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Inheritance Taxes and How They Can Affect Your Planning
New Jersey is one of the six states that has an inheritance tax.[1] This means that if you live in New Jersey (or if you own property in New Jersey), the beneficiaries of your estate may need to pay a tax depending on how much they inherit, what type of asset they inherit, and their relationship to you.
Who is exempt and who has to pay?
Class A beneficiaries are exempt from the inheritance tax. Class A beneficiaries are your spouse, children, stepchildren, grandchildren, parents, or grandparents. They do not have to pay an inheritance tax in New Jersey. This means that not all of your relatives are Class A beneficiaries. You may love your niece as a daughter, but she could be subject to an inheritance tax if you leave her a part of your estate in your Last Will & Testament or Revocable Living Trust.
Class C[2] includes your siblings and your son in law (or daughter in law). The first $25,000 is exempt, but anything more than that is subject to a tax that starts at 11% and is based on a graduated scale.
Class D beneficiaries include everyone else who is not in A, C, or E. Your nieces, nephews, friends, or significant other are Class D. There is a $500 exemption after which they have to pay at least 15% on any inheritance which is subject to the tax.
Class E beneficiaries are tax exempt entities such as charities. They do not have to pay an inheritance tax.
What Assets are Subject to the Inheritance Tax?
Most assets are subject to the inheritance tax including bank accounts, IRAs, real property, personal property. Life Insurance, however, is not subject to inheritance tax in New Jersey.
Notable Exceptions
Interestingly, Life Insurance is not subject to Inheritance Tax. Payments from certain pension plans such as the New Jersey Public Employees Retirement System, the New Jersey Teachers’ Pension and Annuity Fund, and the New Jersey Police and Firemen’s Retirement System are not subject to Inheritance Tax. Also, in New Jersey, there is no inheritance tax on gifts made during lifetime so long as the gifts were made 3 years before death
How Does this Impact Your Planning?
Since not everyone is subject to an inheritance tax and among those who are, not everyone is subject to the same rate, it would be wise to consult with a specialized estate planning attorney when creating your estate plan so that you can maximize the amount of money going to your beneficiaries and minimize the amount going to taxes. Additionally, it would be important for your beneficiaries to know who has to pay the inheritance tax – by making the estate pay the taxes out of the residue, it would make it easier for the Executor to administer the estate as he or she can avoid chasing after the various non-Class A beneficiaries to pay up, but it also would mean that less money would go to the residuary beneficiaries.
Example:
Bob is a widower. He and his late wife never had children, but he has two siblings, two nephews, and three close friends who he would like to include in his Will. He would like to give his seven beneficiaries 1/7 of his total $500k estate.
Half of Bob’s estate comes from his life insurance policy; in which Bob had named his wife as the beneficiary but never updated it when she died, nor had he named any contingent beneficiaries. This means Bob’s estate became the beneficiary upon his death and his seven beneficiaries now have to pay inheritance taxes on their respective shares
Result: Each beneficiary inherits $71,428, but the siblings would only have $66,321 after taxes and the other beneficiaries would have $60,714 after taxes. Out of the $500,000 estate, $63,784 or 12.7% will go to the State.
What could Bob do differently?
If Bob goes to an estate planning attorney, the attorney can advise Bob that his beneficiaries are subject to an inheritance tax, and that his nephews and friends are subject to a greater tax than his siblings.
With this awareness, Bob can be more strategic in how he distributes his estate, can reduce the total amount paid in taxes, and can allow for each beneficiary to inherit more money.
Instead of splitting the estate in 7 equal parts, Bob can split his life insurance amongst his five class D beneficiaries, giving each one 20% of the policy. To make it up to his siblings, Bob can give each sibling 30% of his estate and divide the remaining 40% amongst the class D beneficiaries, giving each one 8% of the estate.
By doing this, each sibling will receive $69,500 instead of $66,321, and the nephews and friends will receive $67,000 each instead of $60,714. Out of the $500,000 estate, only $26,000 or 5.2% goes to taxes.
Conclusion
An estate planning attorney can help you achieve the best results for your beneficiaries. Not only would the attorney have advised Bob on proper titling of all probate and non-probate assets but could have helped ensure which beneficiaries inherit what amount and from where. Just splitting the estate equally might sound fair, but as you saw with Bob, it created a not so great outcome for all of his beneficiaries.
[1] Iowa is phasing its out and is set to be gone by 2025.
[2] Class B no longer exists.
When Your Estate Plan Does Not Match Your Assets
Henry is a widower with three children. He wants his children to inherit in equal shares, and he hires a lawyer to create his Will.
The lawyer creates the Will using Henry’s instructions, and six weeks later, Henry signs in front of two witnesses and a notary.
