Understanding the Role of The Executor or Administrator: A Checklist of Responsibilities to Follow
Here is an Easy to Follow Checklist of Responsibilities for an Executor or Administrator to Follow When Handling an Estate:
The primary goal of having a Will probated is to have the County Surrogate formally approve it and to appoint the individual named in the Will to serve as the Executor or Executrix. The Surrogate does this by issuing letters of Executorship to the named person. These letters of Executorship serve as legal proof that the person appointed as the Estate’s representative has the legal authority to act and act on behalf of the Estate in order to finalize the affairs of the Estate and further the instructions of the decedent as expressed in the Will. The executor will need proof of his or her authority when dealing with creditors, banks, custodians, government agencies and all third parties.
When a person is named an executor (also known as a personal representative), they are given the responsibility of settling the final affairs of a decedent. Essentially, an executor is accountable to protect a deceased person’s property until all debts and taxes have been paid, and then to ensure that the Estate property is transferred to the individuals to whom it was intended (called beneficiaries).
The law does not demand an executor to be a legal or financial expert, but it does require the highest degree of honesty, impartiality, and diligence upon this person. This responsibility is called a “fiduciary duty” – the legal duty to act solely in another party’s best interest.
When a Will is probated, all beneficiaries named in the Will (and next of kin) must be notified by the executor in writing that the Will has been probated. The executor is legally obligated to diligently research and find the whereabouts of all property owned by the deceased at death and the whereabouts of all beneficiaries and next of kin under the Last Will.
The Executor must also open an estate checking account or other depository location for estate monies and assets. An application for a Federal Tax I.D. number for the Estate and other formalities required under the New Jersey Probate Code should be diligently followed by the executor/administrator as part of his or her statutory obligations.
Checklist of Duties of the Executor or Administrator
Additional Duties Required of the Executor or Administrator
There are a lot of tasks facing a newly appointed executor or estate administrator. That’s why I’ve created this brief checklist for you. Not everything is listed here but you can refer to the prior page “Checklist of Things to do When a Person Dies” for even more information you may need to fulfill your responsibilities (Click Here).
HERE YOU GO
- The Executor will need to obtain an Estate tax identification number from the IRS. The decedent’s social security number can no longer be used. Thereafter an Estate checking account(s) should be opened in the name of the estate.
- The Executor should conduct an inventory of the assets of the Estate. An inventory is a brief description and value of the assets of the Estate that will come into the hands of the personal representative.
- The Executor must obtain information about all outstanding bills, debts and legal obligations of the deceased. There is a statutory order of priority in which the debts of the Estate must be paid whether the Estate is solvent or insolvent. With an insolvent Estate the order in which debts are paid is highly relevant because an insolvent Estate can’t pay all its bills. When the Estate is insolvent the Executor should file an application with the Court to have the Estate declared insolvent and to approve the creditor payment plan. The order of priority are funeral expenses, administration expenses, office of the Public Guardian for the Elderly, debts with preference under federal and state law, Medicaid liens, expenses of a final illness, judgments and then all other debts. (NOTE: With proper advice, it is possible for the Executor or Administrator to request an Order to Limit Creditors issued by the Surrogate to protect against undiscovered obligations.) As I stated there are many statutory liens and other potential liabilities that must be researched and satisfied otherwise the estate representative (Executor, Administrator, Personal Representative) can be held personally liable if unpaid. This is a significant legal risk that must be understood by the estate representative. That’s why an experienced probate attorney is so helpful during the process.
- Organize and pay all uncontested bills and resolve all issues regarding questionable bills, debts and/or legal obligations.
- Establish the value of assets and estate property as of the date of death. Both the Federal Government and the state of New Jersey require that the valuation of assets be as of the date of death or sometime immediately thereafter, known as an alternate valuation date.
- Pay all financial obligations of the estate including executor’s fees, accountant’s fees, counsel fees. (NOTE: An Executor/Administrator is entitled by law to a fee or commission their services.)
- Apply for a New Jersey Tax Waiver(s). A tax waiver is a document issued by the State of New Jersey which releases the property from any tax claim by the State. In order to acquire a tax waiver, all death and inheritance taxes due to the State must be paid. If no taxes are due, a form must be filed to demonstrate to the New Jersey Transfer Inheritance Tax Bureau that the estate is tax exempt. Upon evidence that the estate is exempt from taxes and/or payment of any taxes due, the State will issue a tax waiver. You can then present the waiver to banks, brokerage firms, etc. Upon receipt, the tax waiver must also be presented to the county clerk in the county where the real estate is located. Once filed, the real estate is released from the state tax lien. (Tax waivers are discussed extensively in this site on a later page)
- File the appropriate NJ estate, inheritance, and income tax returns. There are statutory time limits for these filings to avoid interest and penalties to the estate and beneficiaries. Generally, they are 9 months from the date of death for a Federal Estate Tax Return and 8 months for a NJ Inheritance Tax Return.
