SouthJersey.CPA

Category: New Jersey

  • How to Pay the Estate Attorney and CPA

    How to Pay the Estate Attorney and CPA

    In my article “Navigating the Six Phases of Settling a New Jersey Estate“, I suggest addressing the question of finding a CPA and attorney first before tackling other estate executor duties. Not all estates need both, and some might not need either. But the practical reality is that the executors of most average estates would logically prefer to have professional help. It is easier, safer, and more effective to hire help than to try to learn to do it yourself.

    I suggest a simple rule of thumb that when there is known risk of conflict between heirs or creditors, use an attorney. When the concepts and terms described in the 6 phases / 20 steps are confusing, use a CPA. Worth adding here than all rules of thumb are more useful in communicating a concept and less useful in application to a specific case. That leads to the next question: how to pay the attorney and CPA.

    First, a beneficiary question 

    Almost everything below assumes the executor is also a beneficiary. That describes most family estates, where a son, daughter, or surviving spouse is named to serve. If the executor inherits nothing, there is no trade to make, and the executor’s commission is the only compensation available. Read the rest of this article with that distinction in mind. 

    The executor commission 

    In New Jersey, an executor is entitled to compensation, and the amount is set by statute rather than by negotiation. N.J.S.A. 3B:18-14 allows corpus commissions of 5 percent on the first $200,000, 3.5 percent on the excess above $200,000 up to $1,000,000, and 2 percent above that. On a $600,000 estate the corpus commission is $24,000. N.J.S.A. 3B:18-24 allows a separate income commission of 6 percent on income the estate receives during administration. A will can set or limit compensation differently, so read the document before running the numbers. 

    The executor could pay both the attorney and the CPA out of that $24,000. Two problems follow. The commission is ordinary taxable income to the executor. For a non-professional executor it is generally not self-employment income, which limits the damage, but it is still taxable income. Meanwhile the executor gets no personal deduction for paying the professionals, because miscellaneous itemized deductions remain suspended now under IRC Section 67(g). The executor pays tax on the full fee and deducts nothing. 

    That is why this approach is unpopular. The more common approach is for the executor to waive the commission, receive the same money as tax-free inheritance, and let the estate pay the attorney and CPA directly as administration expenses. 

    The limited value of estate deductions 

    The estate does get a deduction for administration expenses. But the value of the tax deductions for a typical South Jersey estate is less than most people assume. 

    New Jersey repealed its estate tax for deaths on or after January 1, 2018. The New Jersey inheritance tax remains, but Class A beneficiaries (spouse, children, grandchildren, parents) owe nothing. The federal estate tax exemption is $15 million per person. So a $600,000 estate passing to the decedent’s children files no Form 706 and no inheritance tax return. There is no transfer tax for the deduction to offset. 

    The estate income tax return, Form 1041, remains. The estate administration expenses are deducted against whatever interest, dividends, and taxable gains the estate collects during the period it is open, which on a simple estate is modest. Whatever is left over becomes excess deductions on termination under IRC Section 642(h), and under the 2020 final regulations those deductions keep their character and pass through to the beneficiaries above the line on their personal returns. That might have value, but it is deferred, and it depends on the beneficiaries’ own tax situations. 

    The argument for waiving the executor commission is not the tax deduction but rather that an inheritance is not taxable income and a commission is. 

    The executor’s waiver must be timely 

    A waiver of commissions must be unequivocal and made early in the process. Under Rev. Rul. 66-167, an executor who behaves as though he intends to take the fee, and then waives it late in the administration, can be treated as having received the fee and made a gift of it. That produces the worst of both outcomes: taxable income to the executor and a potential gift to the other heirs. 

    If the executor intends to waive, decide it at the beginning and document it in writing before any commission is claimed or paid. 

    How much to budget for the professionals 

    I am notorious as a financial writer for offering ballpark percentages in articles like this. But I am going to decline to give a percentage here as meaningless, and I would treat percentages from anyone else with the same caution. 

    New Jersey abandoned percentage-based attorney fee schedules a long time ago. RPC 1.5 requires that a fee be reasonable in light of the work performed, and R. 4:42-9 governs fees allowed out of an estate. A routine, uncontested probate and a contested one with a will challenge are not the same job, and no percentage of the estate captures that difference. A percentage also has the odd effect of charging more for a larger bank balance that takes no additional work to transfer. 

    I find it more useful to estimate a cost for each of the 20 steps separately, and then help the executor decide which ones make sense to hand off. Some steps are clerical and the executor can handle them in an afternoon. Some carry real exposure and should go to a professional every time. Once the list is priced, the executor can see the total instead of guessing at it. 