The Will is valid, and as far as Henry is concerned, his work is over. When he dies, his children will inherit equally. Unfortunately, Henry did not understand that the Will applies only to probate assets, i.e those assets that go into the estate upon death. The will does not apply to his non-probate assets, assets that bypass the Will because they automatically belong to someone else upon the owner’s death.
Henry did not discuss with his lawyer what arrangements he needs to make to ensure that all his assets flow the way he wants once he dies. He thought the Will was all that he needed.
What happens to Henry?
Five years later, Henry is having health issues and is struggling with his bills. He has the money, but he is tired, sleeps a lot, and does not always remember which bill is due when. Henry’s son Kevin creates a joint account with Henry, so that Kevin can pay his father’s bills for him.
Kevin does so, dutifully, until his father dies two years later.
Henry named his good friend Mark to be the executor of the estate. Mark knew that Henry had wanted his assets to be equally divided amongst his children. Unfortunately, Henry’s assets were not set up to allow for this.
While trying to administer the estate, Mark ran into three different problems.
Problem #1: The Joint Account
The joint account that Henry and Kevin both had access to had $50,000 in it when Henry died – money that Henry had put into the bank. Kevin’s siblings want him to share the money, as Henry’s Will states everything is to be split evenly.
Kevin refuses, stating that the money is legally his, as that is what the bank has told him. He is angry that his siblings did not do more to help him when their father was struggling, and he does not think they deserve the money.
The siblings go to Mark for help, but there is nothing Mark can do. The joint account is a non-probate asset, which means that the Will does not apply to it. as The account automatically belongs to Kevin once Henry has passed away.
Problem #2: The Life Insurance
When Henry was younger, he purchased a life insurance policy for $100,000, and named his brother, Cory, as the beneficiary. When Henry got married and had children, he forgot to update the beneficiary on the policy. Therefore, when Henry died, the money went straight to Cory. Mark asks Cory to give the money to Henry’s children voluntarily, but Cory cannot because he owes a lot of back child support, and the government took takes the money as soon as it reaches his account.
Problem #3 The IRA
Henry also had an IRA (Individual Retirement Account) when he died. He had made his wife the beneficiary, but he never updated the policy when she died, nor did he name contingent beneficiaries. Mark was able to get the IRA into the Estate, so it could be shared amongst the three children, but this led to a poor tax consequence. When an estate inherits an IRA, it must be cashed out within five years.
If Henry had named his children as the beneficiaries, they could have stretched the payout over ten years, which would have allowed them to pay less in income taxes.
What could Henry have done differently?
If Henry had aligned his non-probate assets with his estate plan, his children would have inherited all his money equally in a tax efficient manner, as he intended when he created a will. Henry could have done several things differently to have a better outcome for his children.
Instead of having a joint account with Kevin, Henry could have appointed Kevin his power of attorney, which would have allowed Kevin to help Henry with the bills without making Kevin an owner of the account.
Then, Henry could have made each of his children equal beneficiaries of the joint account. The bank account would still have bypassed the Will, but it would have been allocated the way Henry wanted.
Additionally, Henry could have updated his life insurance policy and IRA , naming his wife as the primary beneficiary of each policy and his children as contingent beneficiaries, inheriting equally. Therefore, when Henry’s wife passed before him and there was no longer a primary beneficiary, the contingent beneficiaries were still in place to automatically inherit the policies upon Henry’s death.
When you are creating an estate plan, it is important to understand how that plan will treat your probate assets, and what you need to do with your non-probate assets to make sure they pass on the way you intend. It is essential to review your estate plan each time you have a life event, and make sure that the designations on your accounts reflect how you want them to be distributed. It is also important to name contingent beneficiaries in case your primary beneficiary pre-deceases you. When working with an estate planning attorney, always be sure to discuss how to make changes to all your assets to ensure they align with your overall estate planning goals. Life is full of changes – make sure your estate plan and accounts don’t get left behind.
What Is a Living Will, and What Does It Mean to Me?
When an RLG team member sits down with a client to discuss designing their estate planning documents, we are often met with confusion when we bring up the topic of creating a “Living Will.” Clients often have already completed a Living Will document at the hospital before going in for surgery or through AARP – in this document, you would specify “medical treatments you would want to be used and those you would not want to be used to keep you alive, as well as your preferences for other medical decisions, such as pain management or organ donation” (Mayo Clinic Staff). However, in our office, we set up the Living Will so that this document seeks to address only one medical-related decision, which we will cover in the next paragraph. Clients also often think that the “Living Will” is the same as the “Last Will and Testament” because both documents share the word “Will” in the title. This article is intended to clarify the confusion about what a Living Will document is and what purpose it serves.
