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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.





Monday, October 24, 2016

NJ Estate Tax Repeal: How Does This Affect You?

It's official.  According to NJ.com, Governor Christopher Christie has signed a a bill to repeal the New Jersey Estate Tax.  The new law is part of a larger package deal that increases the gas tax, reduces the sales tax slightly, gives the working poor a larger tax credit, gives a tax cut on retirement income and gives a tax exemption for veterans who have been honorably discharged.

Under prior New Jersey law, a person may leave an unlimited amount to a spouse or charity. However, any money going to anyone else above $675,000 (the "exemption amount") is subject to an estate tax. This rule will remain in effect for the rest of 2016.  

For calendar year 2017, the estate tax exemption amount for NJ will increase to $2,000,000.  The tax rate will generally start at about 7.2% and go up to 16% on estates over $10,000,000.

There will be a full repeal of the NJ Estate Tax starting January 1, 2018.  

We have confirmed that New Jersey will NOT be repealing its inheritance tax. Accordingly, money that is left to a non-class A beneficiary will still be subject to a tax.  In other words, there will still be a tax if you leave money to anyone other than a spouse, your descendants, your ancestors or a charity upon your death.

So the big question for many might be how does this affect you.  I will break this down into 5 categories:

1) People who have prepared existing estate planning documents;
2) People with assets between $675,000 to $5,450,000 (for individuals) and married couples with assets less than $10,900,000;
3) Married couples with assets in excess of $10,900,000; 
4) Snowbirds; 
5) Widows and widowers who are the beneficiary of a credit shelter trust; and
6) People who wish to consider Medicaid planning.

1) For people who have already prepared their estate plans, most likely this will not adversely affect your plans.  However, the modification of the tax law likely gives you the opportunity to simplify your documents.  In particular, it is common practice in New Jersey to create a trust for a surviving spouse (often referred to as a Family Trust, Bypass Trust, Credit Shelter Trust or A-B Trust) to double the $675,000 exemption among spouses.  

There still may be other reasons to have a trust for a surviving spouse (such as in second marriage situations), but starting 2018, doubling the NJ exemption amount will no longer be necessary.

2) For New Jersey domiciliaries who have assets above $675,000 (the NJ estate tax exemption limit in 2016) and below the federal estate tax exemption limit ($5,450,000 for individuals and $10,900,000 for married couples in 2016), it was a common part of estate planning for a person to make deathbed gifts to minimize the NJ estate tax liability.  Once the NJ estate tax gets repealed, it will generally be much more beneficial for a person to keep all of their assets until their death rather making substantial gifts during lifetime.

Until 2018, deathbed gifting can be very tax efficient because New Jersey has an estate tax but it does not have a gift tax.  Accordingly, there is the opportunity to substantially minimize the estate tax.  The problem however, is that many people make the mistake of gifting substantially appreciated assets such as stock or real estate. You often want to keep appreciated assets until death to obtain a step-up in basis.   

So before you make a gift, you would need to weigh the potential NJ estate tax consequence of keeping an asset versus the potential capital gains tax if an asset is sold after the gift is made.

Now with the repeal of the NJ estate tax, unless a person is likely to die prior to 2018, you don't need to worry about making the calculation as to whether the NJ estate tax or the capital gains tax will be higher.  It will almost always be better to keep the asset.

3) For married couples with assets in excess of the federal estate tax exemption amount, I have read a number of studies that indicate that a couple can usually transfer wealth in a more tax efficient manner by establishing a credit shelter trust for the surviving spouse rather than relying on portability.  

There are few reasons why wealthier clients may want to continue to use traditional credit shelter trust planning.  The first is that while the estate tax exemption is portable, the generation skipping transfer tax (GST Tax) is NOT portable to a surviving spouse.  Many wealthy clients often wish to make sure the money goes not just to their children, but also to more remote descendants.

Another benefit to traditional credit shelter trust planning is that it acts as freeze for the assets inside the trust.  Specifically, let's assume that we have a married couple with exactly $10,900,000.  If we put half of those assets in trust on the first to die, then regardless of how much that goes up or down, it passes tax free on the surviving spouse's death.  So if the value of the trust goes up at faster rate than the inflation adjustment on the exemption amount, the beneficiaries are basically saving about $0.23 on the dollar because the estate tax is a 40% tax and the capital gains on the appreciation is only taxed at 23%.

