Special Estate Administration Issues

There are a myriad of issues that can confront an estate upon a Decedent’s death. Any professional who is attempting to assist in the administration of the estate must, at the very least, recognize how to spot these issues and to deal with them.

1. Determining the Continuation of Decedent’s Business
Special issues arise when a decedent is the owner of a business. In this regard, this section excludes individuals who own interests in large corporations. This section addresses issues which involve individuals who own sole proprietorships as well as interests in partnerships, limited liability companies and S corporations.

When the business owner dies, the first decision which must be made is whether the business should be continued, discontinued or liquidated. In the event the decedent was a sole proprietor or sole interest holder under a limited liability company or S corporation, it is likely that the business will be either discontinued or liquidated. If there are surviving partners or active members in a limited liability company or S corporation, the business may well continue.

2. Steps to Take in Dealing with Simultaneous Death
“Simultaneous death” is the concept that applies when two or more individuals, who were beneficiaries of each other’s estate, die at the same time. In essence, N.J.S.A. 3B:6-3 provides that, property that would have passed to intestate beneficiaries, “shall be divided in as many in equal portions as there are successive beneficiaries and these portions shall be distributed respectively to those who would have taken in the event that each designated beneficiary had survived.” Furthermore, N.J.S.A 3B:6-4 treats property, held either jointly with right of survivorship or as tenants by the entirety, by converting same into a tenancy in common in the event multiple owners die simultaneously.

N.J.S.A. 3B:6-5 provides that life insurance proceeds pass to the contingent beneficiary if the primary beneficiary dies at the same time as the decedent.

The aforementioned provisions apply solely to intestate matters. In each and every instance, simultaneous death is defined by a beneficiary failing to survive a decedent by 120 hours. Once 120 hours elapses, the property is considered vested in the beneficiary even if he or she has not received same.

Notwithstanding the foregoing, this law is superceded by any lawful provision within a will, living trust, deed or contract of insurance. Such documents may lengthen or shorten the aforementioned period of time for survival. It may also make a presumption regarding one party predeceasing the other in the event of a simultaneous death.

After making this initial determination, one must inquire whether a buy/sell agreement exists. This agreement may also be known as a partnership agreement, shareholders’ agreement or operating agreement (for LLC’s). These agreements serve three important purposes. First, they may control valuation for Federal estate tax (IRC Section 2703). However, such valuation may not be acceptable for New Jersey Inheritance Tax purposes. Second, they detail the terms and conditions by which an individual’s shares will be transferred upon death. Third, operating control or administrative functions may be altered, pursuant to the terms of an agreement, as a result of death.

In the event surviving partners, members or shareholders are to buy out a decedent or his/her estate, buy/sell life insurance may have been obtained and likely used for the purchase of the business interests from the decedent’s estate by the surviving business members. In the event such life insurance does not exist, or is not satisfactory to pay the decedent’s estate, the agreement should specify the terms and conditions by which the business is to be sold and purchased.

In the absence of one of the aforementioned agreements, the transfer of business shall be made pursuant to the Will. In administering an estate, an executor should note whether instructions exist in the Will as to the disposition of the business. If no such instructions exist, the executor generally has the authority to act on behalf of the decedent in deposing of the decedent’s business interest.

For tax purposes, a professional appraisal of the business interest should be obtained. Despite the terms and conditions of a buy/sell agreement, the New Jersey Department of Treasury shall require an independent appraisal for New Jersey Inheritance Tax purposes. In the event the business interests pass from one generation to the next within a family, it is often mandated that the appraisal come from an individual or entity other than the accountant which is employed routinely by the business. In making these evaluations, a qualified appraiser or forensic accountant should explore whether discounts can be obtained for lack of marketability or minority interests when appropriate.

3. Filing for Partition of Undivided Interests in Property
Commonly, both personal representatives and beneficiaries think that the job of an executor or administrator is to liquidate all the estate assets and to distribute checks to the heirs. However, beneficiaries are entitled to “in kind” distribution as well. Pursuant to N.J.S.A. 3B:23-1, there are two forms of in-kind distribution. First, a specific devisee under a Will, is entitled to specific bequests made to him or her. Second, whether a particular asset is not covered by a Will, or in the event of intestacy, an estate beneficiary may request an in-kind distribution if three conditions are met: (1) the person has not previously demanded payment in cash, (2) the property distributed in kind is valued at fair market value as of the date of its distribution (not date of death), and (3) no residuary devisee has requested the asset in question remain a part of the residue of the estate. In the event all of these conditions are met, an in-kind distribution may be made. Of course, this distribution can be made outright if it falls within the percentage to which the beneficiary is entitled under the decedent’s estate. In the event it exceeds such interest, an executor or administrator may distribute same if the beneficiary is willing to pay the difference between his or her interest and the fair market value of the asset. In this event, or in the event another residuary devisee makes the request that an asset remain part of the residue of an estate, a court order should be obtained authorizing the distribution.

On occasion, two or more heirs or devisees may be entitled to distribution of undivided interests in the real or personal property of an estate. Typically, such situations encompass the interests in real property. In such an event, an action before the probate court may be initiated for partition. This action may be commenced not just by the personal representative, but by any of the beneficiaries of the estate as well. This application should be made prior to the formal or informal closing of the estate. It should be undertaken by way of an Order to Show Cause and Verified Complaint.

The aforementioned Order to Show Cause shall demand that notice to all interested heirs or devisees be provided. In the event any beneficiary devisee is a charity, the Attorney General for the State of New Jersey shall be notified as well.

If possible, the court shall partition the property in the same manner as provided by law for civil actions of partition. In the event the court determines a partition cannot be made without prejudice to the owners and which cannot be conveniently allotted to any one particular party, the court may direct that the property be sold.

4. Petitioning the Court for Instructions
A properly drafted Will not only appoints an executor, but provides that executor with a set of instructions to complete their job in the administration of the estate. Unfortunately, the instructions given in Wills are not always clear. There are typically two reasons for poor instructions. First, many people are using software programs and the Internet to prepare Wills. Arguably, the quality of the software programs and Internet programs leave a bit to be desired. Moreover, many lay people do not have a clear understanding of probate laws. Thus, the attempt to save a few dollars in estate planning costs can frequently lead to the creation of deficient estate planning documents. Second, many attorneys, frankly, draft poor Wills.

Recognizing that an executor is responsible for proper distribution, an executor wishes to ensure that he or she is not accused of making a mistake as to distribution after same has been made. As such, in order to remedy the deficient instructions of a poorly drafted Will, an executor may petition the Court for directions.

Specifically, Rule 4:89-1 states, “If an account is to be settled, the plaintiff in the complaint may apply to the Court for directions as to the distribution of the estate.” Rule 4:89-2 states, “In actions for distribution, the complaint shall state: (e) When letters, if any, are granted to a fiduciary; (b) the names and addresses of all persons interested, specifying which of them are minors or mentally incapacitated persons; and in actions for the distribution of an intestate’s estate, the manner and degree in which the next of kin severally stand related to the intestate; (c) the balance in the fiduciary’s hands for distribution, so far as the same may be known; and (d) shall have annexed to the complaint a copy of the Will or other instrument, if any, pursuant to which distribution is to be made.”

In light of the foregoing, it is clear that the issue of instructions is one which is limited to wills and trusts. Intestate estates typically are not involved in this matter, as distribution is governed by the intestate statutes.

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