Kevin A. Pollock BLAWG

Setting up Trusts for High Maintenance Children

2012-01-24T11:12:00.003-05:00

I was talking with a colleague the other day regarding a trust that he manages for a rather difficult benefiary. The trust is rather small in terms of overall dollars, but he advised me that it consumes a great deal of his time because the beneficiary calls hundreds of times a year - begging for money.

As trustee of this trust, he cannot give out much money because the goal of the person who funded the trust was to have the money last for a long time and only be used in the event of an emergency. The trouble is - EVERYTHING is an emergency to high maintenance beneficiary. These individuals live on the edge of financial ruin: they have trouble choosing friends, they are unable to understand the long term ramifications of their decisions, and they are terrible at budgeting.

It is a great imposition on the trustee to manage these trusts, and if the principal is less than $500,000, it is often not worth their time or energy to manage such trusts. What often happens is that the friend or relative that you named as trustee to help out your child no longer wants to be involved and resigns from the position.

If you are the parent of a high maintence child, and you want to set up a trust for your child, one thing you can do is make the job of the trustee a little easier is to really specify how you want the money to be spent. The more specific you make the trust, the easier it is for the trustee to say yes or no. The child realizes that the trustee has specific limitations, which makes it easier for the beneficiary and the trustee to get along.

The downside to this strategy is that it limits the flexibility of the trustee. However, for smaller trusts, it may be better to avoid the cost of constant trustee turnover than to try and allow for too much flexibility.

Updates for 2012

2011-12-27T18:02:00.002-05:00

I've been remiss in not writing very much lately, but I do need to advise everyone that starting January 1, 2012, the federal estate tax exemption is actually going to increase from $5,000,000 to $5,120,000 due to adjustments for the cost of living. The federal estate tax rate remains constant at 35%.

Starting in 2013, unless the government acts:

the current estate tax exemption amounts will revert to their 2001 level, adjusted for inflation (probably giving us an exemption amount near $1,300,000);
the estate tax rate will return to a graduated rate, with taxes as high as 55%; and
we will not have portability.

Have a happy holidays and great New Year.

Checking in with Your Relatives

2011-10-31T11:30:00.000-04:00

I was talking to an elder care coach that I know by the name of Thomas P. Callahan, of A.F.I. Coaching and Consulting, and we started talking about our holiday plans. One interesting item that came up was how busy he tends to get right after the holidays. During this time of year, children return home to visit their elderly parents and become fully aware of how their parents have deteriorated over the course of the year.

If you are visiting home for the first time in a while, here are some warning signs that you should look out for if you are concerned about a loved one:

If they are hoarding items (Such as numerous cereal boxes or sugar packets);
If they have many unpaid bills;
If they are becoming paranoid;
If they having memory issues (do they repeat stories or fail to notice items right in front of them);
If they have substantial weight loss or weight gain;
If they are eating out a lot;
If they are relying on untrustworthy companions (are they isolated from their normal friends and neighbors);
If their car starts to have more dings and dents;
If the laundry is not being cleaned;
If they are sleeping on the couch or recliner instead of the bed; or
If they are watching much more television than they used to.

According to Tom, these traits often go unnoticed because people view their parents as always capable…after all, they are your parents. They are the people you turned to as a child if you fell down.

It is important not to get frustrated when these things start to happen. That leads to unnecessary arguments. If you are seeing your parents exhibiting these traits, you must understand that your parents may not understand what is happening to them.

There are many creative ways to help, but letting things go on as they are is NOT a resolution. As a starting point, you will want to speak with an elder care coach. You will also want to make sure that you know where your parents Wills, Powers of Attorney and Advanced Health Care Directives are located. If they do not have any, you will want to encourage them to meet with an estate planning attorney before they are no longer have the ability to prepare such documents.

New Florida Power of Attorney Law

2011-10-11T17:04:00.003-04:00

Effective October 1, 2011, a new law went into effect dramatically changing the Florida Power of Attorney Statute. A Power of Attorney is a writing in which one party grants authority to an agent to act in place of the principal; each act performed by the agent pursuant to the power of attorney has the same effect and benefit to the principal and the principal's successors in interest as if th principal had performed the act.

Important changes in the new Florida law include:

An individual can no longer make a springing power of attorney - a springing POA is a power of attorney that becomes effective in the event of disability or some future contingent event (there is an exception of military powers);

All Florida Powers of Attorney must be durable powers of attorney (i.e. they must be effective when signed);

A Grantor must specifically initial any provision that allows for:
- gifting, changing beneficiary of a retirement account,
- changing any benefiary of an annuity,
- changing the ownership or beneficiary of a life insurance policy,
- amending, modifying, creating, revoking or terminating a trust,
- waiving the principal's right to be a beneficiary of a joint and survivor annuity, including surivor benefits under a retirement plan, or
- disclaiming property and powers of appointment;

If multiple agents are named, absent explicit direction otherwise, each agent may act unilaterally. This changes the presumption, it used to be that if multiple agents were named, they had to act together; and

Third parties are required to accept a copy of the power of attorney (and not demand an original).

The new Power of Attorney Act also modifies and clarifies the duties of an agent. Specifically, the agent may not delegate authority to act as agent (except for investment functions), the agent must keep record of all receipts, disbursments and transactions made on behalf of the principal, and the agent may not act contrary to the principal's reasonable expectactions, including preserving the principal's estate plan.

The changes are not retro-active, so powers of attorney drafted before October 1, 2011 are still valid (including gifting provisions that are not initialed). However, to avoid confusion, it may be best to redo any older power of attorney forms you have.

Life Insurance for College Students

2011-10-01T11:53:00.000-04:00

I was speaking with a colleague of mine the other day and the subject of college loans came up. It occurred to us that with the new stricter lending regime, it is probably more important than ever for a parent to consider getting life insurance on a child of theirs if they are co-signing a college loan.

Most college loans are no longer dischargeable in bankruptcy or upon the death of a child. So if you are co-signing a loan, consider taking out a life insurance policy on your child to pay off the loan in the event something happens to your child. As always, the larger the policy you obtain, the more worthwhile it is setting up a life insurance trust.

Deficit Reduction Package - Change in Estate Tax Exemption?

2011-09-23T09:14:00.003-04:00

It's way too early to know if President Obama's Deficit Reduction Package will have any traction, but I did want to point out that under his proposal, the federal estate tax exemption would be reduced from the current level of $5,000,000 per person to $3,000,000 per person starting in January of 2013. Additionally, the maximum estate tax rate would go from the current rate of 35% to 45%. The changes in the estate tax exemption amounts and rates would be part of an overall package to reduce the deficit.

I am skeptical this will pass mainly because ever since the Republicans have taken over the House, President Obama and the Democrats have not been able to successfully pursue much of their agenda. It is worth noting though that the Democrats do have significant leverage with respect to this one tax because in the event the parties cannot agree on anything, after 2012 the federal estate tax will revert to pre-2001 levels. This would mean a federal estate tax exemption amount of $1,000,000 (indexed for inflation) and a maximum estate tax rate of 55%.

Dangers of Specific Bequests and General Bequests

2011-09-07T09:57:00.004-04:00

WHAT ARE SPECIFIC GIFTS AND GENERAL GIFTS?
A specific bequest is a gift of a specific piece of property to a specific person. Three examples of this are:

I give my real estate, located at 1 Main Street, Anytown, State, to my son, Jake Smith.

I give my 500 shares of stock of XYZ Corporation to my nephew, Jordan Smith.

I give all of my money in Bank Account number #1 at Big Bank, to my daughter, Samantha Smith.

A general bequest is a gift of a specific amount, made to a specific person. This is considered a general bequest because only the value of the property is relevant, not its source. An example of a general bequest is: I leave $10,000 to my niece, Jody Smith. (It is not important from where the $10,000 comes from.)

If the testator states the source of the funds, this is a general bequest known as a demonstrative gift. An example of this is: I give $10,000 to my cousin, Jamie Smith, from my account number #1 at Big Bank. The gift amount is general, but the source of the funds is specific.

If you just leave everything to a specific person or persons, this is known as a residuary gift. I will not be discussing them in detail here.

HOW CAN THERE BE A DANGER IN MAKING A GIFT?
Some of the dangers that can arise from an improperly drafted specific bequest include ademption, confusion, an unequal sharing of taxes and an unequal sharing of expenses.

ADEMPTION
Ademption is the term used when the decedent no longer owns the property that he or she is giving away. For example, if the decedent in the example above sold 1 Main Street shortly before his death and purchased 2 Main Street, then Jake Smith will get nothing. Because the decedent does not own 1 Main Street at the time of his death, he cannot possibly give it to Jake and the property is considered to be adeemed.

