It’s Not Your Money Yet
It is a common scenario:
Someone passes away and their ‘Last Will and Testament’ states that their entire net estate is left to their only child, who is an adult. Further, not only does the Will give that child the entire estate, but it also appoints the child as Executor of the estate, thereby bestowing upon the child the responsibility of disbursing estate proceeds to “beneficiaries.” As a result, the Executor is now responsible for disbursing funds and assets to… themselves.
This seems to be a rather simple, cut-and-dry situation. And most often it is. However, the worst mistake the beneficiary-Executor can make is to assume that the proceeds of the estate are automatically theirs. The process does not work that way. Do not fall into the trap of assuming you may automatically take your bequest (the assets due to you from the estate). This is why administering an estate is more difficult than it often appears: It takes time and can often become confusing.
Let’s take a common example:
A widowed father passes away, leaving his entire estate to his only child, his adult daughter. The father’s ‘Last Will and Testament’ also names daughter as the Executor. The father’s home is a large portion of the estate. The daughter already owns a home and has no need for a second home. Thus, she decides to sell her father’s home to a buyer. The daughter signs the contract personally as the seller. The buyer has no connection to the family and has no knowledge of how the estate has been administered. To protect their interest, the buyer hires a title company to research any liens that might be associated with the property. The title company learns that the deed is in the name of a deceased person and that seller is actually an estate, not the daughter. The title company immediately requires proof that all relevant taxes have been paid prior to disbursing some or all of the monies from the sale of the home. The daughter argues that she is the sole heir and the house is now hers. Who is right?
The title company will win this argument every time. The daughter mistakenly assumed that, because she is the sole heir and that there is no inheritance tax due when a bequest is from parent to child, she automatically owned or otherwise had the rights to all monies from the home.
However, in New Jersey the state has an automatic lien on all real estate owned by the person who died. And the title company is bound by law to hold some or all of the proceeds from the sale in escrow until it receives proof that either: 1) all taxes associated with the estate have been paid, or 2) there are no taxes to be paid. The title company has no way of knowing whether inheritance taxes are due on any particular estate sale until it obtains proof. And the State of New Jersey has no way of tracking whether taxes have been paid for each particular transaction on behalf of an estate. Last, the Executor’s word is of no value; business simply is not conducted based upon someone’s word. So the Executor will be required to satisfy this inquiry with the proper documentation.
In this scenario, the daughter now has to figure out how to pay any inheritance taxes (should they exist) or prove to the title company that there are none. This problem is compounded by the fact that the daughter has signed a contract for the conveyance of her father’s property with the buyer and the buyer has now expended substantial money (title company, inspections, attorney’s fees, etc.) in furtherance of the contract. Most often, this means that the daughter now has to go backward and begin administering the estate properly while the title company holds the proceeds in escrow.
Despite being the sole heir and Executor of the estate, the daughter would have been wise to consult with an attorney who specializes in probate law to work through the probate process and avoid any questions at a later date. The daughter made the mistake of assuming that her father’s money and assets were automatically hers because she was the sole heir. They were not.