How to Finalize and Wind Up an Estate in Probate
Written by New Jersey Estate Administration and Probate Lawyer Fredrick P. Niemann, Esq.
By statute and case law, the Executor under a Last Will is required to settle a decedent’s estate expeditiously and efficiently and to distribute estate assets to designated beneficiaries. After collecting, itemizing estate assets and paying the decedent’s debts and taxes, the Executor/Administrator must do what is necessary to close out the estate. In order to accomplish this goal, the Estate representative must account to the beneficiaries when he or she proposes to be officially discharged from this position.
In general, there is no set time by which an Executor or Administrator must close an estate and distribute estate assets completion must be done pursuant to a “reasonable person” standard. If an estate is taxable, the Executor or Administrator should wait until the federal and/or state closing letter are received (tax waivers). In the event an estate is subject to both federal and state tax, the N.J. Transfer Inheritance Tax Branch will not release a state closing letter until the federal closing letter is received by its office.
An Executor or Administrator by law is able to make distributions of estate assets directly to the intended beneficiaries with little or no formality and little or no paperwork. However, this formality is not without risks. Typically, the estate representative (executor, administrator) will not be discharged by the Surrogate’s Court unless Refunding Bonds and Releases are signed and filed. If the Last Will or administrator’s appointment requires a bond to be posted, the bond will continue to be imposed and the costs of discharging the bond will be the Estate’s responsibility. Although an Executor most often doesn’t have to be bonded, an Executor waives the protection of a Refunding Bond and Release by not having such a document signed by each beneficiary prior to distribution to him or her. Few attorneys will allow a client to close an estate without a signed release and refunding bond from each beneficiary.
An estate can be closed in one of four fashions: (1) the funds can simply be distributed directly by the Executor or Administrator to estate beneficiaries; (2) the funds can be distributed to heir(s) after each signs a Release and Refunding Bond waiving his or her right to a formal accounting; (3) distribution can be made after the beneficiaries each execute a Refunding Bond and Release following receipt of an informal accounting; or (4) an Order has been signed and filed by a Court following the filing of a Verified Complaint and Order to Show Cause for approval of the Executor’s (or Administrator’s) formal or informal accounting to the heirs.
It is not unusual for families with little or no conflict with a straightforward probate proceeding to execute a Refunding Bond and Release without requesting any accounting or information from the Executor or Administrator. One of the benefits of making partial distributions to beneficiaries is the shift in income from the estate to the beneficiaries. In making a partial distribution, the Executor/Administrator of the Estate can send a Form K-1 to the beneficiaries who, in turn, can claim estate income on their own individual Form 1040. This option is almost always preferable to having the estate income taxed by the estate at significantly higher estate tax rates. In determining whether or not such partial distribution should be made, the Executor or Administrator should weigh the following factors: (a) the needs of the beneficiaries, (b) potential deterioration or loss of value of estate property, and (c) income tax ramifications from shifting estate income. If the Executor or Administrator decides to make a partial distribution, he/she should treat all beneficiaries impartially by making pro-rata distribution of their shares under the intestacy statue.
By doing a partial release, however, the beneficiaries of an estate are placing themselves at some degree of risk, especially if the executor was in fact dishonest. This is because the signature and filing of such a bond(s) closes out the estate and discharges the Executor or Administrator from his/her position without further legal liability. I’ll discuss this subject further on this page.
I mentioned that you can legally close an estate without an accounting to beneficiaries but New Jersey probate laws clearly allow beneficiaries the right to an accounting regarding the affairs and transactions of the estate. This principle was affirmed in a NJ Superior Court decision which stated:
“New Jersey Case-hold has held that it is elementary that the Executor is under a duty to account for the assets of the estate coming to his or her possession or knowledge; and if, through failure of his or her fiduciary duty, he or she is unable to do so, the executor/rix is chargeable with their full value. It is a primary duty of an executor to gather in the assets of the estate; and in the discharge of this duty, to use only such care, skill, diligence, and caution as a person of ordinary prudence would undertake in matters of his own.”
In fulfilling his or her fiduciary obligation an estate representative is governed by the “prudent person” standard which in lay person’s terms means being “reasonably alert and responsible”. Where the fiduciary fails to fulfill his/her obligation, “the beneficiaries and others with an interest in the estate may file exception(s) with the probate court, challenge the account in respect of the sufficiency of the disbursements made, and the Executor may be personally surcharged with the economic consequences of his/her failure of duty.” The term “surcharged” means, simply “penalized dollar for dollar” for what they screwed up and cost the estate.