A Living Will is a legal document that is part of your “advance healthcare directives.” It contains a set of legal instructions laying out your wishes for the termination of artificial treatment if you are unable to make your own healthcare decisions (for example, if you are in a coma or vegetative state and there is no chance of meaningful recovery). The Living Will works in conjunction with another key advance healthcare directive document – the Healthcare Power of Attorney (HCPOA) document. The HCPOA document appoints one or more individuals to make healthcare decisions on your behalf if you cannot make them yourself. Although the HCPOA document is central to one’s advance healthcare directives, the Living Will is even more significant for some. But what is a Living Will?
Imagine that you are given a multiple-choice test that reads as follows:
In the event that I am terminally ill, with no chance of a meaningful recovery, whom do you want to make the final “end-of-life” decision?
- Two physicians
- The person whom I have appointed to make healthcare decisions on my behalf (aka my Healthcare Representative)
If you answered “A.” to the above question, you are saying that you want to execute a Living Will. This document allows you to clearly state in no uncertain terms that in the event you are terminally ill with no possibility of recovery, and you cannot live without artificial support (i.e., if you are irreversibly brain dead and cannot breathe without a ventilator), you authorize two physicians to make the final “end-of-life” decision to terminate life support (it is important to stress that typically, physicians would only make this decision after consulting with the family, but they take away the burden of having a family member make this decision).
If you answered “B.”, you choose NOT to sign a Living Will – instead, the “end-of-life” decision will remain the responsibility of your Healthcare Representative. Simply put, if you want the end-of-life decision to be made by two physicians, you sign a Living Will. If you want the end-of-life decision made by the family member or friend you have appointed as your Healthcare Representative, you do not need to sign a Living Will.
Although the terms may be simple, the decision of whether or not to sign a Living Will is often very difficult. It is important to remember that there is no right or wrong answer – signing a Living Will is a completely subjective decision based on your personal feelings and values, as well as the personal feelings and values of your healthcare representatives. On the one hand, some people say, “I am going to sign a Living Will as I do not want my Healthcare Representatives to bear the emotional burden of making the end-of-life decision, even if they know that is what I want.” On the other hand, others may say, “ I am not going to sign a Living Will as I do not feel comfortable with two strangers making such an important decision that will impact my family and me.” Both points of view are equally valid. Whatever your decision may be, it is essential to have an open and honest discussion with those closest to you about your choices for end-of-life care.
Mayo Clinic Staff. Living wills and advance directives for medical decisions. Mayo Clinic, 2022, https://www.mayoclinic.org/healthy-lifestyle/consumer-health/in-depth/living-wills/art-20046303
Why Pay for a Lawyer?
Why Pay for a Lawyer?
Legal services can be expensive. In estate planning, hiring a lawyer to design and draft an estate plan that includes a Will or a Trust and one or more Powers of Attorney can cost thousands of dollars.
What is it, exactly, that you are paying for? You know it’s possible to create your own Will using online software for a few hundred dollars. This option seems appealing when all you have to do is answer some questions, and the documents will be ready in minutes, while a law firm may take several weeks. Isn’t it just cheaper and faster to do it all yourself?
This is a common line of thinking for many people who want a will or trust, but experience “sticker shock” once they consult with a lawyer. However, most people who think this way don’t realize that what you are actually paying for is the lawyer’s expertise, which can save you time and money in the long run. If you don’t know what you don’t know, how can you be sure that the documents you create will achieve your goals? That’s where a specialized lawyer comes in. Abraham Lincoln once said, “A lawyer’s time and advice are his stock in trade.” Without a lawyer’s expertise, the documents you draft may create more issues for you or your beneficiaries in the future.
Here is one example:
Improperly Drafted General Durable Power of Attorney:
Dan is a widower with one adult son, Kevin. He wanted to create an estate plan, but the law firm he called quoted $2,500, which Dan thought was too expensive. Instead, Dan created his own documents online for $500.
Five years later, Dan is ill, and Kevin wants to move Dan into a facility where he can get the proper care. Unfortunately, the General Durable Power of Attorney Dan created did not give Kevin the authority he needed to sign a lease on Dan’s behalf, nor did it reference the critical New Jersey banking statute so Kevin could access Dan’s bank account to pay the rent.
If Dan still has the cognitive capacity, he can hire a specialized estate and elder law attorney to create the proper documents. But if Dan is incapacitated, Kevin will have to seek a guardianship, which is a lengthy and expensive court process.
In the end, trying to save a few thousand dollars on documents in the short term could cost Dan and Kevin much more overall. Our advice – If you don’t know what you don’t know, lean on the expertise and experience of the right lawyers who have spent hours researching the law and can guide you on achieving your goals.
Want to discuss if RLG is the right fit for you? Contact us today!
What to do if Your Income is Too High for Medicaid
What to do if Your Income is Too High for Medicaid?
