08/19/2014
Handling an Estate in PA and NJ
by Frank Campese, Jr., Esquire
255 South 17th Street, Suite 2801
Philadelphia, PA 19103
phone 215-731-1414
NJ phone 856-354-1859
fax 215-731-1212
[email protected]
Recently, I have been handling a number of estates in Pennsylvania and South Jersey. The laws in Pennsylvania and New Jersey are slightly different but all have a common theme.
This article will take us through handling a simple estate claim in both states. It is always recommended that counsel be hired to address these issues since complications often develop.
Example:
We will use this example to discuss various issues.
A widow passes away leaving 3 children, A, B and C. The estate assets include a home in Philadelphia worth $100,000 as well as two bank accounts containing $50,000 each. The total value of the estate is $200,000.
A. Does the Deceased Have a Will?
The first thing we need to address is whether the deceased passed with or without a will. If there is a will, it will be binding and will control how the estate is handled. The will determines who receives assets (the beneficiary) and who will handle the estate (the executor).
If the deceased had a will, the original must be produced. The executor/executrix would take the original will to the Register of Wills= office in whatever county the deceased resided, along with an original death certificate and a check payable to the Register of Wills to begin the process.
B. If There is No Will.
If there is no will, the first item of business is to determine who will be the administrator. You will note the title of the individual is different.
In our example, let us assume the deceased died without a will. In that case, either A, B or C, the children of the deceased, could act as administrator.
If A, B and C have a good relationship, they can select one individual to act as the administrator. Any two or three of the children could also act jointly.
If there is no agreement, the court will appoint an administrator for the estate. This will be done with a petition at the Register of Wills' office in the county where the deceased lived. Typically, you want to avoid this since the Register may appoint a complete stranger to administer the estate and not select one of the children, especially if there is disharmony. This will increase the costs to the family.
If A, B or C is going to be a sole administrator, the other individuals will have to sign what is known as a renunciation. This is a form that tells the Register of Wills the individual does not wish to act as administrator and is giving up his/her rights so another sibling can act as sole administrator. The sibling does not give up their rights to any assets, but only gives up the right to act as administrator. It should be noted an executor or administrator can charge the estate for his or her time. Typically, the charge is 5%-6% or the gross assets of the estate.
C. Initiation of the Estate
Whether the deceased died with or without a will, the executor/administrator must travel to the Register of Wills and present the appropriate documentation. Following this meeting, the Register of Wills will issue Letters of Administration, Letters Testamentary and Short Certificates, if requested. With these documents, the administrator now acts on behalf of the estate. These documents are necessary to handle all bank issues and real estate transfers.
D. Gathering Assets
The next step involved is the gathering of all assets.
1. Bank Accounts
In our example, we are assuming the deceased maintained two separate bank accounts at two different banks with $50,000 each. We are also assuming the bank accounts are registered in the deceased's name only. The administrator/executor can proceed to the bank with the death certificate, Letters of Administration and Short Certificate, presenting them to the bank manager. The bank manager will be asked to close the account and issue a check in the decedent's name only so those assets can be placed separately in an estate account. The administrator should be prepared to open a separate estate account under the estate's name only. This can be done at the same bank or a different bank. However, the bank will require an EIN number before opening the estate account.
$ The EIN number can be obtained from the Internal Revenue Service. This is typically done either on-line or over the phone. The EIN number is basically the Social Security number for the estate. A bank will need the EIN number before opening an account.
2. Real Estate
Next we will address the issue of real estate. The administrator/executor is responsible for maintaining or selling the property. In our example, we will assume the administrator will sell the property and split the proceeds as opposed to one of the children purchasing the property, which can also occur as long as the fair market value is paid relevant for estate tax purposes.
We will assume the real estate is located at 123 Main Street, Philadelphia and will be placed on the market at a value of $100,000. The administrator signs the documentation as if they were the deceased. The matter proceeds to sale. Any check issued at closing will be issued to the estate of the deceased. That money will have to be placed in the estate account.
In addition, it is expected the title company will require that money be held in escrow until the inheritance taxes are paid. Typically, the closing clerk for the title company will require at least 4.5%-6% of the gross sale price to be held in escrow. That money will not be released until the inheritance taxes are paid and a final receipt issued. This normally takes 6-9 months.
E. Inheritance Taxes
Inheritance taxes are handled differently in different states. In New Jersey, certain beneficiaries pay no taxes. These beneficiaries include spouses, children and grandchildren of the deceased.
In Pennsylvania a spouse pays no inheritance taxes. Class A beneficiaries pay 4.5%. Class A beneficiaries are grandparents, parents, children and grandchildren. Siblings pay a 12% rate and all others would pay 15% of the net value of the estate.
