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Friday, March 14, 2014

Excellent Guide on International Estate and Inheritance Taxes

While I have not had a chance to review it thoroughly to confirm its accuracy, I note that the accounting firm, Ernst & Young, has posted a detailed analysis of the estate and inheritance tax laws of almost every country in this brochure.

For those of you who have assets in multiple jurisdictions or are citizens living abroad, you should familiarize yourselves with these laws and hire competent counsel to asset you in minimizing your taxes.

Monday, March 10, 2014

Calculating Trustee Commissions in NJ

From time to time, people ask me how executor's commissions and trustee's commissions should be calculated.  I have already written a post on calculating executor and administrator commissions, so this post will focus on Trustee commissions. 

New Jersey statutes on trustee commissions are very difficult to interpret because they use the term fiduciary to apply to executors, administrators, trustees, guardians and conservators.  This would not be a problem if the fees were calculated the same, but they are not.  Additionally, there are different rules for testamentary trusts (trusts created under a Will) and intervivos trusts (a trust created while the Grantor was alive).  Going forward, if a particular rule applies to everyone, I will call that person a fiduciary.

To start, the Grantor of a Trust can specifically provide for a trustee commission.  However, for testamentary trusts, if the commission is higher than the amount allowed under the New Jersey statutes, the Will must specifically state that the testator is aware of the commissions allowed under the New Jersey statutes and expressly authorize payment in excess thereof.  N.J.S.A. 3B: 18-31.

Failure to expressly authorize a commission in excess of the NJ statutory limit or failure to state whether or not a trustee is even entitled to commission will result in the trustee being able to take a fee as provided in New Jersey Statutes 3B:18-23 through 3B:18-29.  These statutes also apply to Guardians and Conservators.


So how is the trustee's fee actually calculated?


Unlike an executor who typically takes a one time fee, Trustees are more likely to take annual commissions, especially if the trust goes on for a long time. 

The fee is comprised of both an income commission and a corpus commission.  A trustee is entitled to annual income commissions of 6% without prior court approval. N.J.S.A. 3B: 18-24.



The corpus commission is a bit more complicated to calculate:. Normally an executor will take a one time commission as follows:
  1. 0.5% on the first $400,000 of all corpus received by the executor; plus
  2. 0.3% on the excess over $400,000.  (N.J.S.A. 3B: 18-25)
If there is more than one trustee, an additional 1/5 of all the commissions allowed above is authorized, provided that no one trustee shall be entitled to any greater commission than that which would be allowed if there were but one trustee involved.   (N.J.S.A. 3B:18-25.1)

A trustee is entitled to a minimum fee of at least $100 per year and corporate trustees may set their own rates.   

Upon the termination of a trust, the trustee is entitled to a termination fee in addition to the annual fees he or she may have taken.  3B:18-28.  The termination commission is as follows:
  1. If the distribution of corpus occurs within 5 years of the date when the corpus is received by the fiduciary, an amount equal to the annual commissions on corpus authorized pursuant to N.J.S. 3B:18-25, but not actually taken by the fiduciary, plus an amount equal to 2% of the value of the corpus distributed
  2. If distribution of the corpus occurs between 5 and 10 years of the date when the corpus is received by the fiduciary, an amount equal to the annual commissions on corpus authorized pursuant to N.J.S. 3B:18-25, but not actually received by the fiduciary, plus an amount equal to 1 1/2 % of the value of the corpus distributed;
  3. If the distribution of corpus occurs more than 10 years after the date the corpus is received by the fiduciary, an amount equal to the annual commissions on corpus authorized pursuant to N.J.S. 3B:18-25, but not actually received by the fiduciary, plus an amount equal to 1% of the value of the corpus distributed; and
  4.  If there are two or more fiduciaries, their corpus commissions shall be the same as for a single fiduciary plus an additional amount of one-fifth of the commissions for each additional fiduciary.
An illustration of how to calculate the annual trustee commission

Let's presume the following facts:  Trust owns a house worth $500,000, a $1,400,000 in stocks and bonds, and $100,000 worth of cash. This is the value at the end of the previous year.