Another huge problem with ademption occurs when an agent under a power of attorney sells the property. Then, it will depend upon the state whether the beneficiary gets something or not as some states require that the beneficiary receive an amount equal to the fair market value of the property. I prefer not to specifically name anyone as the beneficiary of real estate or other large ticket items, and if the client insists, I require that they tell me what they would want to do if the property is sold before they die.

CONFUSION
Confusion can result in a number of different ways. One way it can result is if one of the people named as beneficiaries dies - what happens to the bequest? It may depend upon the state. Some states say that the gift goes to the children of the deceased beneficiary. Some states say that the gift lapses. I prefer to explain what happens in all cases and not rely on state law. I will add one of the following in every case: "If Jody Smith does not survive me, this gift shall lapse." or ""If Jody Smith does not survive me, this gift shall be distributed to..."

Another cause of confusion can arise from gifts of stock. What happens if the stock splits or the company creates a subsidiary or is bought out? The answer to this can vary by state. Unless the testator is the owner of a small business and we are engaged in business succession planning, I usually advise clients not to make specific gifts of stock.

AN UNEQUAL SHARING OF TAXES
Making a specific or a general gift can result in an unequal tax burden because in many states, like New Jersey and Pennsylvania, there is an inheritance tax. Beneficiaries will be taxed differently depending upon their relationship to the decedent. So, if a New Jersey decedent left $10,000 to his son and $10,000 to his nephew, the nephew's gift would result in a 15% tax, but there would not be any tax on the bequest to his son.

If a Pennsylvania decedent left $10,000 to his daughter and $10,000 to his brother, the bequest to his daughter would result in a 4.5% tax and the bequest to his brother would result in an 11% inheritance tax. For a full range of all the different tax rates, please review this inheritance tax chart.

So, who should pay the tax in these situations? You can have three results:

Each person who receives money pays their own taxes at their own rate.

They split the taxes equally.

The residuary beneficiaries (possible a third party) can be required to pay the taxes.

Each state has a different requirement, but the testator can override state law by stating who should pay the taxes. A good attorney will help you identify when this might be an issue and help you decide how the taxes should be paid.

AN UNEQUAL SHARING OF EXPENSES
A similar analysis can be made for the unequal sharing of expenses. If you leave $90,000 to your daughter in a specific bequest and leave everything else to your son, most Wills require that the expenses of the estate administration be paid out of the residuary. This may be fine if your son is getting more than your daughter, but what if it's the same or less? These kind of issues must be dealt with in the estate planning stage, not after a person's death.

Estate Administration can be a bit complex, so make sure you contact an an experienced probate attorney if you even have the slightest doubt about how to handle any of these issues.

Estate Administration and Bad Credit

2011-09-01T10:17:00.005-04:00

Everybody knows that good credit is important for receiving favorable financing terms when buying a car or a house. Let me give you another reason to keep your credit up: the ability to act as administrator of the estate of parent or loved one.

When a person passes away without a Will, the closest next of kin can petition the Court to act as Administrator for the decedent's estate. The Court will usually agree to let the next of kin act as Administrator provided that they agree to pay for a Probate Bond. A Probate Bond is basically an insurance policy that insures provides the intestate beneficiaries and creditors of the estate with a way to receive some money in the event the Adminstrator absconds with the funds.

The Court will require a probate bond in almost all situations in which the decedent dies without a Will. A person can only qualify for a Probate Bond if he or she has good credit or significant assets to their name.

Obviously, the way to avoid this situation is to make sure your parents and loved ones prepare a Will which states that no bond is required. However, you find that you are involved in an estate administration in which the decedent did not prepare a Will, before you spend a lot of money trying to qualify as an Administrator, Executor or Trustee, make sure you have good credit.

Step-Up in Basis Rule - Common Mistakes

2011-07-29T10:31:00.007-04:00

When a person sells property, that person has to pay a tax on the gain from the sale. Gain is determined by subtracting the sales price of the object from the basis of such object. For example, if I sold a stock for $100 and the basis was $40, the gain would be $60.

The basis of an object is generally the price a person has paid for it. However, if you pay money to improve the object (such as buying an addition onto a house), the basis will increase. If you depreciate an object for tax purposes, the basis will decrease. To more on the basics of basis, see my post: Understanding Basis.

Notwithstanding the crazy rules for an individual who may have passed in 2010, Section 1014 of the Internal Revenue Code states that if a person holds property at the time of his or her death, it will receive a new basis equal to the fair market value of such property at the person's date of death. This is known as the Step-up In Basis Rule because in almost all circumstances, the fair market value of the assets owned by a decedent is greater than the basis of in the decedent's hands just before he or she died.

However, the Step-up In Basis Rule is really more accurately called the Fair-Market Value Date of Death because, especially in this economy, there is a chance that the date of death value is less than the basis just before death. So the first mistake many people make is in not selling assets before they pass on which they can take a loss. If you bought stock for $20,000 and now it is only worth $10,000, consider selling it. If you sell it before you die, you can take the tax loss, if you keep it until you die, your heirs cannot claim that tax benefit.

If you are an executor or an elder law practitioner, you should also be aware that you have the option of valuing all assets under Section 2032 alternate valuation date. The alternate valuation date is six months following the date of death. So let's say on the date of death the assets are worth $4,000,000 and six months following the date of death they are worth $4,800,000. Unless there is a state estate tax, you may be better off using the alternate valuation date so that the beneficiaries have a higher basis in the property. On the other hand, if, six months after the date of death, the assets are worth less or if using the higher valuation will cause a greater estate tax, you will not want to use the alternate valuation date. The second common mistake made by many is to not wait the six months and run the calculations for both scenarios.

So, if the beneficiaries of a decendent's property get to take appreciated property with a step up in basis, why don't people just transfer their property to a sick relative and then have them bequeath it back them when the sick relative dies. Well, unfortunately, this rarely works. Often times, it can result in a gift tax, inheritance tax or estate tax. Additionally, under Section 1014(e), if you receive a property by gift, you have to hold it for one year before your heirs can get the benefit of the step-up in basis rule. This is the third common mistake. When doing an estate administration, many practitioners and accountants fail to adequately track the basis of the assets.

The Biggest Danger of a Roth IRA Conversion

2011-07-11T17:51:00.005-04:00

After speaking with a client who did a ROTH IRA conversion last year, I realized that there is a major danger to these conversions. You cannot assume that the financial instituion will designate the same beneficiaries on the ROTH IRA as had been named under the traditional IRA. Many financial instituions will send out beneficiary designation forms separately, long after the converison has been done. If the owner is not expecting it, he or she may just throw away the form.

It is very important for anyone who has done a ROTH IRA conversion to double check the beneficiaries on the new account to ensure they are what you want. This is particularly true if you want to name an IRA Stretch Trust.

The Future of Estate Tax: Will “13” Prove To Be A Lucky Number?

2011-06-23T16:57:00.003-04:00

In my blog post of November 12, 2010, I made reference to a dinner bet I made with my father as to when a decision would be made on the federal estate tax issue. (Yes, Dad, I haven't forgotten you were right and I still owe you dinner.) At that point, we were nearing the end of a year in which there was no estate tax and we were about to revert to a tax, up to 60%, on transfers at death in excess of $1,000.000.

In an 11th hour move on December 17, 2010 President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act into law, which reinstated the federal estate tax – but with a $5 million exemption limit and a 35% tax rate - to begin again January 1, 2011 and to sunset on December 31, 2012. Additionally, the concept of portability of the estate tax exemption between spouses was introduced.

So while we achieved relative certainty for two years, January 1, 2013 now marks the unlucky date of reversion to the $1 million estate tax exemption, estate tax rates as high as 60%, and an elimination of the portability provision.

To provide longer term certainty, President Obama, in his recently proposed 2012 budget, is hoping to change the estate tax exemption to $3.5 million, the same as it was in 2009. Additionally, he is seeking to reduce the gift tax exemption and GST tax exemption to $1,000,000 with an increase in the estate and gift tax rates to 45%. The proposal includes making portability of the exemption amount between spouses permanent, for a combined exemption up to $7 million.

You can look at President Obama's approach in two ways. You consider this change as increasing the estate tax (by raising the tax rate and lowering the exemption from its current level). However, you can also consider this reducing the estate tax (by lowering the tax rate and raising the exemption from what would happen in 2013 if nothing were done.) All I hope for is an end to these constant changes. It will be lucky for everyone when we have certainty, beyond two years, on the issue of the estate tax.

I should note that uncertainty is likely to remain as I doubt Congress will agree with President Obama's plan. Republicans control the House and they are still looking for a full repeal of what they call “the Death Taxes.”
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Thank you to my paralegal, Elizabeth Carter, for help with this post.

