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Monday, May 8, 2017

Where Is The Best Place To Die From An Estate And Inheritance Tax Perspective?

Several years ago, I wrote a few articles comparing the tax consequences of dying in New Jersey, New York, Pennsylvania and Florida.  Now that New Jersey has amended its estate tax laws, I thought I should write another post for 2017.

I will write this blawg post with the following assumptions in mind:
1) Nothing is going to a surviving spouse (since no state taxes transfers to a surviving citizen spouse, this is generally not a factor).  Note, NJ still has an estate tax on transfers to a surviving NON-CITIZEN spouse if the transfer is for more than the state estate tax exemption amount, currently $2,000,000.
2) Nothing is going to anyone other than lineal descendants (children, grandchildren, etc.)  Transfers to nieces, nephews, friends, etc. can lead to a significant inheritance tax in New Jersey and Pennsylvania, so that is really a different comparison.
3) Since different states have different rules regarding what types of assets are taxable and where they are located, I will presume that all assets described herein are taxable by your state of domicile at the time of death.
4) The tax rates computed here are approximations only.  This is particularly true because New Jersey has a well known problem with its current estate tax that needs to be addressed.  (Basically, NJ's estate tax law contains a "circular" math calculation to figure out the tax.  We are still awaiting guidance from NJ on how to best do this or if they will issue a correction making the math easier and more straightforward.)

FLORIDA
Let's start off with the easiest of the four states, Florida.  Florida does not have an estate tax. Simply put, you do not have to worry about a tax upon death.

PENNSYLVANIA
Pennsylvania has a FLAT 4.5% inheritance tax on all transfers to children and grandchildren.  There are some notable exemptions though.  In particular, Pennsylvania does NOT have an inheritance tax on:
1) life insurance;
2) real estate or business interests owned outside of Pennsylvania;
3) a "qualified family owned business interest" - defined as having fewer than 50 full-time equivalent employees, a net book value of assets less than $5 million dollars, and being in existence for at least five years at the decedent's date of death. In addition, the principal purpose of the business must not be the management of investments or income-producing assets of the entity.  Here is a short post I wrote about the inheritance taxation of small businesses in PA;
4) Most family farms; and
5) certain IRAs, 401(k) plans and 403(b) plans.  Generally, if the decedent is under 59.5 years of age and not disabled, it won't be subject to a PA inheritance tax.  The decedent must have the right to terminate or withdraw the money without penalty to avoid the PA inheritance tax.

Additionally, Pennsylvania only taxes a portion of money held in joint account with another if it has been titled in joint name for more than 1 year.

NEW YORK
New York has slowly been raising its estate tax exemption up towards the federal estate tax exemption limit.  However, NY never makes anything too easy.  For individuals dying between 4/1/16 and 3/31/17, the exemption amount is $4,187,500 and for individuals dying between 4/1/17 and 12/31/18, the exemption amount is $5,250,000.  Additionally, while NY exempts real estate located outside the state of New York from its estate tax, it also forbids deductions related to such property, which occasionally has the effect of taxing a portion of the property!

The worst part of New York's estate tax regime is that it has a substantial cliff.  Basically, if your assets are 5% higher than the exemption amount, YOU DO NOT QUALIFY FOR THE EXEMPTION!  So, currently if your estate is above $5,512,500, your pay a full tax on everything, and if you are between $5,250,000 and $5,512,500, you only receive a partial estate tax exemption.

The tax rates in New York range from 3.06% to 16% once you have over $10,100,000 of assets.

NEW JERSEY
As stated above, because of the technical problem with NJ's statute, I my calculations are based upon the assumption that New Jersey will offer a true dollar for dollar credit for its $2,000,000 exemption in 2017 (on the first $2M of assets in the name of the decedent, not the last $2M).

Moreover, it should be noted that NJ has the fewest items that it excludes from its estate tax.  It doesn't include out of state real property or business interests fully, but it does do so on a proportionate level, effectively taxing some of it once you are above the exemption amount.

New Jersey DOES have an estate tax on life insurance if you owned the policy on your own life, unless paid to a citizen spouse or charity.

New Jersey's tax rates will be 7.2% to 16% depending upon how far above the $2,000,000 exemption amount you are.