Let's also presume that there is only one trustee and in the year in question the stocks and bonds gave off $56,000 of income. 

Accordingly, the calculation would be as follows:

0.5% on the first $400,000 would be $2,000
3.5% on the next $1,600,000 would be $4,800
6% on the $56,000 of income would be $3,360
So the trustee would be entitled to a total commission of $10,160 for the previous year.


Final thoughts about trustee's commissions

Any commission that a trustee takes will be subject to an income tax.  As a result, if the trustee is also a beneficiary, he or she may not want to take a commission.  Additionally, many times relatives do not appreciate the amount of work involved and will become upset at a trustee if he or she takes a commission. You should think about the dynamics of your family before taking one.

A trustee that does extraordinary work can apply to the court for a commission in excess of the statutory fee.  A trustee needs to prepare an annual accounting, and one that fails to adequately communicate with the beneficiary or otherwise behaves badly can be removed by the court.  If a trustee is removed from office, he or she may be required by a judge to forfeit his commissions.  This is not automatic though.

Finally, as discussed in back in May of 2013, an attorney who is serving as a trustee may be entitled to a fee for legal services AND a commission.

Friday, March 7, 2014

Calculating NJ Executor Commissions

From time to time, people ask me about executor's commissions and trustee's commissions in New Jersey.  Because it is a bit complex, I have broken it down into two posts and I will focus on commissions for executors and administrators today.

To start, a Will can specifically provide for an executor's commission.  In that absence of expressly authorizing a commission an executor will be entitled to take an executor's fee as provided in New Jersey Statutes 3B:18-12 through 3B:18-17. These same statutes also provide that if a person dies intestate (dies without a Will), the administrator of the estate may also take a fee.  Since the fees for an executor and administrator are the same, I will use the term interchangeably for purposes of this post.

New Jersey statutes are very difficult to interpret because they use the term fiduciary to apply to executors, administrators, trustees, guardians and conservators.  This would not be a problem if the fees were calculated the same, but they are not. 

So how is the executor's fee actually calculated?

First, an executor is entitled to annual income commissions of 6% without prior court approval. (N.J.S.A. 3B:18-13)

Second is the calculation of the corpus (or principal) commission.  This is a bit more of a complicated formula. Normally an executor will take a one time commission as follows:
  1. 5% on the first $200,000 of all corpus received by the executor;
  2. 3.5% on the excess over $200,000 up to $1,000,000;
  3. 2% on the excess over $1,000,000;
  4. and 1% of all corpus for each additional executor provided that no one executor shall be entitled to any greater commission than that which would be allowed if there were but one executor involved.   (N.J.S.A. 3B:18-14)
Sometimes an estate administration goes on for a lengthy period of time.  Under such circumstances, an executor can also receive an annual commission equal to 1/5 of 1% (or 0.2%) of the corpus.  However, this commission is not that frequently taken and a court may disallow it if it is in excess of  N.J.S.A. 3B:18-14.

What assets are part of the corpus when determining the executor's commission?
The corpus of an estate is generally defined to mean any asset that has come into the hands of the executor.

Examples of assets that come into the hands of the executor are:  Bank accounts, automobiles, tax refunds, business interests, an interest in a lawsuit or litigation, life insurance payable to the estate, retirement accounts with no beneficiary and real estate that were owned by the decedent. 

Examples of assets that do not come into the hands of the executor and are not subject to the commission include: Life insurance (if there is a beneficiary other than the estate), retirement accounts where a beneficiary other than the estate is named, property that is held as joint tenancy by the entirety or joint tenants with rights of survivorship.

What about mortgaged property - do I use the net value or the gross value?

While it may be unfair if the estate is heavily leveraged, the commission is taken on the gross estate, not the net.  If the result is too onerous, a beneficiary may wish to seek judicial relief.

An illustration of how to calculate the executor commission
Let's presume the following facts:  Decedent owned a vacation house worth $500,000 and a mortgage of $100,000, a primary residence owned with his wife as tenancy by the entirety worth $1,000,000 and a mortgage of $300,000, a $400,000 IRA payable to his wife, $200,000 in stocks and bonds, a $200,000 life insurance policy payable to his children, and $100,000 worth of insurance with no beneficiary. 