- When all obligations of the estate are satisfied, the executor should disburse the remaining estate assets to beneficiaries. Beforehand the executor should have each beneficiary execute a Refunding Bond and Release for the amount of the inheritance received. Failure to obtain this document subjects the executor to personal liability to future claims by creditors against the Estate. Each Refunding Bond(s) and Release(s) must then be filed with the County Surrogate’s Office.
- Initiate the transfer of property out of the deceased’s name and into the beneficiary’s name. This is known as transferring “title” or simply “change of ownership”. If property of the decedent is located outside of New Jersey, additional proceedings are probably necessary (Often referred to as ancillary probate), which means probating the will of the decedent in a state outside of NJ in order to legally transfer ownership of the property to the legal beneficiaries. See our page on ancillary probate and our video on this subject which can be found on this site.
Powers of Fiduciaries in NJ to Exercise the Rights of Shareholders, Members of an LLC & Partners in a Partnership
The Executor is the temporary proxy over corporate and business decisions of the Estate.
N.J.S.A. 3B:14-23(n) states that in the absence of contrary or limiting provisions in the judgement or order appointing an Executor or, in the will, deed, or other instrument, every fiduciary shall, in the exercise of good faith and reasonable discretion, have the power to vote in person or by proxy, discretionary or otherwise, shares of stock or other securities held by the estate or trust.
Accordingly, during the estate administration, an executor has the right to vote the stock and/or membership interest in the name of the deceased stockholder/LLC member at the time of his death, and not just the shares that have been left to the executor in the Will.
In voting shares of stock, etc. the Executor, as a fiduciary is under a duty to vote in such a way as to promote the interests of the beneficiaries or equitable owners. Where a fiduciary holds enough shares to actually or substantially control the conduct of the corporation, he or she is under a duty to exercise that control for the benefit of the corporation, LLC, Partnership.
Under the rule that the legal title to all personal property owned by a decedent at the time of his death becomes vested in his personal representatives, courts have usually held that the right to vote stock etc. follows the legal, rather than the equitable, title. Equitable owners, such as heirs, legatees, or creditors may receive the stock, or its value, when the estate’s administration is concluded; but in the absence of some authority to the contrary, equitable owners cannot exercise any control over the voting of corporate shares so long as the executor or administrator has not been discharged, or there has been no distribution of the estate’s assets.
In practically all instances where a decedent’s personal representative is authorized to vote the shares outstanding in the name of the deceased, they have been permitted to do so without the formality of having the stock transferred into their names in their fiduciary capacity. Where the executor’s or administrator’s authority to vote stock etc. is established, his or her right to vote the shares personally is unquestioned. However, where the vote is cast by proxy, some courts have held that the personal representative must be given specific authority as to how the proxy should be voted at the meeting if it is to be given effect. It has been held that for an executor or administrator to give a general proxy as a subagent of the fiduciary is contrary to law and serves to relieve the representative of his or her responsibility which must remain theirs alone.
Is it Too Late to Save on Taxes After Death: Tax Planning Options for the Executor?
Once appointed by the County Surrogate, the executor of an estate has many strategic decisions to make that may impact the tax liability of both the estate and the estate’s beneficiaries. Once made, many of those decisions become irrevocable or difficult to reverse. The following is a brief overview of some of the major decisions involved in filing a decedent’s final federal income-tax return (Form 1040), the estate’s federal income-tax return (Form 1041), and the federal estate-tax return (Form 706). I will also address New Jersey Estate and Inheritance tax returns on this page.
Decedent’s Final Return
Internal Revenue Code Section 6012(b)(1) charges the executor (or other person entrusted with the decedent’s property) with the responsibility for filing the final income tax return for the decedent. Because most individual taxpayers file on a calendar-year basis, the final tax year will usually cover the period from January 1 to the date of death. For a calendar-year taxpayer, the return is due on April 15th of the following year. An automatic six-month extension may be obtained by filing Form 4868 and paying any estimated tax due with the extension.
If the decedent was married at the time of his death, the executor can generally file a joint return with the decedent’s surviving spouse, provided the spouse has not remarried before the end of the calendar year. If not executor or estate representative has been appointed, the surviving spouse may file the joint return on his or her own.
Generally, married couples will obtain a better result by filing jointly rather than separately. In addition to the applicable tax brackets, there may be other reasons for filing jointly. For example, the decedent may have capital gain losses that cannot be carried over to the estate income-tax return. The executor may want to file jointly if doing so would allow the losses to be used against capital gains realized by the surviving spouse. On the other hand, by filing jointly, the executor becomes potentially liable with the surviving spouse for all taxes and penalties for the final tax year. Each case will present a different set of facts for this analysis. It also raises some ethical and fiduciary conflicts if the executor declines to join in on the tax return with the surviving spouse.