    Some executors prefer to hand the entire workload off and focus on monitoring progress. That is a legitimate choice. In that case the attorney and CPA’s role with the executor often shifts to educating, clarifying, and advising on unfamiliar topics. A flat fee may work best in that case. 

    Summary   

    The financial concept, in many average New Jersey estate cases, can be summarized this way: waive the commission early and in writing, take the same money as tax-free inheritance, pay the professionals from estate funds, price the work item by item rather than as a percentage, and focus on maximizing the net after-tax distributions to the heirs. 

  • Navigating the Six Phases of Settling a New Jersey Estate

    Navigating the Six Phases of Settling a New Jersey Estate

    The six-phase sequence and checklist order below is logical, but estates rarely move in a clean linear flow. Tax filings, creditor resolution, asset collection, and the inheritance tax process typically run in parallel. If tasks appear to occur out of sequence, consider the consequences carefully, particularly where distributions have already been made.

    Before You Start: Decide on an Attorney and a CPA

    Most executors, especially in estates with real property, business interests, or non-Class A beneficiaries, benefit from retaining both an estate attorney and a CPA experienced in fiduciary tax returns. Modest estates in working-class families, however, might not have the resources to justify the cost of both.

    Here is my rule of thumb. If there is any indication of conflict or disagreement, talk to a lawyer. If you need to stretch your budget in a modest estate with no expected conflicts, use a good CPA.

    Have at least the first conversation with the chosen professional as early as possible. It is not necessary to do this before taking the first steps, but many executors quickly find themselves overwhelmed with unfamiliar responsibilities. The attorney or CPA might want to wait until the court letters of authority are issued before entering into an engagement agreement.

    Phase 1 – Establish Legal Authority

    ☐ Step 1. Probate the will with the county Surrogate’s Court, or initiate intestacy proceedings
    This is the non-negotiable first step. Bring the original will, the death certificate, and the filing fee to the Surrogate’s Court in the county where the decedent resided. The court issues Letters Testamentary if there is a will, or Letters of Administration if there is not. Without these, you have no legal authority to do anything else on this list. If the estate is likely to be contested, involve an estate attorney before filing.

    ☐ Step 2. Send required notice to heirs and beneficiaries
    New Jersey law requires formal notice to all beneficiaries named in the will and to all statutory heirs. This starts the clock on certain objection periods.

    Phase 2 – Establish the Estate’s Financial Infrastructure

    ☐ Step 3. Obtain an EIN from the IRS for the estate and file Form 56
    The estate becomes a separate taxpayer at the moment of death. Get the EIN online at IRS.gov. File Form 56, Notice Concerning Fiduciary Relationship, to formally notify the IRS of your role and to ensure that correspondence routes to you rather than to the decedent’s address.

    ☐ Step 4. Open an estate bank account
    All estate receipts flow into this account and all disbursements flow out of it. You will need the EIN and your Letters Testamentary to open it. Do not commingle estate funds with your personal bank accounts.

    Phase 3 – Inventory, Notify Creditors, and Protect Assets

    ☐ Step 5. Prepare a complete inventory of assets
    Identify and value everything: real property, financial accounts, retirement accounts, life insurance, business interests, vehicles, and personal property. Some assets pass outside probate, including life insurance with named beneficiaries, jointly held property with right of survivorship, and IRAs with beneficiary designations. Those assets may still factor into the taxable estate.

    ☐ Step 6. Notify creditors and allow the claims period to run
    New Jersey requires formal notice to creditors. There is usually a nine-month period from the date of death during which creditors can present claims. Do not distribute assets to heirs before this period expires and all valid claims are resolved. You can be held personally liable if you do.

    ☐ Step 7. Identify and resolve any Medicaid estate recovery claims
    If the decedent received New Jersey Medicaid benefits, particularly long-term care benefits, the New Jersey Division of Medical Assistance and Health Services has a right of recovery against the estate. This must be addressed before distribution.

    Phase 4 – Tax Filings

    ☐ Step 8. File any delinquent prior-year income tax returns
    If the decedent was behind on federal Form 1040 or state NJ-1040 returns, get those filed. You sign as executor. These are the decedent’s personal obligations and must be resolved before the estate can close cleanly.

    ☐ Step 9. File the final Form 1040 and NJ-1040 for the decedent
    These cover the period from January 1 of the year of death through the date of death. The due date is the normal April 15 of the following year, with extensions available. A surviving spouse may be able to file jointly for the year of death, so evaluate that option.