The type of accounting that can be filed is known as an “informal” or “formal” accounting. An informal accounting is a general summary of the assets obtained by the Executor/Administrator, as well as income received and spent by the estate, disbursements made by the estate, distributions made by the estate, and proposed final distributions. In many instances, an informal accounting will summarize classes of expenditures rather than make line-by-line itemizations.
A formal accounting is typically generated in one of three circumstances: (1) a complex estate in which the beneficiaries and the Executor or Administrator agree upon the process; (2) where required by the Attorney General of New Jersey when a charity(ies) is involved; and (3) when agreement cannot be reached upon an informal account by estate beneficiaries and the Executor or Administrator whereby the executor can only be discharged by an order of the Superior Court.
When Can A Beneficiary Compel an Accounting From an Executor, Trustee or Administrator?
What Details Must the Final Accounting Contain?
A formal accounting generally includes information in the following areas: (1) a general disclosure of corpus, income, and available funds; (2) receipts of principal or corpus turned over by a beneficiary; (3) gains and losses on the sale(s) or other dispositions of capital assets; (4) disbursements of principal or corpus; (5) distributions of principal or corpus to estate beneficiaries; (6) statement of principal balance on hand; (7) receipts of income; (8) disbursements of income; (9) distribution of income to estate beneficiaries; and (10) reserves held and proposed schedule of distribution to beneficiaries going forward.
When an accounting is filed in court, a representative from the Surrogate’s Office will review the account in detail. Their review is fairly rigorous depending on the county of venue. The Surrogate’s Office charges a fee for their audit of the estate. After the audit is completed, a report is written to the probate judge and the attorney who prepared the accounting addressing any questions or concerns the Surrogate has regarding the account itself. Once approved, notice must be given to all interested parties of the scheduled hearing date when the Court will decide to approve or not approve the accounting. The Order to Show Cause filed by the estate representative will contain language which will set forth the date when exceptions to the accounting and answers to the Complaint must be filed by any protesting party (“exceptions” means disagreements with the accounting).
In complicated estates, it may be necessary to generate a formal accounting to demonstrate that all beneficiaries have been given full disclosure, of estate assets and the handling of the estate by the executor. Wherever possible, avoiding a formal accounting is in everyone’s best interest because of its cost. But if agreement cannot be reached, all parties can agree that a formal accounting can be used to close out the estate. Of course this assumes the formal accounting does not create additional disagreements.
Often, the Charitable Trust Section of the Attorney General’s Office may require a formal accounting in order to finalize an estate when 501(c) charities are involved. By law, Notice of Probate must be sent to the Charity Trust Section of the Attorney General’s office whenever a charity is a beneficiary under a Will. If there is a specific bequest, the Charitable Trust Section does not require an accounting, however, when a charity or charities are remainder residuary beneficiaries, the State can require a formal accounting.
More Information About Formal Accounting(s) And The Courts
Most frequently, a formal accounting is filed when the Executor (Administrator) is unable to voluntarily secure signed Refunding Bonds and Releases from all beneficiaries after attempts to obtain same through the use of an informal accounting. To finalize the estate and to be discharged from his/her responsibilities, the Executor must obtain a Court Order of Discharge. To accomplish this, the Executor or Administrator must file an Order to Show Cause and Verified Complaint with an attached formal accounting. The Complaint will seek an Order from the Superior Court (Chancery Division/Probate Part) (a) approving the Executor’s or Administrator’s accounting, (b) approve the payment of all fees and costs incurred by the estate; (c) approve the Executor’s or Administrator’s commissions; and (d) discharge the Executor or Administrator from any further liability to the estate or its beneficiaries.
On the return date of the Order to Show Cause, the Court will listen to arguments by the parties regarding the accounting and any exceptions filed against the accounting. If necessary, the Court will take testimony. If the dispute is significant enough, the Court, as its discretion, will enter a discovery schedule involving interrogatories and depositions by the fiduciary and/or contesting beneficiaries. A date will be entered for a plenary hearing whereupon the probate judge will decide to accept or reject the accounting in its entirety or in part.