Federal Estate and Gift Taxation of Deathbed Gifts

2011-05-27T09:00:00.001-04:00

Often times, a person who is on his or her deathbed will wish to make gifts to family members. A gift is usually considered a deathbed gift if it is made within three years of a person's death. However, except for certain transfers discussed below, when a gift is made is often irrelevent for federal estate tax purposes because there is a lifetime lookback, not just a three year lookback.

Making gifts in a way that minimizes taxes is actually a very complex process. In deciding whether to make a gift, one must consider the amount of the gift, the type of asset you wish to transfer, to whom it is going to and the basis in the gifted item. I will not be discussing advanced topics such as discounted gifts or generation skipping tax transfers in this post.

The Tax Effect of a Gift

To understand the effect of a gift for federal estate and gift tax purposes, we need to start with a short discussion of the current law.

United States citizens and permanent resident aliens currently can give away an unlimited amount to a US citizen spouse or a charity without incurring a gift tax or an estate tax. US citizens and permanent resident aliens can give away up to $5,000,000 to anyone else. This is known as our lifetime exemption amount, unified credit amount or applicable exclusion amount. (Note, transfers to a spouse who is a permanent resident alien are not unlimited, they are capped by the lifetime exemption amount.)

After 2012, this $5,000,000 amount will be reduced down to $1,000,000 unless the legislation is modified. (I think it is highly unlikely that it will go back down to $1,000,000, but $3,500,000 is quite plausible.) Gifts of less than the $5,000,000 lifetime exemption amount will not result in a tax; they merely reduce the donor's exemption amount and the amount the donor can transfer on death.

In addition to the lifetime exemption amount, each person can make annual exclusion gifts without any tax liability. Annual exclusion gifts are also known as 2503(b) gifts. Gifts in excess of the annual exclusion amount (currently $13,000 per donee per year) are taxable for federal gift tax purposes. When I say that gifts in excess of the annual exclusion amout are "taxable", that means the gift reduces the donor's lifetime exemption, or, if the lifetime exemption has been used up, these transfers will result in a taxable gift. Currently, the gift tax rate and estate tax rate are 35%.

To complicate matters, if the donor is married, he or she can "split" the gift with his or her spouse. For example, let's say I gift $7,000,000 to my two children. If I make the gift alone, $26,000 of the gift is sheltered by my annual exclusion amount ($13,000 for each child). The balance, $6,974,000, reduces my lifetime exemption from $5,000,000 to $0 and results in a taxable gift of $1,974,000. At 35%, the tax on this gift would be $690,900. However, if I had split that gift with my wife, we could also use her annual exclusion amount making the taxable gift to the kids only $6,948,000. Additionally, the taxable gift would be split in half, reducing each of our lifetime exemptions to $1,526,000 and no gift tax would be due.

Gift splitting is available to married couples if each spouse is either a citizen or a resident of the United States. (I.R.C. 2513) In other words, you may gift-split with a non-citizen spouse provided he or she is resident alien.

The power of gifting using the annual exclusion exemption cannot be emphasized enough. If you have an elderly widow who has $8,000,000 who gifts $13,000 to each of her children (4),each of her grandchildren (10) and each of the spouses of her children and grandchildren, that widow can give away 28 gifts of $13,000 tax free. That's $364,000. If she does that for 9 years until she dies, she can pass on 100% of her estate to her heirs without any federal estate tax. If she had kept the $8,000,000 until her death, there would have been a $1,050,000 federal estate tax.

To get a better idea of the power of lifetime gifting using the annual exclusion amount, read my blog post on deathbed transfers in New Jersey in which I discuss gifts by Tabitha and Genie.

For all gifts discussed to this point, it would not have mattered when the gift was made. Gifts equal to or less than the annual exclusion amount do not count against the $5,000,000 exemption amount while those in excess of the annual exclusion amount do regardless of when they were made. It is now time to learn about about some special rules.

Gifts of Certain Assets are Subject to a Three Year Lookback Rule

Many people assume, incorrectly, that proceeds from life insurance policies are paid to the beneficiaries free of tax. While this is true that there is no income tax on such proceeds, it is not true for the estate tax. If a decedent OWNS a life insurance policy insuring his or her own life, the entire death benefit is includible the decedent's estate, regardless of who the beneficiary is. If the value of this death benefit plus the decedent's other assets result in the decedent having an estate over the $5,000,000 limit, the overage will result in a federal estate tax unless the estate is entitled to a marital deduction or charitable deduction.

Under Section 2035 of the Internal Revenue Code, certain assets that are transfered by a person who dies within three years are considered to be owned by the person at his or her death. This rule most significantly applies to the transfer of life insurance policies. So, if a decedent transfered OWNERSHIP of a policy on his life to another party within three years of death, the 2035 rule kicks in and it is considered a taxable deathbed gift equal to the full face value of the policy - not just the value of the policy on the date of the gift.

You should also be aware that the Section 2035 lookback rule also applies to the release of certain interests in trusts and real estate. Additionally, if the decedent paid any gift taxes within three years of death, that will be added back into the donor's gross estate, and the donor will get a credit for the taxes paid. Since these items do not affect most people, I will not discuss them in depth.

Gifts in Which the Donor Retains an Interest or Control

There are many ways to make a gift. I can give you a house or I can draft a deed, keeping a life estate for myself and then giving you the house when I die. I can give you 30% of my company or I can give you 30% of my company and retain the right to vote your stock.

The general rule is that if I make a complete gift, retaining no interest or control, it is a completed gift and will not be includible in my gross estate. If I retain any control or interest, such as a life estate or a right to vote your stock, then the gift, even though complete, will still be includible in my gross estate.

I can also fashion a gift in a manner in which there is a chance that I receive the property back. For example, I can give you a property for your life and then to your father if he survives you, but if he doesn't survive you, I get the property back. If you are much younger than me, there is a small chance that I will get the property back. If you are much older, than the chance I will get the property back is much greater. The probability that I will receive the property back is calculated as of the moment before my death, so the fact that I died before you is irrelevent. If the chance that I would have gotten the property back is greater than 5%, then the value of the property at the time of my death is includible in my gross estate.

What's the big deal if the property is includible in my gross estate if there's a lifetime lookback? Well, let's back to the example in which I transferred a 30% stock interest. Assume that at the time of the gift the 30% interest of the stock was $1,000,000 and at the time of my death that same interest was worth $7,000,000. If I had not kept an interest in the stock, it would have just reduced my lifetime exemption by $1,000,000. By keeping the voting interest, the full $7,000,000 value will be included in my estate resulting in a federal estate tax of $700,000 (35% of $2,000,000).

The Importance of Knowing the Basis of the Gifted Item

As discussed on my post on deathbed transfers in New Jersey it is wise to know the basis of the property that is being gifted. If the donor is gifting an asset, the recipient receives the gift with the same basis as it had in the hands of the donor. This is known as a carry-over basis.

Accordingly, if the donor gifts an asset that it is highly appreciated, it will result in a substantial capital gains tax when the donee ultimately sells it. If, on the other hand, the donor gave the item to donee on his death, the asset would take on a basis equal to the fair-market value of the property as of the date of the donor's death.

Due to the carryover basis rule, it is usually best not to give away appreciated property during life. It is better to either gift away cash or hold on the the asset until death and have the beneficiaries pay a smaller estate tax.

The Benefit of Making Taxable Gifts

Reading through this post, the benefit of making gifts equal to or less than the annual exclusion amount is quite evident, but you may be asking yourself why anyone would wish to make a taxable gift that uses up a person's exemption amount. Look back to the situation where the donor gave away a 30% interest in stock worth $1,000,000 and that stock grew to $7,000,000. It is much better, for tax purposes, if that grows in the hands of someone other than the person who is likely to die first. This technique is known as an "estate freeze" because reduces the chance of assets growing in the donor's hands.

Filing requirements for Taxable Gifts

You should also be aware that if you do make a gift in excess of the annual exclusion amount, you should file a federal gift tax return (Form 709).

Deathbed Transfers in New Jersey

2011-05-26T10:01:00.009-04:00

Often times, a person who is on his or her deathbed will make gifts to family members in an effort to reduce the potential taxes owed.

For transfers to anyone other than a charity, making gifts in a way that minimizes taxes is actually a very complex process. In deciding whether to make a gift, you must consider the amount of the gift, the type of asset you wish to transfer, to whom it is going to and the basis in the gifted item.

Taxes That Must be Considered When Making Gifts

There are generally six taxes that might be triggered as result of the gift. These include the New Jersey estate tax, the New Jersey inheritance tax, the federal estate tax, the federal gift tax, the capital gains tax and the generation skipping transfer (GST) tax.