While none of this planning will be different after the NJ Estate gets repealed compared to now, it makes the planning much easier to justify because right now we have a dilemma as to "HOW MUCH" we fund the credit shelter trust with.  To avoid any tax on the first to die, a credit shelter trust can only be funded with $675,000.  For some, this hardly makes it worth setting up. However, as the estate tax in NJ goes away, we no longer have this concern.

4) For snowbirds and other people who wish to avoid a "death tax", very simply, starting 2018 the tax incentive to move will be dramatically reduced.  Back in 2009, I wrote a post discussing the tax benefit of relocating to Florida.  Once the NJ estate tax gets repealed, for many it will make little difference from a tax perspective where their domicile is.

That being said, there are still significant differences between being domiciled in New Jersey vs. Florida.  After all, if you own real estate in both places, you still will need to pay property tax in both locations.  The biggest differences that people should be aware of are:

  • Florida does not have a state income tax, whereas NJ does.  (Note NJ will start exempting a substantial portion of retirement income from the state income tax); 
  • Florida property has homestead protection only if you are a domiciliary of Florida.  This can provide asset protection and it usually stops the property tax from increasing; and
  • NJ is keeping its inheritance tax.  So if you plan to leave your assets to nieces, nephews, friends or other non-class A beneficiaries, there could be a substantial tax savings upon your death.

5) If you have a husband or wife who passed away leaving money to you in trust, come 2018 it may be beneficial to consider options for terminating the trust.  Imagine a scenario where husband dies in in 2004 leaving $675,000 in a credit shelter trust (often called a Family Trust or Bypass Trust) for his surviving spouse.  It is likely that these assets in trust have appreciated to over $1,000,000.  If these assets stay in trust until the surviving spouse's death, it will not receive another step-up in basis.  However, if the trust is terminated and assets are distributed to the surviving spouse after 2018, it could be very beneficial from a tax perspective.  

There are many caveats to this plan.  First, you would not want to terminate the trust if the first spouse to die wanted to protect the money in trust for his/her surviving children - so you would not want to terminate the trust in second marriage situations.  Second, you may not want to terminate the trust if the surviving spouse has substantial assets or debts.  It may also not be beneficial to terminate a trust if the value of the trust assets have gone down in value.  

Nevertheless, it would be advisable to consider terminating a trust to make life easier for the surviving spouse and avoid the hassle of having to file an extra income tax return for the trust. 

Please note that a trust can only be terminated if the trust allows it, so you should have the trust looked at to see if the document allows the trust to be terminated.  If the trust does not allow for termination, consider whether it should be modified under the New Jersey Uniform Trust Act.

6) While I don't do Medicaid planning, I do engage in tax planning, and tax planning just got much easier.  The problem with Medicaid planning is that there is so much bad information out in the public sphere.  

I frequently get clients with millions of dollars who want to do Medicaid planning.  They don't realize that to do this type of planning, they actually need to give away most of their assets.  This might work well with someone who has a few hundred thousand dollars.  However, the more money you have, the less sense it usually makes to do this type of planning.

For example, if you have a $500,000 IRA, stock with a basis of $100,000 and worth $400,000, and a house with a basis of $50,000 and now worth $600,000, let's talk about the tax impact of most Medicaid planning.  In order to "give away" everything to qualify for Medicaid (a total of $1.5M here), the person would have to withdraw their entire IRA, causing a federal and state income tax of over $175,000.  Additionally, the transfer of the stock and real estate now would be subject to a built in capital gains of $850,000, resulting in about another $175,000 in capital gains taxes when sold.  

All told, this planning will likely cause about $350,000 in taxes.  This does not even factor in the planning fees and the loss of opportunity to grow the IRA in a tax deferred form.  At $10,000/month in a nursing home, that is about 3 years in a nursing home.  According to the non-profit Life Happens, the average stay in a nursing home is almost 2 and half years and about 70% of the population winds up spending some time in a nursing home.  A $350,000 tax could have paid for 3 years of nursing care home... and in a non-Medicaid facility.  