To determine the net value of the estate, the responsible party typically gathers all gross assets and takes a number of deductions. There are numerous deductions including funeral expenses, attorney's fees and other expenses. It is the obligation of the attorney or administrator to make the proper deductions so the appropriate taxes are paid. Obviously, the family is attempting to pay the least amount of taxes possible by law and as such, it is always recommended an attorney be hired to handle the estate tax issue.
F. Handling Expenses and Partial Distribution
Typically I am asked whether partial distribution can be made when there are sufficient assets in the estate. I would agree to partial distribution if all beneficiaries agree. I would have the beneficiaries sign appropriate documentation confirming partial distribution.
In addition, the administrator may have to deal with payment of the funeral bill or other expenses. Again, if there are sufficient assets, these bills can be paid. If any family member has paid the funeral bill, or has made other payments regarding burial expenses, they are entitled to reimbursement, tax free.
G. Handling the Deceased's Debt
Let's assume the deceased died with considerable debt. We are assuming there is a mortgage on the property as well as credit card debt, medical bills and the like.
The administrator must handle these expenses appropriately. If there are no assets to pay the expenses, typically an attorney will become involved at this juncture in order to negotiate these claims.
If there are sufficient assets to pay the debt, the administrator and/or attorney must be careful in paying these debts. There are certain priorities that must be handled. The administrator, with the help of counsel, needs to be aware of what debts are primary and what debts are secondary. There are times in handling an estate where the debts outweigh the assets and a pro rata share needs to be addressed and paid by the individual handling the estate. All of these issues can be handled through counsel who should be aware of the complications in paying any expenses and in what order the expenses should be paid.
Questions:
1. What if the siblings do not agree, who will be the administrator of the estate?
A. Typically, the Register of Wills will accept a petition for citation allowing an argument to be made that one sibling should act as administrator over the other. Again, this is something the court does not like to address. If there is any type of allegation of fraud, mismanagement or mishandling, the court will simply appoint a stranger to act as administrator. That administrator is able to charge a fee and may also hire an attorney that will cost the estate additional assets.
2. Can more than one person act as administrator?
A. Yes. The Register of Wills will accept multiple administrators. In our example, if the 3 siblings feel they should act as co-administrators of the estate, the court will accept a co-administration application as long as all administrators are present. From a practical standpoint, however, this appears to be most difficult unless an attorney is involved and can handle the estate issues directly. The attorney has a difficult time when all 3 individuals must sign a document. In this situation the attorney will usually have the power of attorney signed by all 3 administrators allowing him or her to act on behalf of the estate. This makes life easier for all involved.
3. What if a will exists but the original cannot be found?
A. The Register of Wills will accept a copy of a will with supporting documentation. Certain affidavits would be required and filed with the Register of Wills for a copy to be accepted for probate.
4. What if the will splits certain bank accounts; however, the bank accounts are in joint names with other children?
A. Let us assume the deceased had a joint bank account at Wells Fargo of $50,000 with child A. Let us also assume the deceased died with a will indicating all children would split everything equally among them. The law in Pennsylvania and New Jersey states the bank account designation will supercede any designation in the will. Therefore, in our example, the $50,000 bank account held in joint names with the deceased and child A will go directly to child A.
5. What if the deceased passed away with an IRA or any other type of retirement benefit that named a beneficiary? How is this handled for distribution and how is it taxed?
A. Let's address the first part of this question, how is it handled for distribution? The IRA or retirement fund, if it is titled in the deceased's name along with a beneficiary, this person would be entitled to the same benefit as if it were a joint bank account.
The taxable issue is handled a little differently in different states. If the retirement benefit was not accrued to the deceased, it is quite possible it may not be taxed. Retirement funds have to be looked at in depth to render a decision as to whether that asset will be taxable.
6. Once the inheritance taxes are paid, is the estate completed?
A. No. There are a number of forms that must be filed to close the estate, including an inventory and status report which advises the Register of Wills that an accounting has been completed and accepted by the heirs. These forms include status reports, notice of beneficial interest in estate, approval of informal accounting and a number of other forms that have to be included and filed.
7. What about the issue of income taxes to the federal and state governments?
A. Income taxes are a total separate issue than estate taxes. If the individual passed away in 2013 and earned income during that year, income tax returns will have to be filed with the federal and state governments.
What I have attempted to do in this article is give you the bare minimum information you would need in order to handle a simple estate. It is always recommended you hire counsel to handle the estate issues since even a simple estate can have rather complex issues and tax consequences.
If I can answer any other questions or be of further assistance, please do not hesitate to contact my offices at the number below.