I discuss all of these taxes in more detail elsewhere, but to quickly review the general purpose of each tax:

The New Jersey estate tax is imposed by the state on transfers at death to the extent the decedent's net estate exceeds $675,000 and the money passes to someone other than a charity, surviving spouse, domestic partner or civil union partner.

The New Jersey inheritance tax is also a tax imposed on transfers at death. However, the inheritance tax is based more upon who the money is going to rather than the amount involved. New Jersey does offer a dollar for dollar credit against its estate tax for any inheritance tax paid.

The federal estate tax is imposed by the federal government on transfers at death to the extent the decedent's estate exceeds $5,000,000 and the money passes to someone other than a charity or a surviving spouse.

The federal gift tax is imposed by the federal government on transfers during a person's lifetime to the extent the person's lifetime gifts exceed $5,000,000 and the money is transferred to someone other than a charity or a spouse.

The generation skipping transfer tax (also known as the GST Tax) is generally assessed by the federal government on transfers during life or at death to a person's grandchildren, or more remote descendants to the extent such transfers exceed $5,000,000.

The capital gains tax imposed on the sale of appreciated property, stock or similar assets.

As you may have noticed, only four of the six taxes named above are directly attributable to a transfer being made as the result of someone dying. The reason that a lifetime gift can be taxed at the donor's death is because New Jersey and the federal government have lookback provisions. Lookback provisions basically say that if you make a certain kind of transfer, the government can tax it at your death even if you gave the money away during your life. As you can imagine, this creates a host of problems including finding a way to pay for the tax.

What is a Deathbed Gift?

New Jersey defines deathbed gifts as gifts made in contemplation of death (N.J.S.A. 54:34-1(c)). People usually know the deathbed gift rule as the three year lookback rule because gifts made within three years of death are presumed to be in contemplation of death. If a gift is made in contemplation of death, and the gift was over $500, then New Jersey asserts it was really a transfer at death subject to the inheritance tax.

For New Jersey tax purposes, this particular three year rule ONLY appears under the NJ inheritance tax statutes. There is a very different rule for the New Jersey estate tax because the New Jersey estate tax generally follows the federal estate tax for determining what is taxable and what is not taxable. I will discuss this in more detail below.

Since gifts made in contemplation of death are subject to an inheritance tax, and the inheritance tax only applies for transfers to certain beneficiaries, it is important to know how New Jersey classifies the beneficiaries of the gift.

Determining the Class of the Beneficiary

To determine if a lifetime gift will result in a New Jersey inheritance tax, the first thing that you must do is differentiate between gifts made to Class A beneficiaries, Class C beneficiaries and Class D beneficiaries.

Class A beneficiaries include the decedent's spouse, civil union partner, domestic partner, all lineal descendants (such as children, grandchildren and great-grandchildren), all lineal ascendants (such as parents, grandparents and great-grandparents) and step-children. An adopted child, grandchild or great-grandchild is also considered a lineal descendant. Transfers to Class A beneficiaries are exempt from the NJ inheritance tax, meaning there is no inheritance tax on deathbed gifts or transfers at death to such individuals.

Class C beneficiaries include the decedent's brother or sister and son-in-law or daughter-in-law of the decedent if the decedent's child is also deceased. Class D beneficiaries includes everyone else (most notably nieces and nephews).

If the gift is made to a Class C Beneficiary, and the gift was over $25,000, there definitely will be a NJ inheritance tax if the gift was made "in contemplation of death". If the gift was made more than 3 years prior to the decedent passing, it will not be subject to a NJ inheritance tax.

If the gift is made to a Class D Beneficiary, and the gift was over $500, there definitely will be a NJ inheritance tax if the gift was made in contemplation of death. If the gift was made more than 3 years prior to the decedent passing, it will not be subject to a NJ inheritance tax.

If the deathbed gift is subject to the New Jersey inheritance tax, there will be a tax due of 11-16% of the transferred amount. There is an 11-16% tax on transfers to Class C beneficiaries on the gifted amount in excess of $25,000 and a 15-16% tax on the entire transfer to Class D beneficiaries if the gift is in excess of $500. The more that is transferred, the higher the rate will be.

As an example, assume I owned $5,000,000, and I gifted away $1,000,000 to my nieces and nephews four years ago, $3,500,000 to my nieces and nephews this year and then died within three years, leaving the remaining $500,000 to my two siblings. The $1,000,000 gift to my nieces and nephews would not be subject to a New Jersey inheritance tax because it was longer than three years ago. The first $700,000 of the $3,500,000 deathbed gift to my nieces and nephews would be taxed at a 15% inheritance tax rate ($105,000). The remaining $2,800,000 would be taxed at a 16% inheritance tax rate ($448,000). For the transfers to my siblings, $50,000 will pass free of taxes, and the remaining $450,000 will be taxed at an 11% inheritance tax rate ($49,500). In total, there will be a $602,500 NJ inheritance tax.

For gifts to charity in any amount and gifts of less than $500 to any person, there is an easy answer - it is not subject to an inheritance tax in New Jersey.

Regardless of what classification a beneficiary is in, there MAY BE a New Jersey estate tax and/or federal estate tax if the gift is subject to a three year lookback under the federal estate tax rules or a lifetime lookback if the gifted items are in excess of the annual exclusion amount.

Certain Transfers are Automatically Subject to a Three Year Lookback for Estate Tax Purposes

Under Section 2035 of the Internal Revenue Code there is a limited three year lookback that most significantly applies to life insurance policies transferred within three years of death.

A. Life Insurance: If you learn nothing else from this post, make sure you learn this:

If a decedent OWNS a life insurance policy insuring his or her own life, the entire death benefit is subject to both the New Jersey estate tax AND the federal estate tax. Many people assume life insurance proceeds are tax free. While this is true for income tax, it is not true for estate tax. The only relief is if the beneficiary is a charity, a surviving spouse, a civil union partner or domestic partner because then the estate may be entitled to a deduction;

If the decedent transferred OWNERSHIP of the policy on his life to another party within three years of death, the 2035 rule kicks in and it is considered a taxable deathbed gift.

B. You should also be aware that the Section 2035 lookback rule also applies to certain interests in trusts and real estate. This does not affect most people, so I will not discuss them here.

Gifts in Excess of the Annual Exclusion Amount

Currently, each United States citizen and permanent resident alien can give away $13,000 to as many donees as he or she wishes. This is known as the federal annual exclusion amount or 2503(b) exclusion. Gifts in excess of the federal annual exclusion amount result in a "taxable gift". Usually there is no immediate out of pocket expense though because New Jersey does not have a gift tax and the federal government will only institute a gift tax if the sum of these gifts exceeds the lifetime exclusion amount (currently $5,000,000).

When calculating the New Jersey estate tax, we are required to look not just at what a person owned when he or she died, but also the taxable gifts that the decedent made over his or her lifetime.

In most situations, if the decedent's taxable estate, including prior taxable gifts, is in excess of the New Jersey estate tax exemption amount (currently $675,000), there will be a New Jersey estate tax. However, there is a big difference in the tax depending upon whether the decedent died with estate over the $675,000 threshhold or died with an estate under the $675,000 threshhold, but is deemed to have an estate in excess of $675,000 due to the lookback provisions.

As an example, assume I owned $5,000,000, and I gifted away $4,500,000 to my daughters and then died in 2012 as a widower, leaving the remaining $500,000 in my estate to my children. Normally, there would be no estate tax on a New Jersey estate of only $500,000, but we must add back the prior gifts. Even adding back the prior taxable gifts, it would only produce a $10,000 NJ estate tax. (To learn how this is calculated, you will need to prepare a 2001 Form 706 federal estate tax return and a New Jersey estate tax return. I will discuss this in future post, entitled "Deathbed Transfers in New Jersey - Advanced")

To realize the benefit of making this gift, you should know that if I had died with the entire $5,000,000, my estate would have to pay a $391,600 New Jersey estate tax. In years past, nobody would give away more than a $1,000,000 because that was the old lifetime gift limit for federal gift tax purposes. Any gifts above $1,000,000 were taxed at a very high gift tax rate. However, with a $5,000,000 lifetime federal gifting limit and no New Jersey gift tax, there is ample opportunity for planning to avoid or drastically reduce the New Jersey estate tax.

You should also be aware that if you do make a gift in excess of the annual exclusion amount, you should file a federal gift tax return (Form 706). If a lifetime transfer is in excess of the federal annual exclusion amount, it could lead to a federal estate tax or a federal gift tax at some future time. To minimize this possibility, you should try to structure gifts over longer periods of time and for an amount equal to or less than the annual exclusion amount. To read more about this, see my article entitled: Federal Estate and Gift Taxation of Deathbed Gifts.