Prior to the change in the estate tax law, an argument could be made that the increase in income taxes was somewhat offset by a decrease in estate taxes. Until the end of 2016, with an estate of $1.5 million, there was the potential estate tax of over $60,000.  Repeal of the estate tax obviously changes the equation.  Under the new tax law, it is generally more prudent to keep assets in your name rather than giving them away ahead of time.  So while Medicaid planning can certainly be appropriate for some, the larger your estate, the less financial sense it makes to engage in this type of planning.  


Friday, October 7, 2016

The NJ Estate Tax is Repealed! Almost.

According to NJ.com, effective October 7, 2016, the New Jersey Legislature has approved a bill that will repeal the New Jersey estate tax.  We are only awaiting the signature of Governor Christopher Christie before the law is enacted, and rumor is that he has promised to sign the bill.

Under current New Jersey law, a person may leave an unlimited amount to a spouse or charity. However, any money going to anyone else above $675,000 is going to be subject to an estate tax. This rule will remain in effect for the rest of 2016.  This is known as the exemption amount.

For calendar year 2017, the exemption amount for NJ will increase to $2,000,000.  The tax rate will generally start at about 7.2% and go up to 16% on estates over $10,000,000.

There will be a full repeal of the estate tax starting January 1, 2018.  

The new law is part of a larger package deal that increases the gas tax, reduces the sales tax slightly, gives the working poor a larger tax credit, gives a tax cut on retirement income and gives a tax exemption for veterans who have been honorably discharged.

We have confirmed that New Jersey will NOT be repealing its inheritance tax. Accordingly, money that is left to a non-class A beneficiary will be subject to a tax still.  In other words, there will still be a tax if you leave money to anyone other than a spouse, your descendants, your ancestors or a charity.

Saturday, October 1, 2016

New Jersey Estate Tax Deal

According to various news reports, it appears that New Jersey will officially be eliminating the estate tax.  The deal to eliminate the estate tax is part of a larger deal that increases the gas tax, reduces the sales tax slightly, gives the working poor a larger tax credit, gives a tax cut on retirement income and gives a tax exemption for veterans who have been honorably discharged.

The exact details are still murky, and as far as I am aware the final deal hasn't been published.  It is my belief that the estate tax exemption will increase from $675,000 to $2,000,000 effective January 1, 2017 and be phased out completely over the next few years.

I have not yet heard any reports regarding whether or not the NJ inheritance tax will also be eliminated.  As I learn more, I will pass it on.

Informative news articles can be found here and here.

Sunday, September 11, 2016

Social Security After Death

One of the first questions we are asked is “do I have to do anything about Social Security”?  Here are some important things to know if a decedent was receiving SSA benefits at the time of passing:

Reporting

Normally the funeral director will contact Social Security to report a person’s death if you give them the decedent’s social security number, but family members and personal representatives can also report the information directly to the SSA by calling 1-800-772-1213.  The most important thing is to make sure SSA records reflect the correct information.  Check out SSA Death Master File and familysearch.org

FYI - Reporting cannot be done online.

Survivor Benefits

Surviving spouses (and in some cases ex-spouses) and children are entitled to different types of survivor benefits:

1)      If you are already receiving social security benefits on behalf of decedent, you are eligible for:

a)      A one-time survivor benefit of $255 (surviving spouse or children), which can be automatically processed;

b)      Continuation of benefits – Payments should be automatically be changed to survivor benefits;

No new application is required for benefits and you do not need to go to a local Social Security office.

2)      If you are not receiving social security benefits on behalf of decedent AND/OR you are receiving your own benefits, you are eligible for:

a)      A one-time survivor benefit of $255 (surviving spouse or children), which must be applied for within 2 years of death and is NOT retroactive to DOD(*);

b)      New survivor benefits – You need to submit an application to the local SSA office

You will need to go to the local SSA office and take with you a certified copy of the death certificate as well as proof of your relation to the decedent (e.g. your birth certificate, marriage certificate).  You might be able to make the application over the phone but this can be a long, slow process; SSA calls are often answered by volunteers who pass along your contact information to a representative for call back later.  Whether you apply in person or over the phone, be sure to have your banking information available if you want the benefits direct deposited.

