Tag: Debts and Obligations

Which Bills Should You Pay First When Serving as the Executor or Administrator of an Estate?

Posted on | by Tom

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:

  1. Reasonable Funeral Expenses
  2. Costs of Estate Administration
  3. Debts for the reasonable value of services rendered to the decedent by the Office of the Public Guardian for Elderly Adults
  4. Debts and taxes with preference under federal law or the laws of this State. Medicaid liens fall in this category as well[2]
  5. Reasonable medical and hospital expenses of the last illness of the decedent, including compensation of persons attending him or her
  6. Judgments entered against the decedent according to the priorities of their entries respectively
  7. 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

Posted on | by Tom

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:

  1. Introduce the will into court for probate
  2. Notify the next of kin and the beneficiaries
  3. Locate all assets
  4. Identify all debts and obligations
  5. Pay the obligations in the order of priority
  6. Filing income and/or estate tax returns, where applicable
  7. Distribute the remainder to the beneficiaries
  8. 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.