The Importance of Knowing the Basis of the Gifted Item

It is important to know the basis of the property that is being gifted. If the donor is gifting cash, the basis is exactly the amount of the gift. If the donor is gifting property or stock, it may be unwise to make the deathbed gift because there could be substantial built-in capital gains.

When property is gifted away, the donee usually takes the property with a basis equal to that of the donor's basis. (For more on basis, see my post on Understanding Basis.) If the donor keeps property until his or her death, the recepient will receive the property with a new basis equal to the fair market value of that property on the date of the death. This is often referred to as a step-up in basis rule, although in this economy it may be a step-down in basis.

Let's assume I give away a real estate property worth $4,500,000 to my daughters shortly before I die to save on the New Jersey estate tax. If my basis in the property was only $1,000,000, the kids will take the property with that same basis. If my kids sell it immediately after I die for $4,500,000, there will be a 15% capital gains tax on the $3,500,000 of built in gain. This will produce a federal capital gains tax of $525,000 and probably a New Jersey income tax of $315,000. As discussed above, the New Jersey estate tax would have only been $391,600 if I had held onto the property.

Due to the carryover basis rule, it is usually best not to give away appreciated property during life. It is usually better to pay a smaller estate or inheritance tax than to risk losing the step-up in basis on the decedent's death.

Summary

In summary, large deathbed gifts are not necessarily going to be taxed after the donor passes. Whether there will be a New Jersey tax on a deathbed gift is based upon whether the transaction has occurred in the last three years, to whom the item is being gifted, the type of asset being gifted and on the size of the donor's net estate after factoring in prior gifts.

When all is said and done, even if there is a New Jersey tax (estate or inheritance), large gifts made to Class A beneficiaries prior to death and large gifts made to Class C and D beneficiaries more than three years prior to death will greatly reduce the overall estate and inheritance tax liability unless the donor is making a gift of a highly appreciated asset.

Simple, right?

-------------------

I want to give a special thank you to Martin Bearg, Esq., Rekha Rao, Esq., Rebecca Esmi, Esq., and to individuals at the New Jersey Transfer Inheritance Tax Branch (who wish to remain anonymous) for taking the time to speak with me about this and helping me to gather my thoughts.

Verifying an Employee's Social Security Number

2011-04-25T11:59:00.004-04:00

I just learned that the Social Security Administration has an online system to check that your your employee's name matches their social security number.

As many of you know, employers can get hit with huge penalties for hiring illegal workers. Some illegal workers try to obtain work by using another person's social security number. This system is a way to verify the person you are hiring is in fact legally allowed to work. It is known as the Social Security Number Verification Service (SSNVS).

Any employer can following the directions on the website to sign up.

Understanding What "Per Stirpes" Means

2011-04-10T13:39:00.006-04:00

Sometimes it's easier not to reinvent the wheel. Back in 2006, Debra M. Simon, CPA wrote an excellent article about Understanding the Pitfalls of Beneficiary Designation Forms. Included in that article is a clear explanation what it means to name your issue, "per stirpes" compared to naming your issue, "per stirpes by representation" as beneficiaries under a retirement account, Will or life insurance policy.

I strongly recommend anyone who has more than one child read this article because if one of your children passes before you, you may inadvertently be cutting your grandchildren out of your estate plan.

Thank you to Robert Kenny, Esq. for bringing this article to my attention.

Japanese Inheritance Tax vs. US Estate Tax (2011 Update)

2011-04-01T16:39:00.003-04:00

BRIEF OVERVIEW OF
JAPANESE INHERITANCE AND GIFT TAXES
vs.
AMERICAN ESTATE AND GIFT TAXES

(2011 Update)

I. Estate Taxes

A. America

1. Citizens and Permanent Residents

a. Tax on Worldwide property (credit for taxes paid to foreign countries)
b. Exemption of $5,000,000 in 2011 and 2012 (theoretically back to $1,000,000 in 2013 if no change to Federal Estate Tax). For married couples, the exemption amount is $10,000,000 as a result of portability.
c. Tax of 35% on amount over $5,000,000
d. Unlimited Marital Deduction for Surviving Spouse if Surviving Spouse is a citizen

2. Non-Citizens/Non-Permanent Residents

a. Tax only on Real Property and business interests in the United States (Cash in foreign banks and foreign stocks are not taxed)
b. Exemption of $13,000
c. Tax of between 18%-35% on amount over $13,000
d. Unlimited Marital deduction if Surviving Spouse a citizen

B. Japan (Actually an Inheritance tax, not an estate tax)

1. Japanese Citizens and Permanent Residents

a. Exemption of ¥50,000,000 + (¥10,000,000 for each statutory heir); Possible additional exemption for insurance money, retirement savings, and money left to handicapped individuals
b. Additional exemption for life insurance received of ¥5,000,000 multiplied by the number of statutory heirs
c. Tax between 10%-50% for statutory heirs; Tax between 30% to 70% for everyone other else (except charities);
d. For property outside of Japan, a beneficiary that acquires property will be subject to Japanese inheritance tax if the beneficiary is a Japanese national and the beneficiary was domiciled in Japan at any time during the five years preceding the receipt of the inheritance.
e. A surviving spouse is entitled to a tax deduction. This is a complex formula based upon who is living at the time of the Decedent's death and where the money goes. Generally, a surviving spouse can deduct about 1/2 to 2/3 of the tax.

2. Non-Citizens/Non-Permanent Residents

a. If beneficiary is not Japanese and not living in Japan and property is not in Japan, appears Country where property located will tax such property.
b. If there is a tax, it appears a surviving spouse is entitled to the same marital tax deduction as for Japanese citizens.

II. Gift Taxes

A. America

1. Citizens and Permanent Residents

a. Tax on all gift transfers of Worldwide property
b. Annual exemption of $13,000 per person/per donee (unlimited gifts for donees if different donors)
c. An annual gift to a non-citizen, permanent resident spouse, of $136,000 is available.
d. Lifetime exemption of $5,000,000 (for years 2011 and 2012)
e. Gifts may be split with spouse
f. Tax rate of 35% if lifetime gifts exceed $5,000,000

2. Non-Citizens/Non-Permanent Residents

a. Tax on all gift transfers of US Property (including Cash and Stocks in US companies)
b. Annual exemption of $13,000 per person/per donee (unlimited gifts for donees if different donors)
c. No Lifetime exemption
d. Gifts may be split with spouse
e. Tax rate of 18%-35% if lifetime gifts exceed $13,000

B. Japan (Rates between 10%-50%)

1. Citizens and Permanent Residents of Japan

a. Annual exemption of ¥1,100,000 for each beneficiary (beneficiary taxed after this)
b. One time spouse exemption of ¥20,000,000
c. For property outside of Japan, a donee that acquires property will be subject to Japanese gift tax if the donee is a Japanese national and the donee was domiciled in Japan at any time during the five years preceding the receipt of the gift.

2. Non-Citizens/Non-Permanent Residents

a. Annual exemption of ¥1,100,000 for each beneficiary(unclear – enforcement is almost impossible)

III. Generation Skipping Taxes (Taxes on gifts or bequests to grandchildren)

A. America

1. Exemption of $5,000,000 in 2011 and 2012 (theoretically a return to a $1,000,000 exemption in 2013, but indexed for inflation)
2. Tax of 35% on rest

B. Japan

1. None

For more information on Japanese taxes, the Japanese government has a nice website in English with some helpful facts. This is a link directly to the inheritance tax information:
http://www.mof.go.jp/english/tax_policy/publication/taxes2010e/taxes2010e_d.pdf

It is worthwhile reading the Japanese publication if you have business interests in Japan or if one of other special circumstances (like a handicapped heir) as there are many credits available.

The Mystery of Calculating Executor's Fees in Pennsylvania

2011-01-28T15:51:00.012-05:00

The issue of calculating fees for an executor, executrix, administrator or personal representative in Pennsylvania estate cases is interesting because there is in fact no hard and fast rule about how such fees are to be calculated. Therefore no sure way to know what you can expect to see in the accounting if you are a beneficiary.

While executors’ fees are set by statute in many states, the “PEF” Code (the Pennsylvania Probate, Estates and Fiduciaries Code) provides only that a personal representative’s compensation shall be “reasonable and just” – based upon the specifics of each estate - and that it “may” be calculated on a graduated percentage. (20 Pa.C.S. §3537) The executor then has several options available, including charging (i) a flat fee or (ii) an hourly fee.