SO JUST GIVE ME THE ANSWER, WHERE IS THE LEAST EXPENSIVE PLACE TO DIE?
It's still never that easy, except for Florida.  There is never a death tax in Florida, but let's compare:

NY estate tax vs. NJ estate tax vs. FL
Starting April 1, 2017, between New Jersey, New York and Florida,  if you have assets of less than $2,000,000 and are leaving everything to your children, it does not matter.  There is no state estate tax.

If you have assets between $2,000,000 and $5,250,000, it is cheaper to die in New York and Florida as neither of those two has an estate tax.  At about $5,000,000, New Jersey will have an estate tax of close to $292,000.

As your estate approaches, $5,500,000, New York quickly becomes the most expensive place to die because of the tax cliff.

NY estate tax vs. PA inheritance tax 
Starting April 1, 2017, between Pennsylvania and New York,  if you have assets of less than $5,250,000 and are leaving everything to your children, New York is the clear winner as it does not have a death tax and Pennsylvania has a flat 4.5% tax from the first dollar.

As your estate approaches, $5,500,000, New York quickly becomes a much more expensive place to die because of the tax cliff and because the rate is so much higher.

NJ estate tax vs. PA inheritance tax 
Starting January 1, 2017, between Pennsylvania and New Jersey,  if you have assets of less than $2,000,000 and are leaving everything to your children, New Jersey is the clear winner as it does not have a death tax and Pennsylvania has a flat 4.5% tax from the first dollar.

As your estate approaches, $4,000,000, New Jersey quickly becomes a much more expensive place to die because it has a higher tax rate.

Interestingly, the last time I made these calculations, for individuals dying before 2017, the cross-over point was $1,500,000.

RECOMMENDATIONS
As always, each client has a unique situation.  Many people who have assets in excess of $4,000,000 tend to own real estate in more than one jurisdiction, further complicating the tax picture.  Also just because you have a taxable estate now, it does not mean that you should move to avoid taxes upon your death.  It is usually possible to engage in tax planning to minimize any estate and inheritance taxes.  For instance, we can assist you with gift planning to minimize taxes upon your death.  Please contact us if you would like to learn more about how the changing laws affects you.

Wednesday, March 15, 2017

New Jersey Has Yet To Create An Estate Tax Return Form For People Dying In 2017

As many of you know, New Jersey recently revised its estate tax law.  Effective January 1, 2017, people who die in the year 2017 will have a New Jersey estate tax exemption of $2,000,000.  Since the law was enacted towards the end of 2016, the division of tax needs some time to prepare a new estate tax return form.

Unfortunately, if you are the executor or an administrator of an estate, and the estate is in excess of $2,000,000, you will not be able to file an estate tax return until the State of New Jersey provides guidance on the type of information they will need in order to issue Tax Waivers.  Inevitably, this will lead to a delay in getting access to funds.

If you are an executor trying to access funds from a financial institution, remember, the financial institution is required to release one-half of the funds.  We have heard a few horror stories recently about banks not doing this.  If this happens to you, please refer them to this notice from New Jersey. You will see in the section titled "Blanket waiver" that the bank may release 50% of the funds without a tax waiver.

Note, New Jersey has released Form L-8 and Form L-9 so that decedents who are leaving everything to Class A beneficiaries and charities and who have a taxable estate under $2,000,000 can access their accounts completely and apply for a tax waiver for any real estate owned.  (Thanks to the head of my estate administration department, Elizabeth Ketterson, for the reminder.)

This can be tricky when a decedent wants to give a token gift to a niece, nephew, godchild, step-grandchildren or friend.  Any bequest of more than $500 means that the Executor of the estate cannot use Form L-9 or L-8 to have more than 50% of the funds released as an inheritance tax will result and New Jersey will have an automatic lien on all New Jersey accounts and property.