Ben is retired. He receives a pension and social security totaling $4,000 a month and uses this money to pay for all his expenses, including rent, food, transportation, etc. Other than his home, Ben has less than $1500 in savings.
In the past six months, Ben has had two falls; the second one caused him to go to the hospital. As such, Ben’s doctor recommended that he no longer live alone. Ben’s son, James, finds an assisted living facility nearby so Ben can still see his friends and James can take care of his father’s needs. Unfortunately, the facility is expensive, costing over $6,000 a month. If Ben does not receive some assistance, he will run out of money.
James wants to apply for Medicaid benefits for his father. However, he has heard from one of his friends that Medicaid will only accept you if your income is less than $2523 a month (which is the 2022 income cap limit) – even if all your other income is going towards paying the facility bill but the income is still insufficient to cover the total cost of care. What can James do to help his father get on Medicaid?
James can and should contact an elder law attorney for help because a qualified attorney can set up a Qualified Income Trust or a QIT. Sometimes, this is referred to as a Miller Trust.
A QIT is a special Trust that can help Medicaid applicants whose income exceeds the threshold amount to become financially eligible for Medicaid. The Trust can accept the excess income, but the Trustee will need to use all the money coming in to pay the facility. A qualified attorney can ensure that the trust is drafted correctly so that it not only gets accepted by Medicaid but also, the attorney can guide the Trustee on how to properly administer the trust after it receives the income each month so that the applicant becomes eligible for Medicaid and maintains their eligibility after being approved.
If you have further questions or need assistance with a QIT, don’t hesitate to get in touch with us today.
Which Bills Should You Pay First When Serving as the Executor or Administrator of an Estate?
The Executor (when there is a Will) or Administrator (when there is no Will) of an Estate has several responsibilities. One of them is to pay off the debts and expenses of the Estate.
But what happens in those situations where the estate has very few assets but a whole lot of debt (i.e. potential creditors of the estate who have valid claims against the Estate to get paid back for monies owed by the decedent during the decedent’s lifetime)?
In such situations, it is important to point out that not all creditors stand on equal footing. Some have higher priority than others, which means they should pay paid first. So, the first most important advice we can give you is to consult with an attorney immediately.[1] This means, don’t feel the need to immediately write out checks to different companies or individuals whom you may think needs to get paid just because a bill came your way. All parties know that an Executor/Admin needs time to (1) get appointed; (2) take care of funeral arrangements; (3) marshal up the assets and liabilities in the estate, including tax burden if any; and (4) finally start paying off the liabilities. If you start to pay the bills as you receive them, instead of in order of priority, you run the risk of running out of funds, and then being sued by a higher priority creditor because you mismanaged the Estate.
Each state has its own rules on what priority each creditor has. In New Jersey, our statute NJ Rev Stat § 3B:22-2 (2013) states that the order is as follows:
- Reasonable Funeral Expenses
- Costs of Estate Administration
- Debts for the reasonable value of services rendered to the decedent by the Office of the Public Guardian for Elderly Adults
- Debts and taxes with preference under federal law or the laws of this State. Medicaid liens fall in this category as well[2]
- Reasonable medical and hospital expenses of the last illness of the decedent, including compensation of persons attending him or her
- Judgments entered against the decedent according to the priorities of their entries respectively
- All other claims
Sometimes, it is not obvious which creditor has the superior claim. For example, if the decedent owned a house, and the house had a mortgage, then the mortgage company would have a superior claim to the house than the Office of the Public Guardian, even though mortgages are not on the above list. Similarly see footnote 2.
Finally, not everyone seeking money from the Estate has a valid claim. Just because you are asked to pay does not mean that you should. If you are unsure if a debt is valid, you should request to see supporting documentation.
Conclusion: If you are the Executor/Administrator of an Estate, and you are having trouble determining which creditors have a valid claim or how to prioritize the claims you know to be valid, you should consult an attorney for assistance. Any payments made to the attorney/law firm should be covered under the Estate assets, so you do not have to use any of your personal funds to engage the attorney’s services.
[1] At this time, our office offers a 30 minute complimentary consultation with our team where you can present your issues, and we can guide you on whether or not you can handle matters on your own or if you need a professional to assist you in moving forward.
[2] But be very careful here, because certain Medicaid liens trump all others so, please consult with an Elder Law firm before paying debts of someone who was on Medicaid before he or she passed.
What to Know if You Are the Executor
The executor of an estate has an important job. He or she has been entrusted to follow the wishes of the deceased, and it is important that the executor understands the expectations set in the will, understands the law in the presiding state, and is able to adhere to both as much as possible.