Though a "reasonable and just" standard may appear to be a very loose, wishy-washy standard, anyone acting as an executor or administrator should be aware that the executor’s commission will ultimately be subject to review on many levels: first and foremost, by the Orphan’s Court, to determine the reasonableness of the fee based upon the size of the estate, particularly if a beneficiary has objected to the accounting; second, by the Attorney General’s office, to review the fees’ effect upon the pay out of a charitable gift if a charity is a beneficiary of the estate; and third, by the Department of Revenue, to ensure against fraudulent deductions for fees claimed on the Inheritance Tax Return.

To guard against the prospect of an unfavorable audit, the Pennsylvania personal representative should take careful note of the percentage guidelines established by the court in Johnson Estate, 4 Fid.Rep.2d 6,8 (1983). In actuality, although the schedule established in Johnson was only included as an attachment to the judge’s written opinion, it has served as the unofficial guideline for gauging executor commissions and attorney fees ever since, with countless other judges adopting it as their own benchmark for review of accountings in subsequent cases.

Typically, if the ultimate commission is not more than what is provided on the Johnson schedule (below), and is calculated based upon standards of financial reason and fairness, it is likely that it will likely be met with approval all around.

EXECUTOR COMMISSIONS
						Per Col.	Per Total
	$	00.01	to	100,000.00	5%	5,000.00	5,000.00
	$	100,000.01	to	200,000.00	4%	4,000.00	9,000.00
Executor or	$	200,000.01	to	1,000,000.00	3%	24,000.00	33,000.00
Administrator	$	1,000,000.01	to	2,000,000.00	2%	20,000.00	53,000.00
	$	2,000,000.01	to	3,000,000.00	1½%	15,000.00	68,000.00
	$	3,000,000.01	to	4,000,000.00	1%	10,000.00	78,000.00
	$	4,000,000.01	to	5,000,000.00	½%	5,000.00	83,000.00

1%	Joint Accounts	1%	P.O.D. Bonds	1%	Trust Funds
3%	Real Estate Converted with Aid of Broker	5%	Real Estate: Non-Converted	1%	Real Estate: Specific Devise

Reasonableness, however, always reigns: While the percentage method appeals to judges of the Orphans' Court, keep in mind the Pennsylvania Superior Court has criticized the practice in their own opinions in Sonovick Estate, 373 Pa. Super 396 (1988), and Preston Estate, 560 A.2d 160 (1989).

An Executor should also consider that money received as compensation for any fiduciary duties is taxable for federal income tax purposes and usually for state income tax purposes as well. Accordingly, the executor may want to elect NOT take a commission after all as he or she may receive more by just receiving his or her distributive share of the estate.

For purposes of this article, I have used the titles "executor", "executrix", "administrator" or "personal representative" interchangeably. All refer to the person or entity that is in charge of administering a decedent's estate. In fact, an executor or executrix is a party that is appointed by a Will; an administrator is a party that is not appointed by Will, but is approved by the Court; and a personal representative can be either a party named in a Will or appointed by the Court.

NOTE: Special thanks to Elizabeth Carter for helping to prepare this article.

Estate Planning for Non-Traditional Couples

2011-01-17T15:21:00.001-05:00

For purposes of this article, I am going to define a traditional couple as a relationship between a man and a woman who are in their first marriage and the only children are children of the marriage. Estate planning for traditional couples usually consists of having a Will, Financial Power of Attorney, Medical Power of Attorney and Advanced Health Care Directive.

The traditional plan itself usually consists of each spouse leaving money to the other (occasionally in trust for tax planning purposes). On the death of the surviving spouse, everything is left to the children. The surviving spouse is usually executor and trustee of any trusts. If a traditional couple does not create a Will, the state's intestacy scheme will send the money in the same direction - but without any trust or tax planning.

There are typically three types of couples that need planning significantly different from that of traditional couples:

Same Sex Couples
Couples where at least one party has children from a previous relationship (often called "Blended Families"); and
Couples who are in a long term hetero-sexual relationship but are not legally married.

For all non-traditional couples it is even more important to prepare Wills, Financial Powers of Attorney, Medical Powers of Attorney and Advanced Health Care Directives. However, while the documents stay the same, the methodology is very different.

The laws for same sex couples vary widely by state, and the federal government does not recognized the validity of a same sex marriages or civil unions for tax purposes or for most other purposes. If one partner dies without a Will, in most states, the state intestacy law will not direct that the money goes to the surviving partner. Additionally, in many states, the partner will have no rights to administer their loved one's estate or act as a guardian absent written instruction.

Since state law will usually not protect the rights of same sex couples, it is imperative for gay and lesbian couples to prepare a Will, Power of Attorney and Health Care Directive. Additionally, trust and tax planning becomes even more important as does coordination of the couple's other assets. This is particularly true if there are children involved.

Even in states where the law is favorable, same sex couples must plan to minimize the federal estate tax, as the unlimited marital deduction only applies to heterosexual couples. Planning must also be done to minimize state estate taxes and state inheritance taxes if the couple is thinking about moving to another jurisdiction.

For Blended Families, many of the traditional planning techniques do not work because the goal is not always to provide for the spouse first and then for the children. Special planning is needed to ensure that both the needs of the surviving spouse and children from the prior relationship are addressed. This often involves setting up irrevocable life insurance trusts or segregating assets.

For couples who are in a long term relationship but are not legally married, planning is often a sore point. Legally, such couples are pretty much in the same boat as same sex couples unless they living a jurisdiction that has common law marriage. If no planning is done, the surviving partner gets completely cut out.

Ignoring the issue not only leads to litigation, but a more expensive estate administration process and higher taxes. If you are in a non-traditional relationship, I strongly recommend seeing a competent estate planning attorney in a jurisdiction near you to flush out all the issues that affect you.

New York Statutory Power of Attorney

2011-01-17T12:15:00.004-05:00

If you recall, I wrote an article back in 2009 that the New York legislature changed the requirements for the New York Power of Attorney form.

Looking around online today I noticed that most of the free New York Statutory Power of Attorney forms that are available online are WRONG. They are either old forms or do not include the Major Gifts Rider. This includes the New York State Bar Association form which appears on many government web sites.

Do not forget, if you want to make Major Gifts (defined by New York as gifts in excess of $500 per person per year under NY GOB LAW Section 5-1502I(14)), you must complete the separate Major Gifts Rider. Additionally, although the NY Power of Attorney form does not require any witnesses, the Major Gift Rider does. Both must be notarized - so be careful out there.

Inflation Updates for 2011

2011-01-05T10:55:00.003-05:00

Every year the Internal Revenue Service publishes a list of inflation adjustments. Here are the important ones that relate to Gift and Estate Taxes and others that are just useful:

2011 Annual Gift Tax Exclusion will stay at $13,000. This means a person can give any other person at least $13,000 before it is subject to the federal gift tax. I won't go into the details about how and when it will qualify - just realize that as long as it is an outright gift, it will usually qualify. Also, a husband and wife may split a $26,000 gift for tax purposes before there is a gift tax.

2011 Annual Gift Tax Exclusion for Gifts to Non-Citizen Spouses will be $136,000. This is the maximum amount a person may transfer to a non-citizen spouse before the gift is subject to a gift tax. In order for US law to apply, we will usually be talking about a gift being made to a permanent resident alien spouse. One place where this gets triggered unexpectedly by many is retitling of real estate - so be give careful thought to this before changing ownership. This is up from $134,000 in 2010.

The 2011 Federal Estate Tax Exemption will be $5,000,000. We've talked about this before, so it should not be a surprise to anyone that the estate tax exemption is settling at $5,000,000 for the next two years. This means that if you die in 2011, the federal government will not have a death tax on the first $5,000,000 that you pass on (unless you have made large gifts in previous years).

The 2011 Federal Lifetime Gift Tax Exemption will also be $5,000,000 for the next two years. This is in addition to the annual gifts that a person can make. Beware of gifting highly appreciated assets!

2011 Reporting Requirements for Large Gifts Received from Foreign Persons: recipients of gifts from certain foreign persons may be required to report these gifts under § 6039F if the aggregate value of gifts received in a taxable year exceeds $14,375.

2011 Mileage Reimbursement Rates: the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

51 cents per mile for business miles driven
19 cents per mile driven for medical or moving purposes
14 cents per mile driven in service of charitable organizations

Source: IRS Rev.Proc. 2010-40 & IR-2010-119 & IRC Section 2001

Federal Estate Tax Reform 2011

2010-12-23T15:09:00.004-05:00

As you may be aware, President Obama recently signed the “Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010”. In addition to keeping most of the income tax rates at their 2010 levels, this Act includes a major change to the federal estate tax.

