Too Specific

When approaching the drafting of a last will and testament, many people wish to specifically leave assets to certain individuals.  They might want to give their home to one person, their car to another person, and a brokerage account to yet another person.  For instance, Mr. Smith’s Will might read as follows:  “I devise my home located at 1 Happy Lane, Wall, New Jersey, to my son Joe Doe.  I devise my Buick automobile to my son Mark Doe.  I devise my Wells Fargo brokerage account to my daughter Mary Doe.”

When you give someone a part of your estate through a Will, you are said to have “devised” the asset to the beneficiary.  When you give a specific asset to someone in your Will (your home, your car, your brokerage account), you are said to have “specifically devised” the asset.

I am not a big fan of specifically devising assets in a Will unless there is a compelling reason to make the specific devise.  There are numerous issues that can arise when you specifically devise assets in your Will.

One issue arises if the estate is subject to a death tax, such as New Jersey estate tax or inheritance tax.  If Mr. Smith leaves Joe his home, Mark his car, and Mary his brokerage account, each of these assets has a different value, so each of these assets will cause a different amount of death tax to be charged against Mr. Smith’s estate.

Joe, who is getting the house, might be receiving the largest portion of the estate from a monetary perspective, but if the Will fails to address appropriately the issue of who pays the death tax, all of Mr. Smith’s children might end up paying the same share of the death tax, even though Joe received most of the estate.  Putting aside the fact that an uneven distribution of the estate might—in and of itself—cause hard feeling among Mr. Smith’s children, the fact that the children who are receiving a smaller share of the estate are paying the same amount of tax could add insult to injury as far as the children are concerned.

Another problem with specifically devising assets is, the plan counts on Mr. Smith dying owning the assets he specifically devised.  For instance, what if Mr. Smith doesn’t own his home at the time of his death.  Let’s say that Mr. Smith lived in a nursing home (or assisted living residence) for the last two years of his life and didn’t own his home for the two years prior to his death.  What does Joe, to whom Mr. Smith specifically devised his home, receive under the Will of the testator?

The short answer is, Joe isn’t going to receive the home that Mr. Smith didn’t own at the time of his death.  The Will of Mr. Smith cannot control what he did not own when he died.

In fact, Joe isn’t going to receive anything under the Will based upon the specific devise of the house.  The devise of the house will simply lapse, and Joe will not receive anything from this specific devise.

Now, this might cause even harder feelings among Mr. Smith’s children than the uneven division of his estate.  Joe might feel that he is entitled to something from his father’s estate because his father specifically devised the house to him.  The house might have been the most valuable asset in Mr. Smith’s estate.

As logical as Joe’s arguments may seem, the reality of the situation is different.  Joe might end up in a fight with his siblings as he makes a losing argument for recompense from other assets Mr. Smith might have died owning.  For instance, Joe might say, “I’m entitled to a larger share of dad’s bank accounts because that’s where the money from the sale of dad’s house was deposited.”

Joe will lose these arguments.  Mr. Smith’s attempt to give his estate to his children in a manner he thought was appropriate based upon each child’s needs could end up causing tremendous family tension.

Conflict Between Federal and State Law

The process of administering the estate of a decedent is, in most instances, quite simple.  For most estates, the executor does not need to retain the services of an attorney.  In fact, with some estates, the last will and testament of the decedent does not need to be submitted to probate because the property of the decedent passes by way of beneficiary designation or to a surviving joint owner.

While most estates are simple, not all estates are.  In fact, some estates can be quite difficult to administer for one reason or the other.  Ironically, sometimes it is the smaller estates that can be the most difficult to administer.  An estate that has insufficient assets to pay the debts of the decedent can be one of the more tricky estates to administer.

If an estate has insufficient assets with which to pay the debts of the decedent, the estate is said to be insolvent.  When an estate is insolvent, there is a certain priority with which the debts of the estate must be paid.  An executor cannot simply pick and choose which debts to pay.

What the typical person serving as executor would most likely do is pay the debts as he receives the bills from the creditors.  The executor would think he was doing a good job and being conscientious by paying bills “right away,” but in fact, such actions could expose the executor to personal liability for failing to abide by the law.

There is a New Jersey statute that governs the priority of debts.  The order in which debts have to be paid is as follows:  funeral expenses, expenses of administering the estate, debts owed to the Office of the Public Guardian, debts with preference under federal or state law, reasonable medical expenses associated with the last illness, debts that have been reduced to judgment, then all other debts.

It is the fourth priority of debts—debts with preference under federal and state law—that I want to focus on today.  To me, a debt with preference under federal law would be any debt owed to the United States government, such as unpaid income taxes.

Now, reading the New Jersey statute, you would think that an executor handling an insolvent estate would be safe in paying the income taxes of the decedent after he paid the funeral expenses and the expenses associated with administering the estate (such as legal bills, executor’s commissions, cost of probate, etc.).  The problem is, there is a conflict between state and federal law on this issue.

A federal statute provides that any debt owed to the United States government takes preference over all other debts.  The federal statute goes on to provide that if the executor of an estate pays any debts before paying a debt owed to the United States and if there is then insufficient assets with which to pay the debt owed to the United States, then the executor is personally liable for the debt owed to the United States.

So, let’s assume the following facts:  Mr. Smith dies with an estate worth $13,000.  His funeral costs $9,000.  His executor is entitled to a commission of $500.  His executor paid $150 to submit Mr. Smith’s Will to probate.  His executor hired a lawyer to file an action to declare the estate insolvent, and the lawyer charged $3,000 to file that action and have the estate declared insolvent.  Mr. Smith owes $2,000 to the IRS and has various other debts some of which have been reduced to judgment.

Now, given the New Jersey statute, you would think the executor would be fine paying the funeral and the costs of administration in full and making a partial payment to the IRS.  But the federal statute says otherwise, and if the executor fails to pay the IRS in full, then the IRS can sue the executor for the remainder of the debt.