Let's also presume that there is only one executor and during the administration, the $200,000 of stocks and bonds gave off $5000 of income. 

Included for purposes of calculating the commission are:  the $500,000 house, the $200,000 in stocks and bonds and the $100,000 life insurance policy with no beneficiary (for a total of $800,000).  There is no deduction for the the $100,000 mortgage.  The primary residence, the IRA and the $200,000 life insurance policy are excluded.

5% on the first $200,000 would be $10,000
3.5% on the next $600,000 would be $21,000
6% on the $5000 of income would be $300
So the executor would be entitled to a total commission of $31,300.


Final thoughts about executors commissions

Any commission that an executor takes will be subject to an income tax.  As a result, if the executor is also a beneficiary, he or she may not want to take a commission.  Additionally, many times relatives do not appreciate the amount of work involved and will become upset at an executor if he or she takes a commission. You should think about the dynamics of your family before taking one.

An executor that does extraordinary work can apply to the court for a commission in excess of the statutory fee.  An executor that behaves badly can be removed by the court.  If an executor or administrator is removed from office, he or she may be required by a judge to forfeit his commissions.  This is not automatic though.

Finally, as discussed in back in May of 2013, an attorney who is serving as an executor may be entitled to a fee for legal services AND a commission.

Thursday, February 13, 2014

Gifting to Parents to Save on Capital Gains Taxes

As I gaze outside at yet another major snowstorm here in Mercer County, NJ and contemplate how nice it would be if I were visiting my folks near my Boca Raton, Florida office, I am reminded of a tax savings idea that I heard was gaining traction amongst wealthy children whose parents are still living.

With the federal estate tax exemption up to $5,340,000 after its most recent adjustment for inflation, children that own highly appreciated assets (such as stock or real estate) can simply gift these assets to their parents now. When the parent passes away, the children can receive these assets back with a stepped up basis, potentially saving hundred of thousands of dollars in capital gains taxes when the assets are finally sold.

While at first blush this seems like an incredibly easy strategy to save money on taxes, there are actually many pitfalls. In particular, the strategy will not work well if:
1) the parent is receiving Medicaid or government benefits;
2) the parent lives in a state or jurisdiction that has a state estate tax or inheritance tax;
3) the parent has remarried; or
4) the parent has significant wealth and has their own estate tax problems.

Additionally, there could be problems if you have siblings or step siblings as the child who originally owned the assets would obviously want to ensure their return. Here is the final catch, the IRS will not like it if you prearrange this plan. In other words, the parent can't immediately promise/guarantee that they will redirect the asset to the child.

Finally, gifts of certain assets will require an appraisal for the federal gift tax return that would be required (Form 709), potentially making this a costly transaction.

Please contact our attorneys if you would like to learn more about this type of gift planning or any other estate planning.

Friday, January 3, 2014

One Does Not Simply Inherit Assets in New York

I am in the midst of one my of my more difficult estate administrations in New York, and I thought it would be worthwhile to remind everyone how important it can be to set up a revocable trust in situations where you are leaving your estate to someone other than your next of kin.

In the matter I am working on now, the decedent (let's call her Jane) passed away leaving everything to her long time boyfriend and one other person.  Jane was not married and had no children, but she did have many siblings and nieces and nephews.  Even though Jane had a Will, the State of New York is requiring that we get each of Jane's surviving siblings to sign an affidavit approving of the probate of the Will. (This is known as a Waiver of Process; Consent to Probate Form.) 

Jane also had one sibling (Fred) who died before her.  So we have to get this form signed by all of Fred's children as well.  Should I bother mentioning that everyone has lost contact with one of Fred's sons?

Unless EVERY one of Jane's next of kin signs this form, the proposed executor has to go through extra steps to start his or her job.  This means the bills don't get paid, real estate can't get sold, and money can't be transferred to the people named in Jane's Will.

