Estate FAQs
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Settling a loved one's estate is a multi-step tax, legal and financial process that begins shortly after a loved one's death.
This process generally starts with the Executor named in the decedent's Will coordinating with the local probate court to receive court authorization to begin acting on behalf of the decedent's estate.
Once authorized to act on behalf of the estate, the Executor will begin addressing a wide array of tasks that often includes identifying a decedent's assets, selling certain assets such as real estate, settling any debts of the decedent, filing any required income or estate tax returns, and then distributing any remaining probate assets to the beneficiaries named in the decedent's Will.
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An Executor is responsible for managing all of the tax, legal, and financial affairs of a decedent's estate in an accurate and timely manner. To the extent that errors or oversights are made, an Executor can become personaly liable for unpaid debts, inaccurate tax filings, and the mismanagement of the estate's assets.
Since most Executors are not experienced tax or legal experts, it is quite common for an Executor to hire an Attorney to advise on all legal matters and a CPA to assist with the tax, accounting, and other financial needs of the estate.
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Here are a few important documents that an Executor will want to possess at the beginning of any estate settlement process.
Death Certificate
Having access to multiple copies of a decedent's death certificate is a necessity for any Executor as this document will be requested by every third party professional, institution, or entity that the Executor engages with.
Last Will & Testament
The last will and testament is a legal document that names the Executor and details the people, trust entities, or charities that will receive the decedent's Probate Assets. This legal document along with the death certificate will be necessary for an Executor to gain probate court authorization to begin settling the estate.
Recent Bank Statements
Bank statements will help an Executor identify different sources of income as well as different expenses or debts that a decedent might have outstanding as of the date of death.
Prior Year Tax Returns
Tax Returns from prior years will help an Executor identify the different sources of incomes that a decedent has received in the past. This information will help ensure that accurate and complete tax returns are filed and all potential assets are identified.
Summary of Accounts & Assets
Developing a detailed summary of a decedent's accounts, assets, and liabilities will help the Executor keep track of key account details such as date of death values and named beneficiaries.
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Perhaps the most confusing aspect of managing a loved one's estate is trying to understand the difference between the Taxable Estate and the Probate Estate.
Simply put, a decedent's Taxable Estate includes all assets owned by a decedent at death irrespective of how that asset will transfer to its intended beneficiary. The total amount of one's Taxable Estate will dictate whether an Estate Tax is due on the total value of those assets.
A Probate Estate differs from a Taxable Estate as it only includes assets owned by a decedent that do not pass to its intended beneficiary via specific contractual terms, state law, or the terms of a funded trust. Therefore, a probate estate will generally exclude certain assets such as an IRA or 401K account with a named beneficiary, life Insurance with named beneficiary, a jointly owned bank or brokerage account, and assets held within a trust.
Any asset that does not transfer through one of these alternative legal processes will transfer to the beneficiary(s) named in the decedent’s Will as part of a court-supervised probate process. Most commonly, a decedent’s probate estate will include assets such as clothing, jewelry, artwork, and cars. However, it is not uncommon for personal real estate and financial accounts to also end up in one’s probate estate.
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Differentiating between a Taxable Estate and a Probate Estate is very important when it comes to an Executor discharging his or her duties.
An Executor of a New Jersey Resident's estate has two important responsibilities. The first responsibility is identifying all assets and liabilities of a decedent's Taxable Estate to determine if any Federal Estate Tax or NJ Inheritance Tax is due. If it is determined that a tax is due, the Executor would then inventory and value all assets in the Taxable Estate for purposes of filing a Federal Estate Tax Return or NJ Inheritance Tax Return.
An Executor's second responsibility is identifying and taking possession of all probate assets held within the Probate Estate, paying any debts or taxes owed, and then distributing the remaining probate assets to the beneficiaries named in a Decedent's Will.
Therefore, as an Executor you have an obligation to identify and value all assets and liabilities in a decedent's Taxable Estate to determine what tax obligations might exist. However, you will only be tasked with taking possession of and distributing the assets of the Probate Estate as all other assets of the Taxable Estate will pass to the intended beneficiaries outside of the probate court process.
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Yes. As discussed above, many valuable assets of a decedent can pass outside of the probate court process. When an asset transfers to an intended beneficiary via an alternative legal process, the asset involved is often referred to as a non-probate asset.
Here are the three ways assets can transfer at death outside of a probate court proceeding.
Certain Assets Transfer via Contract
The quickest and most cost-effective way to transfer an asset is by naming a beneficiary on an insurance or investment account. When you name a beneficiary on a life insurance policy, annuity contract, IRA, Roth IRA, or 401(k) retirement plan, you are establishing a contractual arrangement that dictates how that particular asset will be distributed at death.
Certain Assets Transfer via State Law
Another quick and cost-effective way to transfer an asset at death is to utilize state law. A common example of this type of transfer would be the use of jointly owned property in which each owner possesses a right of survivorship in a particular asset. This might include jointly owned bank accounts or jointly owned real estate that is retitled to include a right of survivorship amongst the joint owners. With that noted, joint ownership of an asset can be structured in several different ways and some jointly owned assets may still need to pass through probate.
