court may reduce the amount of the property transferred if it determines that the amount substantially exceeds the amount required for the intended use. The amount of any reduction shall be transferred as directed in the trust instrument or, if no such directions are contained in the trust instrument, to the estate of the creator of the trust.

e. If no trustee is designated or if no designated trustee is willing or able to serve, a court shall appoint a trustee and may make such other orders and determinations as are advisable to carry out the intent of the creator of the trust and the purpose of this act.

2. Prior Law - Previously, an animal trust existed as an honorary trust (i.e. there was no judicial enforcement).

3. Planning Points

a. Unlike most other trusts, the beneficiaries of an animal trust literally cannot talk for themselves, so the Grantor/Pet Owner must clearly indicate what level of care should be given to the surviving pet. The document should also clarify what payments may be made to the pet’s caretaker.

b. A remainder beneficiary should always be considered (and it is usually inadvisable to make the caretaker the remainderman).

c. Many animals live longer than 21 years, so a truly trusted caretaker and trustee should be considered. Any animal trust that is in excess of 21 years likely continues as an honorary trust.

d. The animal should be clearly identified to prevent fraud.

4. Tax Aspects

a. A Pet Trust is taxed as a complex trust that has not made any distributions. Revenue Ruling 76-4876.

b. In general, a trust's income is subject to graduated income taxation at the same rates as individuals with the highest marginal rate of 35% taking effect after only $10,050 (for 2006) of income, a significant detrimental income tax effect. Some commentators have reported that the IRS will tax these trusts at a marginal rate that is lower than that of the average trust.

Irrevocable Trusts

There are many different types of irrevocable trusts. The most popular irrevocable trusts include:

1. life insurance trusts;
2. asset protection trusts;
3. charitable trusts;
4. trusts created upon death (such as QTIP trusts and bypass trusts); and
5. special needs trusts.

Generally, an irrevocable trust is designed to prevent its terms from being modified in the future. As a practical matter, what this means is that a person (the Grantor) creates a document (the Irrevocable Trust) outlining how his or her beneficiaries should receive any assets that are placed into the trust.

The Irrevocable Trust document itself has provisions which state that the Grantor may not make changes or modifications to the trust. Unlike a Revocable Trust, the Grantor of an Irrevocable Trust gives up all control once the trust is created. There are times when such trusts can be later modified, whether by court or by consent of all the beneficiaries, but never by the grantor alone.

Frequently people also create an Irrevocable Trust because once assets are transferred to such trust they will receive favorable estate and inheritance tax treatment. Assets in Irrevocable Trusts receive favorable tax treatment because they are excluded from the gross estate of the grantor at the time of the grantor’s death.

Another reason people also create irrevocable trusts is to provide as a means of protecting the assets in the trusts. By giving up control of the assets (in a non fraudulent way), a potential creditor may not sue the Grantor and try to claim against the assets in the trust.

In most states, including New Jersey, a Grantor may not be a beneficiary of an asset protection trust. However, a few states do allow self settled spendthrift trusts.

Revocable Inter Vivos Trust (a/k/a the Grantor Trust)

The Revocable Grantor Trust is a favorite of practitioners who wish to help their clients avoid probate. The other advantage to the trust is that for individuals who wish to keep their family secrets out of the public domain, it provides a means to keep their estate planning wishes private.

1. The major benefit of the Grantor Trust is that it provides a method for managing the Grantor’s assets, which is particularly useful in the event of incapacity.
2. It is valuable for clients who are not sure if they plan to stay domiciled in New Jersey and may move to a part of the country where avoiding probate is of utmost importance.
3. Planning considerations

a. When transferring real property into any trust, there is a cost associated with the transfer. Additionally, there may be real estate transfer fees and if there is a mortgage on the property, the mortgage company may have an issue with the transfer.
b. Under Revenue Ruling 85-45, the sale of a person’s principal residence held in trust qualified for the I.R.C. §121 capital gains tax exclusion provided the person and trust otherwise qualified for the exclusion.
c. Probate of property in New Jersey is not as expensive or time consuming as in other jurisdictions, so the cost of establishing the trust may not always be justified.