    ☐ Step 10. Address the New Jersey Transfer Inheritance Tax
    New Jersey is one of only five states that still impose an inheritance tax, and the rules hinge on each beneficiary’s relationship to the decedent:

    • Class A (spouse, civil union partner, domestic partner, children, grandchildren, parents, stepchildren): exempt. Use Form L-8, the affidavit for financial institutions, or Form L-9, the real property affidavit, to release assets without a formal tax clearance proceeding.
    • Class C (siblings, sons-in-law, and daughters-in-law): taxable above $25,000, at rates of 11% to 16%.
    • Class D (all others): taxable above $500, at 15% on the first $700,000 and 16% above that.
    • Class E (qualified charities): exempt.

    When there are taxable transfers, file Form IT-R, the Inheritance Tax Return for Resident Decedents, and obtain Form 0-1, the transfer inheritance tax waiver, before transferring or selling encumbered assets.

    The tax is due eight months from the date of death. Interest accrues at an annual rate of 10% on any tax not paid by that date. Note carefully that an extension of time to file is not an extension of time to pay. Form IT-EXT extends the filing deadline only, and interest still runs from the eight-month mark. If you know tax will be owed but the return is not ready, make an estimated payment with Form IT-EP before the deadline. Escrow arrangements may be possible for real estate closings pending final tax determination.

    ☐ Step 11. Determine whether a federal estate tax return (Form 706) is required
    The federal estate tax applies only to gross estates exceeding the current exemption. If a return is required, Form 706 is due nine months after death, with a six-month extension available. New Jersey repealed its own estate tax effective January 1, 2018, so there is no longer a separate New Jersey estate tax return.

    ☐ Step 12. File Form 1041 and NJ-1041 for estate income
    The estate is a separate income tax entity from the moment of death. Income earned after death, including interest, dividends, rental income, and gains on asset sales, is reported on Form 1041 and NJ-1041. The estate may elect a fiscal year ending in any month, which gives you some flexibility in timing distributions and deductions. These filings may span multiple tax years if administration is prolonged.

    ☐ Step 13. File Forms 1042 and 1042-S only if applicable
    These are relevant only if the estate has foreign, nonresident alien beneficiaries, or certain types of U.S.-source income payable to foreign persons. They are not standard New Jersey estate filings. If you have foreign beneficiaries, get specialized advice, because the withholding and treaty analysis is complex.

    Phase 5 – Collect, Liquidate, and Close

    ☐ Step 14. Collect assets and manage the estate
    Transfer titled assets into the estate’s name, collect receivables, manage investment accounts, maintain real property, and arrange for appraisals as needed. Pay ongoing expenses such as property taxes, insurance, and utilities from the estate account.

    ☐ Step 15. Handle retirement accounts and beneficiary-designated assets
    IRAs, 401(k) accounts, and similar accounts with named beneficiaries pass outside probate. The executor still needs to ensure that the beneficiary designations are honored and that the beneficiaries understand the distribution rules, including the ten-year rule enacted by the SECURE Act of 2019 and any required minimum distributions.

    ☐ Step 16. Document stepped-up basis for inherited assets
    Assets in the probate estate, and certain assets included in the taxable estate, receive a stepped-up cost basis to fair market value at the date of death. Proper documentation now prevents capital gains problems for the heirs later.

    ☐ Step 17. Close real estate transactions
    If real property is being sold, coordinate with the inheritance tax waiver process described in Step 10. Title companies in New Jersey will require either a Form 0-1 waiver or a self-executing Form L-9 affidavit before closing. Account for real estate commissions, transfer taxes, and attorney fees in the closing costs.

    Phase 6 – Final Accounting and Distribution

    ☐ Step 18. Prepare and present the formal estate accounting
    Prepare a complete accounting of all receipts, disbursements, gains, losses, taxes paid, and fees charged. Depending on the circumstances, this may need court approval as a formal accounting, or it may be handled by informal consent of all beneficiaries. This accounting is your protection as executor.

    ☐ Step 19. Pay all remaining obligations
    Taxes, liens, attorney fees, executor commissions allowed under N.J.S.A. 3B:18-14, and any other valid claims must be satisfied before distribution.

    New Jersey allows executors to be paid for their services. The commission is taxable income to the executor and must be reported on the executor’s own return. An executor who serves in a professional capacity may also receive a Form 1099-NEC from the estate. Many family executors waive the commission, particularly when they are also the primary heir and the commission would only convert an inheritance into taxable income.