Thursday, February 9, 2017

Notification of the Death of a Loved One

New Jersey recently passed a new law that requires senior citizen housing developments to notify the next of kin in the event that a resident passes away in the development.  See http://www.nj.com/politics/index.ssf/2017/02/christie_signs_next-of-kin_notification_law_to_pre.html#incart_river_home

You would think that most organizations would have procedures in place for sort of thing, but it is actually a fairly common occurrence that families are not notified immediately when a loved one dies, goes to the hospital or is injured.  Accordingly, it is best for each family to make sure that if you are moving a loved one into a facility of any kind that you determine what policies and procedures the facility has in place to notify emergency contacts.

The facility should be able to recognize that when health emergencies take place, it is often important to notify a different one set of people and that if there is a death or other type of emergency, a different set of people should be notified.  Ideally, whatever facility or organization you work with can build a custom plan and contact tree that meets your needs.  

Monday, January 23, 2017

Why Titling Of Assets Is So Important In Second Marriages

I was talking to another estate planning recently and discussing how much of our work involves assisting clients who have blended families.  Blended families generally refers to clients who are married but at least one of the spouses has a child from a previous relationship.

In comparing stories and ways that we can assist clients, we discovered that the biggest hurdle that we face is with respect to titling of assets.  To understand the problem, you must realize that the following are examples of things generally trump whatever you put in your Will or Trust:


  1. Life insurance beneficiary designations;
  2. IRA/401k/403b and other retirement beneficiary designations;
  3. Annuity beneficiary designations;
  4. Owning real estate as husband and wife;
  5. Owning real estate with a survivorship clause;
  6. Owning real estate with a life estate;
  7. Having someone on your bank account as a Pay on Death (POD) or Transfer on Death (TOD) beneficiary;
  8. Owning a bank account or brokerage account jointly with someone;
  9. Contractual agreements (such as a buy-sell agreement or divorce decree);
  10. Joint ownership of cars and other vehicles; and
  11. Joint ownership of bonds.

So, to put this another way, if you have two children from a previous relationship and are married to a new spouse, you may want 1/3 to go to each of your two children, and 1/3 to your spouse.  Well, even if you have a Will which says 1/3 goes to each person, this will not happen if some of your assets name a beneficiary or are in a joint account with someone.

Let's say in the example above Husband is the parent to 2 children and he owns the following:  A $400,000 house in New Jersey with Wife (who has no children), a $1,500,000 apartment in New York in just his name, a business worth $10,000,000 owned 70/30 with a partner, a 401k worth $3,000,000 naming his wife the beneficiary, a life insurance policy worth $1,000,000 naming his wife as a beneficiary, a brokerage account in his name worth $2,000,000 and a checking account with Wife worth $100,000.   Accordingly, the Husband has a net worth of $15,000,000.  (I'm only including $7M of the $10M business.)  It is Husband's desire to give $5M to each.

Without any additional planning and assuming that Husband and business partner have no agreement in place, a Will that leaves everything 1/3 to each child and Wife has the following consequences:

1)  The Wife would get the NJ house, the 401k, the life insurance, plus the joint checking account for a subtotal of $4,500,000.  Additionally, she would receive 1/3 of everything else (another $3,500,000) for a total of $8M.
2)  Each of the kids would receive $3,500,000 of assets - far less than what H intended.
3)  The business would be owned 23.33% by each of the children, 23.33% by the Wife and 30% by the business partner.

Unfortunately, however, life is usually even more complicated than this!  Frequently, there is a divorce agreement that might require that the life insurance be payable to the children.  Sometimes either the surviving spouse or the child is named as executor - and then the surviving spouse does not get along with the children.

Because these situations are so complex, they are very likely to result in estate litigation.  To minimize the costs of an expensive an hostile administration, it is very important to understand that title of assets frequently overrides what a Will or Trust might state and plan accordingly.




Tuesday, January 17, 2017

Opening of New York Law Firm Office

I am pleased to announce that we have officially opened an office in Manhattan.

While our main office is still located near Princeton, New Jersey, we will be happy to meet with clients by appointment at our New York location:

122 East 42nd Street
Suite 620
New York, NY 10168
Phone: 646-727-0399



The Law Office of Kevin A. Pollock LLC in midtown Manhattan, New York is located in walking distance from Grand Central Station in the historic Chanin Building at the corner Lexington Avenue. 