The executor has eight main tasks:
- Introduce the will into court for probate
- Notify the next of kin and the beneficiaries
- Locate all assets
- Identify all debts and obligations
- Pay the obligations in the order of priority
- Filing income and/or estate tax returns, where applicable
- Distribute the remainder to the beneficiaries
- Close the estate
How to Introduce the Will
Every county has a procedure for introducing the will into the local surrogate’s court.
Typically, the executor must provide the original will, an official death certificate, the required information about the deceased, the names and address of the next of kin and the beneficiaries, and the required identification information about the executor.
If the court accepts all the documents, then it will issue the Letters Testamentary and the Executor Short Certificates. This documentation establishes that the executor can act on behalf of the estate, and it will be needed when interacting with different fiduciaries or institutions on behalf of the estate.
Notify the Next of Kin and the Beneficiaries
Once the court accepts the will into probate, the executor must notify the next of kin and the beneficiaries. The executor must also make a copy of the will available to them upon request.
New Jersey requires that notice be sent through certified mail. New Jersey also has a time limit for notifying beneficiaries. The clock starts once the will has been accepted into probate.
An attorney can help make sure that the executor meets any statutory deadlines. An attorney can also help if a beneficiary’s address is unknown or cannot be found.
Once the necessary parties have been noticed, the executor must turn over to the court proof that the beneficiaries received proper notice and that they received the notice in time.
Locate all Assets
The executor must find all assets that the decedent owned. If these are probate assets, the executor must get control of them so they can be used to pay off the decedent’s debts. The rest can be distributed in accordance with the will.
Unless the decedent had prepared his or her estate planning documents through a specialized estate planning firm that prepared a comprehensive asset spreadsheet as part of the estate plan, it is hard to know what the decedent owned or how to get control of it. Moreover, the decedent could have lived in different states or countries having different assets in different places. Sometimes, the custodian of the property is not cooperative. An attorney can be helpful if you are having trouble locating the decedent’s assets or getting estate assets released.
Identify All Debts and Obligations
New Jersey has specific rules about the order of priority when it comes to paying the decedent’s debts. It is important that the executor pays the bills in the correct order because if the funds run out, and the executor paid lower priority bills before higher priority bills, the creditor could sue the executor for its loss. Additionally, the executor has to be aware of whether or not federal or state death taxes are due from the estate and must review the will to see who (the estate or the individual beneficiaries) are responsible for payment.
In New Jersey, the costs of the administration are one of the higher priority bills, which includes any attorney’s fees and the executor’s commission. New Jersey also regulates how much the executor is allowed to be paid based on the size of the estate. If the estate is large or difficult to manage, it may make sense to hire an attorney to help with the administration and ensure that the proper procedures are followed.
Filing Income Tax Returns, Where Applicable
Depending on how long the estate will be kept open, the executor has a duty to report all income earned by the estate during this time. The deadline for this filing is based on either a calendar year or a fiscal year and must be reported on a Form 1041. NJ no longer has an estate tax, but if the worldwide assets of a decedent are greater than the exemption, or if the decedent was a NY resident with significant assets, then a federal estate tax return or NY state estate tax return may be due. Finally, where the estate assets are below the threshold, there may still be a need to file an estate tax return to elect portability.[1] In these cases, it is extremely important that the executor review the will carefully to see who can pay the taxes—the individual beneficiaries or the estate out of the residue.
Distributing the Remainder to the Beneficiaries
Once the bills have been paid, the executor is to distribute the rest of the assets in accordance with the will. Not all gifts to beneficiaries have the same priority. There is a difference between an equal distribution of estate residue to the children of the decedent and giving specific assets/bequests to specific beneficiaries.
It is important that the executor understands the difference and correctly distributes the assets, or else he or she can be held personally liable for any mistakes.
This is especially important when the executor is one of the beneficiaries. The executor has the ability to make decisions on behalf of the estate including liquidating assets and distributing the cash, he or she must act in accordance with the will. The executor cannot use his or her position to unfairly distribute assets or disadvantage another beneficiary. An attorney representing the estate can also act as a check to make sure the executor is not exceeding his or her authority. New Jersey also requires paperwork be completed before the distributions to the beneficiaries. This involves securing releases from all beneficiaries to avoid personal liability for the executor for nonpayment of taxes or for making distributions to beneficiaries with outstanding child support obligation subject to wage garnishment. An attorney can help prepare all of the needed forms and make sure everything is properly accounted for and signed.
Closing the Estate
Once the bills have been paid and the assets have been distributed, the executor should file any outstanding estate or inheritance tax paperwork, where applicable, and then close the estate by filing a final court filing.
Closing the estate is important because if the estate is left open, then the executor is still personally liable should any new creditors emerge or if any beneficiaries complain after accepting his or her share.