    ☐ Step 20. Distribute net proceeds to heirs and close the estate
    Make final distributions only after all tax clearances are in hand, all creditor claims are resolved, and the accounting is approved. Get signed receipts and releases from each heir. File a final Form 56 to close out your fiduciary relationship.

    What to Expect

    Most estates require at least a year to close. Some take three to four years, especially when unique real estate is involved. The executor who moves through these phases deliberately, and who asks for help before a problem hardens into a dispute, almost always finishes faster than the one who tries to hurry.

    I am a CPA in Cumberland County and I handle these filings for South Jersey families and executors, including the inheritance tax returns and waivers that hold up so many closings. If you have been named executor and you are not sure where you stand, call me before the eight-month clock runs out. The conversation costs nothing and it is usually short.

    Tony Novak, CPA, MBA, MT
    SouthJersey.CPA

  • Bridgeton Partnering for Success Event tomorrow

    I’m grateful for the invitation to tomorrow’s business event in Bridgeton, hosted by the Bridgeton Area Chamber of Commerce, its Bridgeton Business Alliance Committee, and the City of Bridgeton UEZ. Chamber members are invited to set up a table for their own business, and I’m glad to accept.

    Plenty of people know they have a tax problem and don’t have anyone they trust to talk to about it. The notice sits in a drawer. The letters keep coming. That’s the conversation I hope to start with a few guests tomorrow, and it’s the reason I’m setting up a table at all.

    If that describes you, the specifics I handle are IRS notices, audits, back taxes, and collection letters, along with bookkeeping, payroll, estate filings, and business startup and wind-down.

    The Bridgeton business community, and especially its Hispanic business owners, has become a real niche service area for me. I enjoy working with these small business owners who make up the strong backbone of this community. Showing up in person builds the know, like, and trust factor that matters more than anything else in this work. I don’t do enough of these.

    If you miss the event and still want to talk something through, send a text or leave a message on my direct line at 856-314-5625. I’ll follow up personally within a day.

  • The Unexpected $10,000 Tax Bill

    I delivered bad news to a hardworking older couple today. The first time in their lives that they needed professional tax help was too late to make a real difference.

    They had spent years helping a friend in South Jersey under financial stress: a car repair, a heating bill, a medical bill, a roof. It added up to six figures. Nobody set out to lend that much. Nobody set out to lend anything. They were doing what people in this community have always done for each other. They show up.

    When she got sick, they took the harder job too. Power of attorney. Executor. The paperwork of dying, which is nobody’s idea of a favor.

    She died. The house sold. And the money that came back to them, the same money they had already spent on her, was taxed as an inheritance instead of treated as repayment of a loan.

    The tax bill was five figures. It did not have to exist.

    Why New Jersey saw it that way

    New Jersey repealed its estate tax in 2018, so people assume the state stopped taxing death. It did not. The inheritance tax is still here, and it does not care about the size of the estate. It cares who receives the money.

    Spouses, children, parents and grandchildren are exempt. Siblings and in-laws get a small exemption. Everyone else is Class D: friends, neighbors, cousins, the person who drove her to chemotherapy for two years. No exemption. Fifteen percent from the first dollar.

    The mistake was not in the will

    The easy version of this story blames whoever drafted the estate documents, and the easy version is wrong. A few casual words in the homemade power of attorney, added as a personal touch, turned a loan repayment into a taxable inheritance. I had to read it several times before I saw it.

    By then the money had already moved. Years of it. You cannot document a loan retroactively and expect a state auditor to accept it, and you should not ask an attorney to try. The failure happened at a kitchen table, the first time somebody wrote a check and said don’t worry about it. That is where the fifteen percent was decided.

    What would have worked

    One page. A promissory note, or a signed acknowledgment of indebtedness updated as the advances continued. Written when the money moved, not after. Or a power of attorney with express authority for the agent to reimburse documented advances, so the debt gets settled during life and none of it is an inheritance.

    Either costs almost nothing. Neither gets done, because asking a friend to sign a note feels like an accusation, and because nobody in that room is thinking about the Division of Taxation. I understand both. I still had to hand them the number.

    The point

    Nothing I could do in April was going to fix this. By the time a return reaches my desk, the decisions that drove the tax were made months or years earlier, by people who had no idea they were making tax decisions. They were being decent to a neighbor. The code has no category for that.

    The work worth paying for is the interruption. Someone in the room early enough to say: write this down, it will matter later.

    If you are supporting someone informally, or you have been named executor or agent for a friend, have the conversation now. Not at closing. Now, while the paperwork can still describe what is actually happening.

    The tax is not a penalty for helping. It is a penalty for not writing it down correctly.