Tuesday, November 29, 2016

Caring for a Loved One - Guardianship, Powers of Attorney and Medical Directives

Holiday gatherings are often a time for us to gather with relatives and friends. The bustle of activity can highlight the impact that aging has had on our loved ones in the passing year. Observing decline in the people we care about can be unsettling and may generate many questions about how to best care for their needs. 

Creating a plan for dealing with problems before they develop, and putting a financial power of attorney and a healthcare power of attorney in place while your loved one is still competent can prevent a lot of misunderstanding, heartache and expense. If a loved one is already at a point where he or she is unable to care for and make good decisions for themselves, and if they are no longer competent to prepare financial and health care powers of attorney, Guardianship is the legal process that you must go through to be able to make decisions for them. 

Without guardianship or comprehensive powers of attorney, you will generally not be able to legally: 

  1.  Authorize their admission or discharge from a hospital or nursing home;
  2.  Hire and fire their doctors or authorize medical treatment; or 
  3.  Use their assets to pay for their expenses and care 

There are two different types of guardianship in New Jersey, the Guardianship of the Person and the Guardianship of the Estate, both of which require court appointment. The same person may serve as both types of guardian and are frequently referred to as Guardianship of the Person and Property. 

Guardianship of the Person allows you to make decisions about where an incapacitated person will live, which doctors will attend to their health, and how their medical conditions will be treated. Guardianship of the Estate allows you to manage the assets and financial affairs of the incapacitated person. In many cases, this means that the primary responsibility of the Guardian of the Estate is to figure out how to best use their loved one’s financial assets to provide care for them for as long as they are in need of it. 

To be appointed as a guardian, you must be able to prove to the court that a person is incapacitated, or unable to govern themselves or manage their affairs. In practice, this means that a person must be unable to make generally rational decisions about their medical care, personal care or finances. The incapacity may be caused by physical illness, mental disability, or chronic use of drugs or alcohol. For example, many of the individuals who seek guardianship are the parents of special needs children who have recently turned eighteen. 

If a person is able to perform some but not all of the tasks necessary to care for himself the guardianship may be limited to the areas where help is most clearly needed. As guardianship is such a powerful appointment, a court will not order it unless it is necessary. A critical part of the procedure to assess the need for a guardian is to require affidavits from two professionals (routinely physicians or psychiatrists) confirming the person’s mental and physical condition. 

You must also provide detailed information about your request to the incapacitated person and their next of kin (frequently their spouse and children, but this could also include their parents, grandparents, siblings, nieces, nephews or grandchildren depending on the situation). These individuals will then also have a chance to participate in the court process and present evidence that may either support or detract from your case. 

The allegedly incapacitated person will also have a person (usually an attorney) appointed on their behalf to help ensure that their voice is heard during the court proceedings and to assist them with resisting the guardianship if that is their desire. If guardianship is awarded, a person seeking guardianship must agree to be a fiduciary of the incapacitated person, which means that they must do what is in the best interests of their ward, even if it conflicts with their own personal interests. 

To help confirm that guardians are honoring that commitment, they must submit an annual report to the Court providing details about how the incapacitated person is doing and how their money has been spent.

Guardianship carries with it a lot of responsibility. Speaking with an estate planning attorney who routinely practices in this area of the law can help you determine if guardianship is worth pursuing and how to accomplish it in a way that will be minimally disruptive for you and your loved one.

Written by: Jessica J. Sauer, Esq. and Kevin A. Pollock, Esq., LL.M.

 “To care for those who once cared for us is one of the highest honors.”-Tia Walker

Wednesday, November 9, 2016

Estate Tax Thoughts on a Trump Presidency

It is no secret that most Republicans and Donald Trump wish to get rid of the federal estate tax (or as it is commonly referred to "The Death Tax").  With Republicans in charge of the House, Senate and Presidency, I think we are very likely to see a full repeal.

Many will counter that George H.W. Bush could not get a full repeal with Republicans in control of all 3 parts of the government.  I will suggest to you that those days are long gone.  There are no more moderate Republicans to push back against a full repeal, and President Trump has an incredibly personal vested interest in keeping his empire intact for his children.

There is a small chance of a filibuster against it, but I still see a strong likelihood that the federal estate tax will be gone by 2018.