As part of the Court’s decision-making, the judge will decide the appropriateness of awarding fiduciary commissions, legal fees and costs incurred by the fiduciary. Although such fees are typically paid by the estate, the Court does have discretion to modify the Executor’s fees and can adjust the reasonableness of legal fees and costs.
Additionally, the Court can determine which party should be responsible for the payment of such fees and costs. Although fees and costs are typically paid by an estate, the Court can surcharge the Executor or Administrator if there exists evidence of gross negligence or fraud (“surcharge” means “punish”). Conversely, the Court can surcharge an opposing party for legal fees and costs incurred by requesting an accounting if the Court finds that the proceedings were generated in bad faith.
Once a Court gives approval of the final accounting, the executor’s surety bond can be discharged. This is done in one of two ways. First, the beneficiaries will be presented with a Refunding Bond and Release. If they fail to sign off Refunding Bonds and Releases, an application can be made to the court by the Executor to have the beneficiary’s share paid into the court of if forward thinking inset an Order discharging the bond in the application to approve the final accounting.
What about a beneficiary’s right to demand a final accounting? A beneficiary of an estate can compel an Executor or Administrator to account to him or her after one full year has gone by after the appointment of the Executor or Administrator unless special cause exists to compel an earlier accounting.
Distribution of Non-Probate Estate Assets to Beneficiaries
What is the role of the Executor in getting the assets of the estate to the beneficiaries? The answer often depends on the nature of the assets to be distributed. Is there a distribution of non-probate assets, (2) is there a distribution of specific bequests, (3) who are the beneficiaries in the distribution of the residuary estate.
While perhaps surprising to many readers, non-probate assets are outside the scope of an Executor or Administrator’s responsibility to the estate. Non-probate assets are not counted in the Executor’s or Administrator’s commission or bonding obligation. An Executor who has knowledge of the existence of non-probate assets, should give that information to the intended beneficiary and facilitate the payment of any estate on inheritance taxes.
What are non-probate assets? First, non-probate assets can consist of assets such as life insurance, annuities, individual retirement accounts, and other retirement plans known as qualified plans. These assets are paid directly to the named beneficiaries. These accounts or policies are only paid to the estate if there is no named beneficiary., which then makes them a probate asset subject to the jurisdiction of the Executor. If there is a named beneficiary, the Executor or Administrator should simply provide a certified copy of a death certificate to the beneficiary so that he/she may claim the proceeds from said accounts or policies, but again facilitate the payment of any taxes due to the state or IRS. If no beneficiary is named, the Executor or Administrator will provide Letters Testamentary to the financial institution holding said asset and will eventually cause that asset(s) to be re-titled or paid over the estate. In my opinion, the Executor should go no further. Other attorneys disagree.
Then there are pay on death accounts commonly referred to as transfer-on-death (TOD) or paid-on-death (POD) accounts. These are generally bank accounts, but are also utilized with government bonds as well (i.e. EE, US Savings bonds, H bonds, etc). To claim these funds, the TOD or POD beneficiary must provide a certified copy of the death certificate to the custodian. The beneficiaries can obtain a copy of the death certificate at the municipality where the decedent resided at the time of his/her death.
Finally, assets can pass by law under New Jersey’s survivorship statute. Examples include accounts listed as joint tenants with right of survivorship. To claim the funds, the death certificate is produced by the surviving account holder and, by law, the funds are transferred to the joint surviving account holder.
With respect to real property, it is a misconception that legal title has to be immediately changed to remove the decedent’s name. Not true. It is not always necessary to transfer the ownership of property by deed from the estate to the surviving owner. When the property is finally sold or conveyed, the granter will merely recite the predecessor’s death in the deed recital.
Today, many financial institutions will only release on-half of the jointly owned/non-probate assets to the legal survivor until a waiver is obtained by the State of New Jersey, unless the beneficiaries are Class A beneficiaries (i.e., spouse, parent, children, or other lineal descendants). Whereupon the assets will be released immediately if a Form L-8 is executed at the financial institution. For more remote relatives and beneficiaries, some or all of the asset will not be released until a tax waiver is received from the state of New Jersey.
Not sure how to wind up the Estate or handle Non-Probate assets as the executor or administrator? If so, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at firstname.lastname@example.org. Please ask us about our video conferencing consultations if you are unable to come to our office.