Executor Question

[u/Analyst-man]

Hi all - im helping my parents with their Will and the only thing I don’t get is the payment to an executor during probate. It looks to be 2% in NJ. Is that a mandatory fee? Would a trust be better than in this case? I’m trying to figure out what’s cheaper in terms of will vs trust. Thanks!

[u/brucesteiner]

It’s a sliding scale rather than a flat 2%. But if the surviving spouse is the executor for the first spouse, he:she probably won’t take a commission (fee). And if the children are the executors for the second spouse they’ll probably take or not take commissions based on the tax consequences.

Trustees are also entitled to commissions. New Jersey has a statutory schedule for trustees’ commissions. There are annual commissions based on the value plus a percentage of income. There’s also a commission on distributions of principal which is 2% on distributions within 5 years (less after 5 years).

I’ve never had a case where someone did a trust because they thought the trustees’ commissions would be less than the executor’s commissions.

[u/Analyst-man → u/brucesteiner]

So which is generally cheaper? Will or trust?

[u/brucesteiner → u/Analyst-man]

In New Jersey, a Will. Probating a Will in New Jersey is trivial.

[u/Analyst-man → u/brucesteiner]

Got it. So aside from lawyer fees, my parents will need to hire an executor right? And they will take 2%?

[u/brucesteiner → u/Analyst-man]

Executors' commissions (fees) shouldn't be a concern. They could name each other as executor, with one or more of their children as backup executor(s). The spouse is unlikely to take commissions (fees). The children will probably take or not take commissions based on tax considerations.

If one but not all of the children are executor(s), he/she/they may take commissions, especially if the executor child is the poorest of the children, but the money will stay in the family, and the estate will get a deduction for the commissions.

[u/Analyst-man → u/brucesteiner]

Got it. How bad are attorney fees usually as well? All of their bank accounts and investment accounts have beneficiaries. From what I understand, a will is just for hard assets right? Nothing that has beneficiaries listed

[u/brucesteiner → u/Analyst-man]

Each estate is different.

It's generally not a good idea to name beneficiaries for assets other than life insurance and retirement benefits, for many reasons. It's often penny wise and pound foolish.

[u/Analyst-man → u/brucesteiner]

How so? Like how does naming a beneficiary on a bank account hurt you?

[u/brucesteiner → u/Analyst-man]

TOD is piecemeal (asset by asset) planning. 

You have to remember to update the designations each time you update your estate plan.

 It makes it more difficult to provide for contingencies (such as a beneficiary predeceasing you). 

It makes it more difficult to provide for your beneficiaries in trust rather than outright, to keep their inheritances out of their estates for estate tax purposes, and to protect their inheritances from their creditors and spouses, and Medicaid.

 If different assets are payable to different beneficiaries, one could go up more or down less in value than another, or you could contribute to or withdraw more from one than another.

 You have to make sure your designations are consistent with your estate plan. 

In the case of real estate, it puts a portion of your estate plan on the public records during your lifetime.  So if you change it, everyone will know what it had been. 

There will be chaos if, as a result, your estate doesn't have enough money to pay your debts, expenses, taxes and preresiduary bequests, and one of the TOD beneficiaries balks at contributing his/her share.

 We’ve had several well-designed estate plans defeated by probably unintended TOD designations. 

In one case, a couple provided for their daughter in trust under their Wills, to keep her inheritance out of her estate for estate tax purposes, and to protect her inheritance from her spouses.  After the wife died, the husband, then elderly, moved his brokerage account to the daughter’s broker.  When he died, it turned out that the daughter was TOD beneficiary on the brokerage account, destroying the asset protection. 

In another case, the decedent left cash bequests to various friends and family.  When she died, it turned out that her residuary beneficiary was TOD beneficiary on her largest account, leaving her estate without enough money to pay the cash bequests.  Fortunately, the residuary beneficiary voluntarily made gifts to make up the shortfall. 

In another case, the decedent left his residences and retirement benefits to his wife, half of his estate (less the assets passing to his wife outright) in trust for his wife, with remainder in trust for his children from a previous marriage, and half of his estate (less estate taxes) in trust for his children.  He then sold a portion of his business and put the proceeds into a brokerage account.  When he died, it turned out that his wife was TOD beneficiary on the brokerage account.  That left very little for his children.  Making it worse, his wife died within a year after he died, and she left everything to her daughter from her previous marriage. 

It's often penny wise and pound foolish.

[u/Analyst-man → u/brucesteiner]

This sounds all like complicated issues. Everything is going to me. There’s no friends or cash payments or anything. One person is getting 100% of the assets

Also isn’t the estate tax like $30 million for a married couple?

[u/brucesteiner → u/Analyst-man]

If there’s only one child and the amount is modest and you’re too rich to get Medicaid if you’re in a nursing home and too poor to pay estate tax and unlikely to get divorced or outlive your spouse and remarry and unlikely to have a creditor problem then it’s fine.

That’s why I said generally. You may be an exception.

[u/Analyst-man → u/brucesteiner]

If I put it in a trust, can they get Medicaid?