Final Remarks
An estate administration will take at least nine months from the decedent’s death until the estate can be closed. In some cases, the administration can take much longer, potentially years depending on the size of the estate, the number of beneficiaries involved, the location of the assets, or any complications that arise along the way (for example. if there is confusion as to ownership of any assets or if any provisions in the will are unclear).
An attorney can help the executor by ensuring the proper procedures are filed, that the required paperwork is completed and submitted, and by acting as a buffer between the executor and the next of kin, beneficiaries, or the fiduciaries and institutions involved. All of this can ultimately help save the executor time and stress during what will be a difficult situation.
[1] Portability refers to the act of taking over a deceased spouse’s unused exemption which is to be added to the surviving spouse’s exemption.
Inheritance Planning: Stark Differences between U.S. Beneficiary & Indian Nominee Rights!
Certain persons of Indian descent, their progeny and spouses could qualify to register as Overseas Citizens of India giving them permanent residence rights among other things. Similarly in the United States, qualified individuals may acquire lawful permanent status in many ways including via employment or through family connections. Lawful permanent residents are popularly known as green card holders. Inheritance laws apply equally to citizens and permanent residents in these two countries. Recently, a few of us (accounting and legal professionals) from both India and the US, were researching inheritance planning issues related to “Overseas Citizens of India” and discovered significant differences in the United States and India when it comes to the succession of bank accounts from a deceased account holder to his or her ultimate beneficiaries. We will discuss these differences in this article as they apply to citizens and permanent residents.
On the US side:
Probate vs. Non-probate accounts: In the US, an account can be a probate asset or a non-probate asset, depending on how it is set up.
A probate account is an account owned in the sole name of the individual account holder, with no beneficiary designation(s) attached to it. Upon death, the probate account goes through the probate process, which is the legal route by which these accounts make their way through the Last Will & Testament (“Will”) of the deceased account holder (“decedent”) over to the beneficiaries named in the Will. Where there is no Will, the account has to pass through the intestacy laws of the State in which the decedent resided and the beneficiaries (or heirs) of the decedent are determined by State law. In either case, the probate process involves court supervision or oversight.
By contrast, if the account is non-probate, then it does not go through the same channels and instead the account passes directly to the beneficiary or beneficiaries by operation of law, by contract or by trust. Joint accounts, or accounts with a “Transfer on Death or TOD” beneficiary or a “Payable on Death or POD” beneficiary[1], life insurance policies or retirement accounts with beneficiary designations or assets inside of a Revocable or Irrevocable trust, are all considered non-probate assets. Except in limited circumstances (typically in matters of public policy, state law etc.), once an individual is named as a beneficiary of an account or is joint account holder with another, this individual becomes the legal owner of the account and inherits the account automatically – outside of the court system.
Therefore, in the US, upon on the death of an individual, things are relatively straightforward (especially if there is a Will in place). All probate assets in the name of the decedent pass into an estate account that is set up by the Executor named in the Will. To open the estate account, the Executor will need to appear at his or her bank of choice armed with a Death Certificate, photo ID, a Tax Identification Number or TIN# (in lieu of the decedent’s Social Security Number for taxes), and a Letters Testamentary (or Appointment Letter) procured from the Court. Similarly, if there was no Will, the same process is followed except that the individual stepping forward to serve – now called the Administrator – has to post a bond to secure the estate assets (as an insurance for the ultimate beneficiaries) before he or she can obtain the Letters of Administration from the Court.
It is pertinent to note that in either case, Courts as well as the banks do not proceed without first obtaining proper documentation from the individual stepping forward to serve and banks will likely be subject to liability if they fail to obtain the necessary documentation. More importantly, it is unheard of for banks and other institutions to transfer probate assets of a decedent directly to an account belonging to the Executor/Administrator. These accounts must be transferred to the estate account of the decedent and held there until the estate administration formalities are completed, including payment of any taxes/debts or other obligations of the estate, before money passes to the beneficiaries.
On the India side:
A bank/financial account can be held individually or jointly. Joint accounts can be held: ‘either or survivor’, ‘anyone or survivor’ or ‘former or survivor.’ Account holders are also often referred to as First Holder and Second Holder where if the first holder dies, the second holder automatically receives the beneficial interest in the account. However, all accounts (including those that are individually owned) can have nominee designations. Unlike the US where a nominee designation would be treated as a beneficiary designation, the person named as the nominee receives payment from the bank only “as a trustee of the legal heirs of the deceased depositor, i.e. such payment to him shall not affect the right or claim which any person may have against the survivor(s)/nominee to whom the payment is made.” [2]
So here is where things can get quite tricky, and often messy, when the nominee designations don’t match up to either the beneficiaries listed under the Will or, the account holder dies intestate i.e., where there is no Will, when the nominee designations do not reflect the lawful heirs of the estate.