See "How to Find Your Local Office" service at www.ssa.gov, or call the SSA, toll-free, at 800-772-1213

FYI – Application for benefits cannot be done online.

IMPORTANT:  Don’t wait to apply for benefits!  With limited exception, the SSA won’t pay you for the period prior to the date you made the application.  i.e. if you waited 6 months after the date of death to apply, you won’t likely be able to recoup the benefits that could have been paid during that 6 month period.

Decedent Benefits and Reclamation

It’s just one week after your mom’s passing - you’re looking at the bank statement for  her checking account and notice that her direct deposit social security payment was   auto-deducted after she died. Now what?

Social Security payments are:

·         Retroactive i.e. a payment made in August represents the benefit due for July

·         Paid on specific days of the month according to a person’s birthdate and/or the types of benefits received.  Click here to see the Schedule for Social Security Benefit payments

·         Not pro-rated. In other words, a person is only entitled the monthly benefit only if she was alive for the full month.

·         Subject to automatic reclaim. Monthly benefits that are direct-deposited to a decedent’s bank account will be automatically reclaimed if the Treasury Department determines the decedent was ineligible for the benefit. (Direct deposit is required for all SSA applicants after March 1, 2013, and for anyone receiving benefits as of that date. Direct Express card is another payment option)

Example #1: 

Mom died July 15, 2016.  Social security payment was deposited August 2, 2016.  Mom did not live for the full month of July, so the payment will be auto-reclaimed.  (If by chance you’ve acted quickly enough to close the account and withdraw the funds prior to the Treasury reclaiming the benefit, you cannot keep the money; Mom was not entitled to the benefit and the government will absolutely want it back. You will need to reimburse the government via check sent to your local Social Security office. ) 

Example #2:

Mom died August 10, 2016.  Social security payment was deposited August 2, 2016. Mom lived for the full month of July so payment can be kept.  If a deposit is made in September (representing the August benefit), the September payment will be reclaimed because Mom did not live for the full month of August.

Example #3:

Same scenario as Example #2, Mom died August 10, 2016 and Social security payment was deposited August 2, 2016. However, even though your mom was eligible for the benefit, it is later auto-deducted on August 15, 2016 which you believe to be in error.   A family member or personal representative of Mom’s estate can apply for payment using Form SSA-1724

Example #4:

Mom died August 10, 2016 and her checking account was closed on August 20, 2016.  Mom lived for the full month of July and is entitled to the July benefit, but the Social security payment which should have been deposited Wednesday, August 23, 2016 (DOB April 27) was not received.  A family member or personal representative of Mom’s estate can apply for payment using Form SSA-1724.   

Example #5:

Mom died July 15, 2016, a deposit was made August 10, 2016 and it is now December and no reclamation has occurred. 


120-day Rule: It’s possible that the bank itself properly contested the reclaim.  SSA has 120 days to submit a request for reclaim from the date it receives notification of date of death and sends a “death notification entry”.  While this is the rule, it’s best to double-check with the bank directly to confirm that is the case – it could be that the bank simply hasn’t responded to the request and is sitting on money that should be returned.

Written by Elizabeth C. Ketterson, Esq.  Elizabeth is a Senior Associate at the Law Office of Kevin A. Pollock LLC and helps to run the Estate and Probate Administration Department at the firm.

Monday, August 29, 2016

Income Taxation of Trusts - Determining Which State Can Tax the Trust

Determining the situs of a trust (i.e. the residence of a trust) is not always an easy matter.  Each state has its own rules regarding whether a trust is a "Resident Trust", and often these rules are different from the tax rules, and in some states these rules have been challenged in Court as unconstitutional, where the taxpayer has prevailed, but yet the "unconstitutional rule" is still on the books.

This brings us to the wonderful worlds of New Jersey and Pennsylvania.  (Although I am sure a challenge is coming to New York soon.)

