A lot of my postings on this blog tend to focus on how you can protect your assets while alive or after you pass away. However, equally important is knowing how to protect yourself if you are ever called upon to act as executor of the estate of a friend or loved one who has passed away.
Assuming you have already been sworn in as executor at the Surrogate's office (which is a simple process), the first key to protecting yourself is filing all necessary Inheritance and/or Estate tax returns. After said returns are filed with payment, the State will issue "tax waivers" which allow you full access to the Estate's assets. If the estate for which you are executor has a gross value under $675,000 and all beneficiaries are descendants, spouses, or ancestors of the decedent, then no such tax returns are necessary for access to the estate's assets.
The next key is paying off all of the decedent's debts before distributing any assets to beneficiaries. If you distribute to beneficiaries before paying off debts, it is possible that the estate's creditors can assert personal liability against you for the decedent's debts. This is obviously very bad, and to be avoided at all costs.
What happens if the estate doesn't have enough assets to pay off the debts of the decedent? In a nutshell, this means that the beneficiaries get nothing. Many people unfortunately believe that this result can be avoided by placing assets into a revocable living trust or by keeping assets in joint accounts, "payable on death" accounts, or "transfer on death accounts". Such people are wrong in their belief. Under New Jersey law, revocable living trusts, joint accounts, payable on death accounts, and transfer on death accounts offer no protection against creditors. N.J.S.A. 17:16I-7; In re Estate of Kovalyshyn, 136 N.J. Super. 40 (1975). Creditors may proceed directly against assets held in any of those forms.
So if there aren't enough assets to pay all debts, and the beneficiaries are getting nothing, which creditors get paid first? The short answer is that there is an amalgam of federal and state statutes that determine who gets paid. For example, under 31 USC 3713, the federal government usually gets paid first. The good news is that as an executor, there is an easy way to make sure the right people get paid and that you are protected. You can file an estate insolvency proceeding in Superior Court. In such a proceeding, the Superior Court will tell you exactly who to pay and how much, and you can rely on orders of the court to relieve you from any liability. While it is true that filing such an action will require you to hire an attorney and incur legal fees, those legal fees come out of the funds held by the Estate and you aren't out of pocket for anything. Any legal fees simply reduce the amount that creditors recover. As executor, you generally don't lose out on anything.
In a normal situation where the estate has sufficient assets to pay off the decedent's debts and there is money left over to pay beneficiaries, you generally don't need to go to court at all as executor. After paying off all debts, you are ready to distribute funds to the beneficiaries as directed in the decedent's will. Before you do, you are required to run a child support search on the beneficiaries. There are several companies that can do this for you, and it usually only costs about $10. Assuming you have run the necessary child support searches and no beneficiaries have a delinquent child support obligation, you are ready to distribute. Before you distribute, however, be sure to have each beneficiary sign a "release and refunding bond" to relieve yourself from liability for later-discovered debts. These "release and refunding bonds" get filed in the Surrogate's office at a fee of $5 each, and officially "close" the Estate. It is also wise to provide each beneficiary with a short summary of what you did with the Estate's funds while you were executor. This is called an "informal accounting".
If you have any questions about what to do as executor of a New Jersey estate, feel free to contact me.
TAX ADVICE DISCLAIMER: Any tax advice contained in this communication (including attachments) was not intended or written to be used, and it cannot be used, by you for the purpose of (1) avoiding any penalty that may be imposed by the Internal Revenue Service or (2) promoting, marketing, or recommending to another party any transaction or matter addressed herein.
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