Medical Expenses. Unpaid medical expenses may be deducted as a debt on the decedent’s estate-tax return or deducted as a medical expense in the year incurred if paid within one year of the date of death. Generally, if the estate is nontaxable, taking the deduction on the final return will result in the greatest tax savings. However, where the estate is using both the applicable exclusion amount and the marital deduction to eliminate estate taxes, the executor’s decision regarding where to deduct the medical expenses may affect each beneficiary differently.
Estate Income Tax Return
Because the decedent’s final tax year ends on the date of death, the estate’s first tax year begins the following day and may be for a period of less than one year.
The executor is required to file an income-tax return for the estate for each tax year in which the estate has gross income for $600 or more or if any beneficiary is a nonresident alien.
Calendar vs. Fiscal Year
Initially, the choice of which year to select to file is a consideration. The taxable year is chosen on the first return. Unlike trusts, which must use a calendar year as a taxable year, estates may choose either a calendar or fiscal year. A fiscal year may be for a 12-month period that ends on the last day of any month other than December.
In many cases, the executor will want to choose a fiscal year that ends after the close of a beneficiary’s taxable year. The reason for this is that a beneficiary is deemed to receive his or her share of the estate’s income on the last day of the estate’s fiscal year, even if the distribution was made earlier. Let’s see how this works.
Illustration. Decedent dies on May 15 of Year 1. The tax year of the estate’s sole beneficiary is the calendar year. By choosing a fiscal year that ends on January 31, the executor assures that any income distributed during Year 1 will not be included in the beneficiary’s income until Year 2. Thus, you can postpone the effective date when the tax is owed.
If the decedent had a revocable living trust that became irrevocable at death, an election may be made to treat the trust as part of the decedent’s estate. If the estate has adopted a fiscal year, making the election would allow that year to be used for reporting the trust’s income.
Administration Expenses and Losses. A constant question coming up concerning the decedent’s final debts and expenses. Generally, an executor can choose to either deduct estate administration expenses and losses on either the estate’s income-tax return or the corresponding estate-tax return. If the estate tax is non-taxable, the executor will typically want to take all available deductions on the estate’s income-tax return. However, if the value of the gross estate exceeds the applicable exclusion amount ($675,000), different considerations come to play and the analysis becomes more involved. The executor will always want to get the most value dollar for dollar on the treatment of deductions.
The Estate-Tax Return. There are several important decisions an executor may need to make in connection with the estate-tax return.
Portability Election. Under the Federal Tax Code, if the estate of a married decedent is not greater than $5,430,000 in 2016 (increases annually with inflation) which under federal law triggers the filing of a federal estate-tax return, the executor may still want to preserve the unused exclusion amount for the surviving spouse. The tax code offers an election to the estate of any decedent who was a resident or citizen of the United States on the date of his or her death who is survived by a spouse. The executor must make this election on the estate-tax return.
Executors who fail to file the federal estate tax return (because the applicable exclusion renders the estate exempt from filing) but would like to make the portability election anyway may still be able to do so. Hence, the executor of the estate may file a complete and properly prepared Form 706 for the estate within nine (9) months of date of death, plus any applicable extensions.
Alternative Valuation Date. This concept is quite valuable to understand. Generally, the assets of an estate are valued as of the decedent’s date of death. However, the executor may elect to have estate assets valued as of the date six months later or even sooner if the assets are sold, exchanged, or otherwise disposed of prior to six (6) months. To make the election, the executor must demonstrate that the election will decrease both the value of the gross estate and the amount of the estate and generation-skipping transfer taxes. Before making this election, as the executor, you should consider the effect the election will have on other available elections. In some cases, the beneficiaries may be better off financially by keeping the higher date-of-death value because it will reduce subsequent capital gains and/or increase depreciation deductions because of the higher bias utilized for income-tax purposes.
Disclaimers. The use of disclaimers is an important tool when evaluating options in estate administration. While ultimately it is the beneficiary who must elect to make a “qualified disclaimer”, the executor will often be included in the decision and whether such election is best for the estate and the beneficiary. Timing is critical here because disclaimers must be made within nine months of the date of death. This election deadline is unrelated to the filing of the federal estate-tax return. It is based on the date of death so any extension of time to file the estate-tax return will not extend the period for making the disclaimer.
Proper administration of an estate requires the executor to make several strategic decisions – both tax related and otherwise – in a timely manner. Careful planning is essential for successfully fulfilling one’s fiduciary duties to the estate and the estate’s beneficiaries.
To learn more about tax waivers, see the following page entitled, “Transferring Assets to Beneficiaries During Probate”.
In order to protect and ensure that all functions of the executor/administrator are performed properly, it is wise to consult with Fredrick P. Niemann, Esq. who is an estate administration and probate attorney in New Jersey. He can be reached toll-free at
(855) 376-5291 or by email at firstname.lastname@example.org.
Fredrick P. Niemann, Esq. has working relationships with many New Jersey County Surrogate offices.