One of the biggest questions to tackle in formulating an estate plan is the payment of any estate and inheritance taxes. Should the estate pay the taxes or should it come out of the pocket of the recipients? Fortunately, with the state’s repeal of the estate tax, and many estates not big enough to pay federal estate tax, decisions like that are made easier because you know who will have to pay tax and at what rate. Estates that have a lot of liquid probate assets also can handle large inheritance tax bills, and executors and administrators can settle their beneficiaries’ tax burdens through the assets received in the estate. New Jersey’s laws hold personal representatives personally accountable for any unpaid inheritance tax up to the amount in the estate. So if there are not enough assets in the estate, or assets passed non-probate directly to the beneficiaries responsible for tax, how does the personal representative get the tax paid? The best thing for an executor or administrator to do is to reach out to the beneficiaries and ask for the portion each is responsible for. But if the beneficiaries are unresponsive or unwilling, the personal representative of the estate has some options.
The first option is for the executor or administrator to pay everything back and then sue the beneficiaries for contribution based on their responsibility for the tax. The other option is for the executor or administrator to pay only the portion he or she is responsible for, along with the amount the estate can pay, and then post a bond payable to the State for double the remaining amount due, while the State pursues the remaining beneficiaries. It takes the personal representative and the estate off the hook for the remaining tax due, making it a cheaper alternative versus having to pay the remaining tax due. The only drawback is that the estate would be making annual payments on it until the state collects its money, which do eventually add up, and it ties up the affairs of the estate until that issue is settled.
By being proactive, you can ensure as executor or administrator you are protected from liability for taxes or any other burdens or responsibilities you have in administering an estate. Having an experienced attorney in your corner can help alleviate this stress in navigating and completing the administration process.
If you are looking for additional details on this topic or if you require advice about your situation, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com. Please ask us about our video conferencing or telephone consultations if you are unable to come to our office.
Written by Stephen W. Kornas, Esq. of Hanlon Niemann & Wright