Certain Assets Transfer via the Terms of a Funded Trust
The final way that an asset can be transferred at death is through the terms of a funded trust. Assets held in trust will be distributed by the Trustee of the Trust to trust beneficiaries in the specific manner detailed in the Trust Document.
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No. The Trustee of the Trust manages trust assets and is responsible for the tax, financial, and legal affairs of the Trust. Unless the Executor is also named as the Trustee of the decedent's Trust, the Executor has no authority to act on behalf of the Trust.
What is a Trust?
A trust is a separate legal entity that is created to take ownership of certain assets while someone is living, upon one's death, or both.
A trust is created by drafting and executing a Trust Document which names the Trustee of the Trust and spells out all the specific terms of your trust. Once a Trust is funded, the Trustee will become responsible for managing the Trust's assets based on the specific terms of the Trust Document.
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Holding a power of attorney (POA) authority over another's financial affairs is an authority that expires at that person's death.
After one's death, the Executor named in the decedent's Will becomes responsible for the tax and financial affairs of the decedent and their estate.
Questions About Settling an Estate
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The Federal Estate & Gift Tax is a tax assessed on the value of all lifetime asset transfers to others (excluding your spouse) that exceeds $13.6 million (2024). This means that any individual can transfer up to $13.6 million to others while you are living or at death and incur no federal estate or gift tax on the transfer. For a married couple, this lifetime exemption doubles to $27.2 million. With such a sizable lifetime exemption, very few Americans are currently subject to the federal estate and gift tax.
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In 2024, any person can give up to $18,000 to another person without triggering a requirement to file a Gift Tax Return. However, if a gift larger than $18,000 is made in 2024, the donor of the gift must file a Gift Tax Return to notify the IRS of the gift.
The good news is that no actual tax is due on any gift until total reportable lifetime gifts exceed $13.6 million. However, a Gift Tax Return is still required to notify the IRS that you have used a portion of your lifetime Estate & Gift Tax Exemption in the current year.
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Historically, the State of New Jersey assessed both an Estate Tax and an Inheritance Tax on the value of a New Jersey resident’s estate. Beginning in 2018, New Jersey eliminated the Estate Tax but retained its Inheritance Tax.
The New Jersey Inheritance Tax is an 11% to 16% tax assessed on any asset transfer above $25,000 to a sibling and any asset transfer above $500 to anyone else such as a cousin, niece, or family friend. This tax would apply to any transfer at death or within three years of one’s death.
However, it is important to note that the New Jersey Inheritance Tax does not apply to any asset transferred to your spouse or any lineal descendent such as a child, grandchild, etc.
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After the date of death, any income realized from a decedent’s assets is no longer taxable to the decedent. Instead, any taxable income would be reported by the individual or entity that assumes ownership of the asset after the date of death.
For example, any income earned by a probate asset would be reported on a Form 1041 filed on behalf of the decedent’s estate whereas any income earned by an asset held in trust would be reported on a Form 1041 filed on behalf of the decedent’s trust. Lastly, any income earned on an asset that passes directly to an individual beneficiary such as a brokerage account with Transfer on Death (TOD) instructions would be reported on the individual beneficiary’s personal tax return.
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One of the most important tax considerations when inheriting any asset is establishing your cost basis in the inherited asset for future income tax purposes.
As a general rule, most assets owned by a decedent at the date of death will be inherited with a tax basis equal to the asset’s value on the date of death. This is often referred to as receiving a stepped-up basis.
To highlight this important concept, let’s assume a decedent bought his home for $200,000 in 1985. In 2024, the decedent passed away and the home was valued at and sold for $800,000. In this scenario, the beneficiaries of the estate would inherit the home with a tax basis of $800,000 and no income tax would be owed on the $600,000 in appreciation.
While the stepped-up basis concept applies to many inherited assets, there are a few key exceptions.
The first few exceptions would be any pre-tax IRAs, 401(k) plans, and non-qualified annuities. When you inherit these specific assets, you also inherit the decedent’s original tax basis in these accounts. Therefore, as funds are withdrawn, a beneficiary will report the taxable portions of these withdrawals as income on their personal tax return and pay the associated taxes.
The second exception to the stepped-up basis rule would be a scenario in which a decedent makes a gift of an appreciated asset before their death. In such a scenario, the recipient of that gift would assume the decedent’s original tax basis as the stepped-up basis rule does not apply to assets transferred by gift during one’s lifetime.
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Yes. Unfortunately, when you inherit any type of retirement account (IRA/401K) or non qualified annuity, you will be subjected to a highly complex set of required distribution rules which must be followed to avoid costly IRS penalties.
For instance, unless you are a spouse or disabled child, most beneficiaries of an IRA or 401k will need to withdraw all funds by the end of the 10th full tax year after the date of death. Additionally, some IRA or 401K beneficiaries will also need to meet minimum annual distribution requirements in each of these 10 years prior to withdrawing all funds.
Another example of these special tax rules are the the rules that apply to an inherited non-qualified annuity. With this type of account, a beneficiary must choose between taking minimum annual lifetime distributions based on their life expectancy or simply withdrawing all funds within 5 years of the date of death.