Let’s start with what a bank is instructed to do – in an effort to alleviate the “tortuous procedures …[that] caused considerable distress” to family members upon the death of a deceased account holder, the RBI or Reserve Bank of India issued a circular stating that where accounts have a valid nomination, the bank has to follow a 3-step protocol, before paying out the balance directly to the survivor(s)/nominee, with full discharge of any liability against the bank for making such payments.
The three steps outlined were that the bank:
- exercise due care and caution as to the identity of the survivor(s)/nominee and valid proof of demise of the accountholder;
- make sure that there was no court order restricting the Bank/institution from making such payment; and
- makes it clear to survivor(s)/nominee that payment is being made to him or her only as a trustee of the funds and that valid beneficiaries to the funds could have a claim against the survivor(s)/nominee.
But interestingly, there is also some indication to suggest that if banks insists that the survivor(s)/nominee produce legal documentation like the succession certification, Letter of administration or probate etc., or ask for him or her to obtain a bond, that would actually “invite serious supervisory disapproval”[3]. Where there are no nominee designations, the bank is “advised to adopt a simplified procedure for prepayment to legal heir(s)…keeping in view the imperative need to avoid inconvenience and undue hardship to the common person.”[4]
It follows that if the nominee designation does not match the Will of the succession rights of the beneficiary, then the legal heir’s only option is to fight it out in court. In an article on the subject, S.S, Rana & Company cite Supreme Court cases where the Court has held that the nominee is only a custodian of the account[5]. Moreover, Section 72 of the Companies Act, 2013, states that while the nominee shall become entitled to all the rights in the shares and debentures of the company immediately upon the death of the shareholder, the rightful ownership of shares remains with the legal heir and not the nominees[6]. Courts in India have time and again reiterated that the legal heir is the ultimate, rightful owner of the property of a deceased individual, a nominee (pursuant to a nomination given by the deceased during his / her lifetime) would act only as a trustee on behalf of the rightful legal heir(s), and hold such property until the matter of succession or inheritance is decided and implemented. Even in the case of a minor being a nominee and not a legal heir, the natural or legal guardian acting on behalf of such minor nominee has to act as Trustee on behalf of the legal heirs.
Complexities increase where there is no testamentary instrument, and the personal law of the decedent provides a certain set of rules/guidelines for devolution of the estate on the legal heirs. For example, in the case of a Hindu male, Class 1 heirs (mother, children, grandson of his predeceased son and so on) who get priority over his assets, leave out the father, who is not considered an immediate legal heir and therefore has no right to his son’s assets[7].
Some exceptions to the above are in the case of life insurance or Relief/Savings Bonds where the nominee is also considered the beneficial owner and therefore entitled to the proceeds of the policy or the bonds.
Solution for both countries –
It is imperative for anyone with assets located both in India and overseas to execute a well thought succession plan. One must aim at erasing confusion over the nominees and his/or legatees/beneficiaries. One must not only consider setting up a Will (in all countries where applicable) clearly delineating the various beneficiaries under the Will but also to methodically and systematically go through every single account and align nominee designations in accordance with the Will. Nomination and Will must be in harmony.
Those who are US citizens/residents should understand the contrasts that exist in the two countries where a beneficiary designation trumps the Will in almost every case in the United States whereas it follows a completely different treatment in India. The easiest way to ensure a smooth and a seamless transition to your loved ones in India, is to ensure that the nominee designations mirror your intention, irrespective of a Will being made, listing the true and intended beneficiary of the account.
Our goal as planners and professional advisors is to guide families to pass on their wealth to the intended beneficiaries in a clear and hassle-free manner. This means keeping families out of the judicial system and not have legal heirs bring a court action to assert his or her lawful claim over the estate assets against an unscrupulous nominee. Unfortunately, in its efforts to make things stress-free for grieving families, the Indian banking system may have inadvertently made it more difficult for lawful beneficiaries to claim what may have been theirs.
Contributing Authors:
Poorvi Chothani, Esq. is the founder and managing partner of LawQuest, an employment and immigration boutique law firm. Poorvi, a graduate of University of Pennsylvania, is admitted to the bar in India and the USA and is a registered and practicing solicitor, England and Wales.
Sujatha R. Krishnaswamy is a Chartered Accountant & MBA from Georgia Tech. She is also the co-founder of Crestworth Management Partners Pvt. Ltd., management consultants & tax advisors, based in Bangalore, with a special focus on Indian and U.S. taxation for individuals.
Roopa P. Doraswamy, B.A., L.L.B (Hons), J.D., is a Co-Founder at Flywork Innovations Pvt. Ltd, a SaaS enabled marketplace for legal and compliance. She is a graduate of National Law School of India University (NLSIU) Bangalore and Northeastern University School of Law, Boston
Sushma Nagaraj, B.A., L.L.B from Bangalore University, India is a qualified lawyer in India who manages an independent private law practice. Her specialty is in the areas of estate, trust and property laws in India.