4. Tax aspects

a. While the Grantor is alive, this trust will be ignored for tax purposes and taxed to the Grantor. The trust may also use the Grantor’s social security number until this time.
b. Upon the death of the Grantor, the taxation of the trust will be dependent upon the terms of the trust. A new tax ID number will usually be appropriate.

5. Administration

a. During the life of the Grantor.

1) The administration of Grantor trusts is quite simple while the Grantor is alive as the Grantor who acts as his own Trustee generally has complete control over all the assets as if he owned the assets outright.
2) At any time a Grantor may terminate (or revoke) the trust and receive all of his assets back. This may be especially useful if there is a third party Trustee who is not doing what the Grantor wants.
3) All bank accounts and titling of assets should be made as follows: “[Trustee Name], as Trustee of the [Trust Name]”.
4) To avoid confusion, a Trustee should always indicate when he or she is acting on behalf of the trust rather than in an individual capacity. Accordingly, checks, letters and any other documents should be signed as Trustee.

b. Upon the death of the grantor, the trust turns into an irrevocable trust. The administration will be dependent upon the actual terms of the trust instrument.

1) Unlike trusts created under a Will, the Trustee does not need to acquire Letters of Trusteeship from the Surrogate. This is both a time saver and a small cost saver.
2) Summaries of various common irrevocable trusts to be discussed later.

Reasons for a Will

1. General Benefits
   a) Ensures a clear WRITTEN clear plan for the distribution of assets after your death
   i. Provides proof of plan
   ii. You get to choose who serves as executor, trustee and guardian
   iii. A clear plan can help avoid infighting amongst surviving family members
   

   b) Important means of ensuring that money will go to whom you wish it to go rather than according to state law
   c) Eliminates need for Insurance bond for Trustees and Guardians (Savings of approximately $500 for every $100,000 that the estate is valued at)

   
   
2. Establish trusts for your children/grandchildren
   a) Minors – allows for both discretion over distribution and control over timing of distributions
   i. Tiered distribution – traditional means of giving money to children (age 21, 25, 30)
   ii. Dynasty trusts – stays in family blood forever if funded with enough money.
   

   b) Problem children – can give trustee discretion as to when to distribute money out

   
   
3. Flexibility
   a) A Modern Will should allow for a great deal of flexibility because of the ever-changing tax laws.
   i. Regardless of whether a Testator’s estate goes up or down, the will should contain formulas to take into account the current state of the tax laws and future anticipated changes.
   ii. Ability to take into account State Tax laws in conjunction with Federal Tax Laws
   

   b) Trustee provisions - Many problems occur when beneficiaries are stuck with trustees whom they cannot remove. A modern Will should have the ability for trusted beneficiaries to replace trustees and appoint independent trustees to allow for invasion of principal to beneficiaries in a way that will not produce adverse tax consequences.
   c) Post mortem planning - A will should allow for the surviving spouse or an independent executor to do planning after the death of the testator including tax planning.
   i. Disclaimers
   ii. Limited Powers of Appointment – You can allow the surviving spouse to appoint the balance of a trust among your children as he or she sees fit. (This is especially useful when children have varied income levels.)
   iii. Granting of a General Power of Appointment for tax purposes.
   

   d) Side letters – Under New Jersey law, a testator may revise the provisions regarding disposition of tangible personal properties without redoing the entire will. (E.g. You can easily change your mind about who you want to leave your golf clubs to without redoing your Will.)
   e) Combining trusts – A well drafted will (and trust) should allow you to combine two or more trusts with similar terms to save time and money.

   
   
4. Minimization of Tax consequences
   a) Establishing trusts allows couples to make full use of both spouses’ tax exemptions.
   b) Anyone who plans to distribute to non-lineal descendents, up or down, must plan to minimize inheritance taxes
   c) Establishment of multiple trusts for minimization of Generation Skipping Transfer Tax (GST tax)