The need to have this form signed will wind up costing the estate a lot of time and money as the Executor must make diligent effort to track down this missing nephew.  It will also complicate matters if any of Jane's siblings or Fred's children does not sign and notarize the form required by New York.  Other than doing the right thing, none of Jane's relatives has any incentive to sign this form.  In fact, if any of Jane's relatives believe that Jane's boyfriend shouldn't inherit, they can certainly make it a difficult and expensive process.

If Jane had properly titled her assets in the name of a revocable trust and named beneficiaries on her IRA and life insurance policies, she could have helped her loved ones avoid the probate process.  By avoiding probate, all of these steps become unnecessary and would have saved everyone time, trouble and money.

Monday, December 30, 2013

Florida Office

I'm pleased to announce that effective January 1 that I will have a new office in Boca Raton, Florida.  The new office address is:

5499 N. Federal Highway
Suite K
Boca Raton, FL 33487

My phone number in Florida will remain unchanged: 561-247-1557.

Please contact me for any of your Wills, Trusts or Estate Administration needs.

Tuesday, December 17, 2013

Right to Name Guardian for Minor Children When Parents are Separated or Divorced

I was discussing the affect of a divorcee naming a guardian for minor children in a Will with a few colleagues the other day and I thought I would share some of our findings. 

When there is a custody dispute between a natural parent and a third party, the law regarding who has custody of the child is governed by the case:Watkins v. Nelson, 163 N.J. 235 (2000).

The court found that there is a presumption in favor of the natural parent which arises from a parent’s fundamental liberty interest protected by the Due Process Clause of the Fourteenth Amendment to the United States Constitution and is rooted in the right to privacy.  However, a parent’s right to custody of his or her own child is not absolute. The presumption in favor of the natural parent.  This presumption can be rebutted by a showing of gross misconduct, unfitness, neglect, or exceptional circumstances affecting the welfare of the child.

When a third party seeks custody of a minor child (or an incapacitated individual), the court must engage in a two-step analysis. First, the court must determine whether the presumption in favor of the legal parent is overcome by either a showing of unfitness or exceptional circumstances. If either is satisfied, the court must then decide whether awarding custody to the third party would promote the best interests of the child.  So, at the end of the day, a court will decide who should have custody based upon what is in the best interests of the child.

In New Jersey, there also a statute on point as to the decedent's right to name a guardian and to what extent it will be honored.  The relavent statute is: N.J.S.A. § 9:2-5. Death of parent having custody; reversion of custody to surviving parent; appointment of guardian by superior court; removal
In case of the death of the parent to whom the care and custody of the minor children shall have been awarded by the Superior Court, or in the case of the death of the parent in whose custody the children actually are, when the parents have been living separate and no award as to the custody of such children has been made, the care and custody of such minor children shall not revert to the surviving parent without an order or judgment of the Superior Court to that effect. The Superior Court shall have the right, in an action brought by a guardian ad litem on behalf of the children, to appoint such friend or other suitable person, guardian of such minor children, and shall have the right to remove such guardian, and to appoint a new guardian or guardians, and to make such judgments and orders, from time to time, as the circumstances of the case and the benefit of the children shall require.

Even if the court does not honor your request for guardian, you can still set up a trust for your child, and you can name anyone you wish to act as trustee to manage your funds until the child is old enough to handle his or her own finances.  This is important because otherwise the guardian or surviving naturual parent will have complete authority over these funds.

To summarize, if you do not want the surviving parent of the child to receive legal custody of your child:
1) It is a good idea to create a Will;
2) You should name a guardian under your Will for your minor children and any incapacitated children because it gives that proposed guardian standing to sue the surviving natural parent for custody (I would also recommend giving reasons in the Will or elsewhere to estatablish why the person you are proposing as guardian would be better suited to care for the child than the surviving parent);
3) The courts do not have to honor your request as to whom you name as guardian, they will try to determine the best interests of the child; and
4) Regardless of custody issues, you should set up trusts for your children and name a trustee to manage the funds until the child is of age, otherwise the surviving parent will have authority as natural guardian to spend that money as he/she sees fit.