Rekha V. Rao, J.D. from the Elisabeth Haub School of Law at Pace University is the principal and founding member of Rao Legal Group, LLC. She is licensed to practice in New York and New Jersey and has developed her firm’s niche in the areas of estate planning, estate & trust administration, elder law, guardianship, and special needs planning.
Priya Gidwani is the CFO and founding member of Rainmaker. As a CFO with emerging, growth and mid-market companies, Priya’s experience spans everything from helping to launch start-up enterprises to managing finance for mid-size companies. Priya also has significant experience of working in the US with companies like Siebel Systems Inc. and Providian Financial Corporation. Priya is a Chartered Accountant from India and holds a Master’s degree in Accounting from Illinois State University.
[1] Note that not all bank accounts have or offer a POD or TOD designation but if it does (part of the contract), then such accounts will pass directly to the named beneficiary or beneficiaries and bypass probate
[2] Settlement of Claims in respect of deceased depositors – Simplification of Procedure; RBI/2004-05/490, DBOD. No. Leg. BC. 95/09.07.005/2004-05, 2(A)(2.1)(c),
https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=2284&Mode=0#:~:text=Banks%20are%20advised%20to%20settle,(s)%2C%20to%20the%20bank’s [emphasis added]
[3] Id. at 2(A)(2.2).
[4] Id. at 2(B)(2.3)
[5] In its article, Legal heir or Nominee? Who is the rightful owner?, some cases cited to are: Shalkti Yezdani v. Jayanand Janat Salgaonkar, Smt. Sarbati Devi and Anr. V. Smt. Usha Devi, Uma Sehgal and Ors. vs. Dwarka Dass Sehgal And Ors etc.,
https://s3.amazonaws.com/documents.lexology.com/6edb5a5b-1308-4947-bfac-5f69d1f58278.pdf?AWSAccessKeyId=AKIAVYILUYJ754JTDY6T&Expires=1650889871&Signature=dfN8XJOf4BRwSKqO3v4VdBueUbE%3D
[6] Id.
[7] Wrong Nominee and right nominee for bank A/cs, FDs, mutual funds, financial assets by Pragati Kapoor & Preeti Motiani, ET Online (2021), https://economictimes.indiatimes.com/wealth/legal/will/wrong-nominee-and-right-nominee-for-bank-a/cs-fds-mutual-funds-financial-assets/articleshow/85396026.cms?from=mdr
New Jersey’s Intestate Share Title 3B:5-3: Intestate share of decedent’s surviving spouse or domestic partner
The intestate share of the surviving spouse or domestic partner is:
a) The entire intestate estate if:
- No descendant or parent of the decedent survives the decedent; or
- All of the decedent’s surviving descendants are also descendants of the surviving spouse or domestic partner, and there is no other descendant of the surviving spouse or domestic partner who survives the decedent.
b) The first 25% of the intestate estate, but not less than $50,000.00 nor more than $200,000.00, plus three-fourths of any balance of the intestate estate, if no descendant of the decedent survives the decedent, but a parent of the decedent survives the decedent.
c) The first 25% of the intestate estate, but not less than $50,000.00 nor more than $200,000.00, plus one-half of the balance of the intestate estate:
- If all of the decedent’s surviving descendants are also descendants of the surviving spouse or domestic partner and the surviving spouse or domestic partner has one or more surviving descendants who are not descendants of the decedent; or
- If one or more of the decedent’s surviving descendants is not a descendant of the surviving spouse or domestic partner.
IN PLAIN ENGLISH
If your spouse or domestic partner dies without a Will, then
- You, as the surviving spouse, can inherit the entire estate only if you and the decedent had children together, and these children were the only children from that marriage (and there were no other children from other marriages or relationships).
- If you are the surviving spouse, and you and the decedent had NO CHILDREN together AND if the decedent’s PARENTS are still alive, then you are entitled to get the first 25% of the decedent’s estate up to the first $50K and 75% of the remaining balance. The decedent’s parents get the rest!
- If you are the surviving spouse, and you and the decedent HAD CHILDREN/DESCENDANTS FROM OTHER MARRIAGES OR RELATIONSHIPS who are alive, then you are entitled to get the first 25% of the decedent’s estate up to the first $50K and 50% of the remaining balance. The other children get the rest!
TAKEAWAYS
- Understand the difference between probate assets and non-probate assets (check out our website for our blog posts about that) and know that the intestate estate only deals with probate assets.
- If you are (1) newly married; (2) do not have children; or (3) have a blended family, get yourself a Will now!!