Summary of the New Tax Law

Starting in 2011, each United States citizen and permanent resident alien will be entitled to a $5 million lifetime gift and estate tax exclusion amount. Anything over $5 million will be taxed at 35%. This means that starting January 1, 2011, you will be able to give away $5 million dollars either during your lifetime or at your death… but only for 2 years. This new tax law sunsets at the end of 2012.

Another major change in the federal estate tax law is that it allows for the transfer of a decedent’s estate tax exclusion amount to his or her surviving spouse. This is known as the portability provision. So let’s say a husband dies in 2011, leaving $3 million to his children; his widow can receive his $2 million in unused exclusion amount so that if she dies in 2012 she can pass on $7 million to her children free of the federal estate tax. This is a major boon to couples who fail to prepare a Will and for couples who have not equalized their estates.

So How Does the New Tax Law Affect You?

For 99.5% of the population, it means that you will not have to pay a federal estate tax if you pass away in 2011 or 2012, and you may or may not have to pay a huge estate tax if you die after that. Tax planning must be done to deal with state estate and inheritance taxes as well as the possibility that the federal estate tax will return in full force in 2013. Additionally, traditional estate planning documents should still be prepared to direct where assets go, set up trusts for children, nominate executors, guardians and trustees, where necessary, avoid probate.

It is also important to remember:

In Florida, the benefits of setting up a revocable living trust and avoiding probate remain unchanged. Additionally, if you own real estate in another jurisdiction other than Florida, you may have to pay an inheritance tax or estate tax in that jurisdiction.
New Jersey still has an estate tax that applies to anyone who dies with more than $675,000 in assets and New Jersey DOES NOT have a portability provision. Furthermore, New Jersey also has an inheritance tax, up to 16%, on transfers to certain individuals, including siblings, nieces and nephews and friends.
New York still has an estate tax that applies to anyone who dies with more than $1 million in assets. Moreover, New York DOES NOT have a portability provision and it is strongly recommended that clients title their assets in a way that will avoid probate.
Pennsylvania still has an inheritance tax of up to 15% that applies to everyone who plans to leave assets to anyone other than a spouse or a charity.

In most cases, the new law should not affect most of the documents that competent attorneys will have drafted over the last 5 years. However, I highly recommend estate planning documents should be reviewed if they were drafted by an attorney who does not focus on tax planning or if you have had changes in your personal life or a substantial change in your wealth.

The new tax law also provides ample opportunity for gift planning, including gifts to trusts; however, such gifting could also have negative capital gains tax implications if done incorrectly.

As always, I am available for a consultation if you have any questions.

Revised Estate Tax Appears to Be a Done Deal

2010-12-17T16:57:00.004-05:00

As I write this post, the new tax law appears to be a done deal. We are just awaiting President Obama to sign off on it. It will probably take me a week or so to digest all of the finer points of the new tax law, but I will briefly discuss the main points that I am aware of:

The new estate tax AND gift exemption amounts will be $5,000,000 per person (this is a reunification, previously the gift tax exemption amount had been $1,000,000) - This takes effect in 2011;
There will only be one rate for gift and estate taxes - 35% on transfers above the exemption amount - This also takes effect in 2011;
Capital Gains tax rates will continue at 15%
It appears that there is a portability provision. This would allow one spouse to give the other spouse everything outright at death, and then the surviving spouse would have a $10,000,000 exemption. (NOTE: This would not be advisable in New Jersey or New York where an increase in state estate tax would result.)

Also of note:

There appears to be a 0% GST tax rate for 2010, so for the super wealthy, you have another few weeks to fund generation skipping trusts. In 2011 and 2012, the GST Exemption amount will be $5 million;
There appears to be an extension of a provision that would allow certain IRA owners to contribute money in their IRA to charity with favorable tax consequences;and of course
There will be a continuation of almost all of the tax rates that were in place in 2010.

It looks like I owe my dad a dinner.

The New Jersey QDOT Trap - Revised

2010-12-14T12:10:00.002-05:00

When a person dies, the surviving spouse can receive all of the decedent's money free of tax, but only if the surviving spouse is a citizen of America. If the surviving spouse is not a U.S. citizen, anything over the estate tax exemption amount is subject to an estate tax. One way to avoid paying a tax on money going to the benefit of a surviving non-citizen spouse is to set up a Qualified Domestic Trust (QDOT).

With the ever increasing federal estate tax exemption, and the fact that we do not have a federal estate tax in 2010, most practitioners are not giving much thought to the use of QDOTs. This is because many practitioners are trying to avoid the large federal estate tax and not the smaller NJ Estate tax. If the estate is not going to be subject to the federal estate tax, the thinking is that there is no need to set up a QDOT for the surviving spouse.

Unfortunately, New Jersey has a little known rule that subjects the estate of a decedent to the New Jersey Estate tax if assets in are being left to a non-citizen spouse. This could create a significant tax on the death of the first spouse and another tax when the surviving spouse dies as well.

To avoid the NJ Estate tax, a QDOT can be set up for the surviving non-citizen spouse to deal with assets passing to him or her. Normally, if a QDOT is set up, almost all distributions other than income distributions and distributions for hardship will be subject to the federal estate tax. However, it appears that according to Treasury Regulation 20.2056a-6, the federal estate tax would not kick in until after the original decedent's exemptions are used up.

If the surviving spouse intends on becoming a citizen shortly after the first spouse passes, the QDOT can be dissolved with no tax consequences provided no disqualifying distributions were made.

The New Jersey QDOT trap only applies to decedents who own more than $675,000 at the time of their death and who were married to non-citizen spouses. However, when calculating the size of a decedent's estate, New Jersey will look at all of the decedent's assets, including retirement accounts, life insurance homes, stocks, bonds, etc.

(Note: it does not matter if the decedent is a citizen or a permanent resident alien. What is important is the citizenship of the surviving spouse.)

REVISION NOTE: This posting was revised on October 19, 2011 to correct errors and make clarifications.

Betting on the Estate Tax

2010-11-12T10:46:00.003-05:00

With all the uncertainty surrounding the federal estate tax, I still refuse to speculate on what will happen. I did however make a bet with my father (Dinner) over when a decision will be made on the estate tax.

My father believes that since Congress is in a lame duck session, they will try to act and create a little certainty to make things clear for planners and the citizens of this country.

I believe that the Democrats have absolutely nothing to gain by acting before 2011. If they vote in 2010, they will want to vote on something less than a full repeal of the estate tax - which is effectively a tax increase.

I believe that the Democrats can and will position the sunset as a Republican act (since it was done in 2001 when the Republicans controlled the House, Senate and Presidency). Then, in 2011, when the estate tax exemption returns to $1 million and up to a 55% tax rate, the Democrats can offer a tax cut without having to offer a full repeal.

The Democrats can then force the Republicans to vote against tax cuts that they don't like.

Who will win the bet? Clarity or politics. I've bet on politics winning the day.

Titling of Assets

2010-10-30T17:46:00.000-04:00

The way you hold title to your assets is key to any comprehensive estate plan. The greatest Will in the world is going to be ineffective if you have survivorship assets, IRAs or life insurance benefits going to people you don't want them going to. In short, how you own your property determines where it goes when you die. Additionally, how you own your property can affect how it is used if you become disabled.

There are many different ways to own property. You can:

own it outright, solely in your own name (these assets pass by your Will);
own it outright with another as joint tenants in common (your share of these assets pass by your Will);
own it outright with a spouse (this asset passes to your spouse on death regardless of what your Will says);
own it outright with another as joint tenants with rights of survivorship (this asset passes to the other person on death regardless of what your Will says);
own it outright, but have it be payable on death to another. This includes: Life Insurance, Annuities, Retirement Accounts, 529 Accounts and POD Accounts or TOD Accounts. (These assets pass to the named beneficiary regardless of what your Will says.);
own it through a business (Many businesses that are owned with other parties will have an agreement that says where the business will go when you die. Accordingly, this will trump what you have in your Will.);
own it through a revocable living trust (Assets in the trust will usually pass according to the terms of the trust);
be a beneficiary of a trust (Assets in the trust will usually pass according to the terms of the trust - but this trust was not a trust established by you, so you may not have control over where it goes); and
be a third party beneficiary. (This is basically a trust without a written trust document. This scenario often occurs when there is a contract between two people that benefits a third party. For example, a divorce agreement between a husband and wife might require the husband to leave $100,000 to his children. This will trump whatever the husband puts in his Will if rights a Will cutting out his children.)

A good estate planning attorney will make sure to review the title of all of your assets. By doing so, he can help you:

ensure that your money goes where you want it to go;
advise changes that should be made to the title of assets (particularly for married couples) to maximize estate tax exemptions and minimize taxes;
avoid the risk of litigation; and
reduce probate costs.