Let's take four different situations:
1) A NJ Resident Trust;
2) A Non-Resident NJ Trust;
3) A PA Resident Trust; and
4) A Non-Resident PA Trust.

In situation 1, a Trust is considered a NJ Resident Trust for state income tax purposes, and must file Form NJ-1041, if:
a) The Trust consists of property transferred by a NJ decedent via his/her Will;
b) If a NJ person gifts property to an irrevocable trust; or
c) If a NJ person owns assets in a revocable trust dies and now the trust is irrevocable.

It is important to note that an irrevocable trust is NOT considered a NJ Resident Trust if it was created in another jurisdiction even if all the trustees and beneficiaries are now NJ residents unless the trust situs is changed to New Jersey.

Moreover, even if the trust is considered a NJ Resident Trust, it is NOT subject to New Jersey income tax if:
a) It does not have any tangible assets in NJ;
b) It does not have any income from NJ sources; AND
c) It does not have any trustees who are NJ residents.

It is probably worth creating a separate post on what it means for a person to be domiciled in a particular state, but for now, let's say that it is clear that a person has fixed, permanent home in New Jersey.

All of the above can be gathered simply by looking at the instructions for NJ Form-1041.  However, what happens if the Trustees and beneficiaries move out of state?  Can NJ still tax the entire trust if only a portion of the income is attributable to NJ?  In 2013, the Tax Court of New Jersey decided in Residuary Trust A under the Will of Fred E. Kassner, Michele Kassner, Trustee v. Director, Division of Taxation, that New Jersey could not impose a tax on undistributed income generated by the trust simply because the Trust owned an S-Corporation created in New Jersey when the Decedent was a New Jersey domiciliary, but the Trustee was located outside of NJ and all of the other assets of the trust were located outside of NJ.

Specifically, the Court stated that the due process clause bars NJ from taxing undistributed income of a trust to the extent the trustee, assets and beneficiaries are outside of New Jersey, citing Pennoyer v. Taxation Division and Potter v. Taxation Division.

So, even if a trust is considered a NJ Resident Trust, it does NOT mean it will actually be subject to NJ income tax.

In situation 2, a Non-Resident NJ Trust, which can best be described as any trust that is not a NJ resident Trust, is only subject to NJ income tax to the extent the trust has income from NJ sources, such as a NJ business, real estate or gambling winnings.  (Although hopefully your trustee is not actually gambling!)

With respect to Situation 3, the rules for determining whether a Trust is a PA Resident Trust are almost identical to New Jersey.  However, where NJ had some clear exclusions whereby a trust was not subject to the NJ income tax, PA tries to tax all income if there was a resident trust.  This can be a big problem if you have a PA grantor of a Trust or a PA decedent where following the creation of the trust, the Trustees and the beneficiaries are all out of state.

Now, all is not lost as there was very recently an important case, McNeil vs. Commonwealth of Pennsylvania, in which the Court decided that Pennsylvania did NOT have the right to tax the income of a trust, which was created by a PA Grantor, when the trust was created in another jurisdiction, the Grantor had died, the Trustees where located outside of PA, and the only connection to PA where some discretionary beneficiaries that had not in fact received any income.

Pennsylvania seems to have acquiesced considerably in this decision.  While they still say "Resident Trusts" are subject to PA income tax and must file the PA Form 41, the instructions on that form, Pennsylvania allows a Resident Trust to be converted to a Non-Resident Trust by change the trust situs if it lacks sufficient nexus to PA.  It appears that the Trustees must follow certain steps to do this, but once done, the trust will no longer be subject to PA income tax.  (See page 3 of the form and 20 PA Code Section 7708.)

With respect to Situation 4, if there is a PA Non-Resident Trust (basically a trust that was not created by a PA resident), PA generally takes the position that the Trustee must only file a tax return in PA if the trust has PA source income or if there is a resident beneficiary.  The requirement to file the return when there is a resident beneficiary is new and particularly problematic because the requirement to file is true EVEN IF THE TRUST MAKES NO DISTRIBUTION TO THAT BENEFICIARY.

Importantly, the failure to file the PA-41 (Income tax return for a PA Trust) can trigger interest and penalties as high as 50%.