Seminar Announcement - Which Side of the Delaware River Should I Live on?

2010-10-29T10:11:00.010-04:00

Let’s Get The Facts Straight!

Which Side of the Delaware River Should We Live On?

New Jersey vs. Pennsylvania

We invite you to be enlightened on the Facts and Myths about Estate Planning and how it may or may not differ depending on where you live. Our free seminar will cover such topics as:

· Inheritance Taxes, Estate Taxes, Laws that affect Non-Traditional Couples & Titling of Assets

· Financial Investment Opportunities, Income Taxation of Retirement Plans & The Importance of Proper Beneficiary Designations

· Property Tax, Property Values, Schools & Real Estate Investment Opportunities

Guest Speakers

Kevin A. Pollock, J.D., LL.M.

Attorney at Law, licensed in NJ, NY, PA & FL
Law Office of Kevin A. Pollock LLC

Kate P. Sweeney, CFP, CIMA

Senior Vice President
Senior Investment Management Consultant
Morgan Stanley Smith Barney
-------------------------------------------------------------

Saturday,November 6, 2010

9:00 a.m. to 11:00 a.m.

NEW HOPE MANOR

44n Sugan Rd.

New Hope, PA 18938

PRESENTED BY:
Weidel Realtors

New Hope/Lambertville Regional Office

215-862-9441

Refreshments will be served

Comparison of PA and NJ Inheritance Tax Laws - Chart

2010-10-28T10:15:00.001-04:00

As a followup to my October 4 post comparing the PA and NJ Inheritance tax laws, I thought it might be helpful to see all the information in a format that is a little easier to comprehend. Accordingly, I have prepared a chart, which you can view by clicking on this link: Chart Comparing New Jersey and Pennsylvania Inheritance Tax Laws.

Pennsylvania Inheritance Tax Trap

2010-10-05T17:10:00.002-04:00

Estate Planning Practitioners and clients should be aware that there is an inheritance tax trap in Pennsylvania. In most states, it is common to set aside a certain amount for the spouse and the children in one trust on the first to die. This is known as a bypass trust and done for a variety of reasons, but usually to take advantage of the federal estate tax exemption on the first to die.

In Pennsylvania, a trust like this will cause an immediate inheritance tax because a portion of the money is going to children who are taxed at a rate of 4.5%. Accordingly, if you are moving to PA from another state, it is highly likely that you should to redo your estate plan.

A Comparison of the Pennsylvania and New Jersey Inheritance Tax Laws

2010-10-04T10:23:00.007-04:00

Some states, including New Jersey and Pennsylvania, have an inheritance tax. Other states, like Florida and New York, do not have an inheritance tax. An inheritance tax is a tax on the person who receives money from a decedent.

The inheritance tax rate itself depends upon the relationship between the person receiving the money and decedent. For example:

In both New Jersey and Pennsylvania, if the person receiving the money is a spouse (or a charity), there is no tax.
If the person receiving money is a sibling, there is a flat 12% tax in PA. In NJ it is a bit more complicated - the first $25,000 is exempt; beyond that there is a tax of 11-16% depending upon on the amount of the bequest.
Generally, if the person receiving money is anyone else (besides a child, parent or same sex partner), then there is a 15% flat Pennsylvania inheritance tax and a 15 or 16% New Jersey inheritance tax depending upon the amount of the bequest.
The first BIG DIFFERENCE is that Pennsylvania taxes bequests to all lineal descendants and certain lineal ascendants at 4.5%. New Jersey does not charge an inheritance tax to any lineal descendants or ascendants. (Note: Pennsylvania does not charge a tax on the bequest to a parent if the decedent was under 22 years of age.)
The second BIG DIFFERENCE is that Pennsylvania has a 15% inheritance tax on bequests to a same sex partner. In New Jersey, as long as the partners are in a civil union or domestic partnership, there is zero inheritance tax. If the partners are not in a civil union or domestic partnership, then there is a 15 or 16% tax, depending upon the amount of the bequest. For more information, see my blog on Estate Planning for Same Sex Couples.
In NJ, a bequest to a son-in-law or a daughter-in-law is taxed at the same rate as a bequest to a sibling. N.J.S.A. Section 54:34-2c. In PA, such transfers are taxed at the same rate as a bequest to a child. 72 PS 9116 (Note: If the son-in-law or daughter-in-law later remarries, this does not apply.)
In both NJ and PA, step children and adopted children are taxed in the same manner as natural children. New Jersey also allows inheritance tax free transfers to mutually acknowledged children in certain circumstances. N.J.S.A. Section 54:34-2a.
The only other significant difference in the rates is that New Jersey exempts transfers that are less than $500. Pennsylvania exempts certain transfers of up to $3,000.

New Jersey and Pennsylvania also have similarities and differences between the types of assets that they will tax. This is not a complete list, but as an example:

Neither state taxes life insurance, real property located outside of the state or business interests located outside of the state;
Both states will fully tax cash and brokerage assets of individuals who died while domiciled in their state.
Both states will fully tax real estate and business interests located inside the state of resident and non-resident domiciliaries.
Joint property held with rights of survivorship are fully taxed in New Jersey unless the recipient can prove he or she contributed to the joint property. In Pennsylvania, only the portion of the property owned by the decedent is taxed.
IRAs, Annuities, 401(k)s, 403(b)s and other retirement assets are taxed in New Jersey, but not in Pennsylvania, provided the account owner passes away before having the right to withdraw the money free of penalty (generally before retirement age of 59.5) AND provided that a person was named as beneficiary of the retirement plan. In PA, if the owner of the 401(k) has the right to close down the account it will also be subject to a tax, this is generally age 62 or 65.
Retirement plans, annuities and other benefits payable by the federal government to a beneficiary are not subject to an inheritance tax in NJ or PA.
In Pennsylvania, transfers made within one year of death are taxable, but each such transfer is subject to a credit of up to $3,000 per recipient. In New Jersey, transfers "made in contemplation of death" are taxable for inheritance tax purposes. There is a presumption that transfers made within three years of death are made "in contemplation of death".

Note: An inheritance tax is not to be confused with an estate tax. A state can have either an inheritance or an estate tax, both, or neither. Additionally, many of the assets that are exempt from inheritance tax (such as life insurance) are subject to an estate tax.

The NJ inheritance tax is due within 8 months from the date of death. In PA, the inheritance tax is due within 9 months of the date of death, but there is a 5% discount if the tax is paid within 3 months from the date of death.

The NJ Inheritance tax statute can be found at N.J.S.A Section 54:34-1, et. seq. The PA Inheritance tax statute can be found at 72 PS 9101, et. seq.

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Edited on January 20, 2011 thanks to input from Patricia Picardi.

New Jersey Estate Tax

2010-10-03T22:54:00.001-04:00

New Jersey has many different types of taxes, including two different taxes on death: the NJ Estate Tax and the NJ inheritance tax. The New Jersey estate tax is a tax on transfers at death and certain transfers in contemplation of death.

Transfers to charities, a surviving spouse, a surviving Civil Union partner or a surviving Domestic Partner are exempt from the NJ estate tax. Transfers to anyone else are taxable to the extent that the transfer exceeds $675,000. New Jersey never does anything in a simple manner, and it does not technically offer a $675,000 exemption from the estate tax. NJ actually exempts the first $60,000 of transfer and then taxes the next $615,000 at 0%. The effect of this is that the first $675,000 can almost always pass to whomever you want tax free.

Each New Jersey resident is entitled to the NJ estate tax exemption. Accordingly, married couples and Civil Union couples can double the amount that they pass on to their children with proper planning. (This usually involves setting up a bypass trust for the surviving partner or spouse rather than leaving them money outright.)

The New Jersey estate tax is a progressive tax, meaning that the more you pass on, the higher the tax rate. The NJ estate tax rate generally varies from 0% to 16% depending upon the amount of the transfer. The major exception is that for the first $52,175 over $675,000, there is a 37% tax. For a detailed breakdown of the tax rates, see page 10 of the NJ Estate Tax Return.

New Jersey offers two different method of calculating the state estate tax on the NJ Estate Tax Return: the 706 method and the so called "Simplified Method". The Simplified Method allows the executor or administrator of the estate to avoid filing a 2001 version of the federal estate return, but it often results in a higher tax. For this reason, it is often advisable to hire a competent estate planning attorney to minimize this tax liability.

A decedent's estate can be subject to both the NJ estate and inheritance taxes. New Jersey does offer some relief if an estate is subject to both taxes. For example, if a person with $1,000,000 dies and leaves the entire amount to her nephew, this transfer would be subject to both taxes. A transfer of one million dollars in normally subject to a $33,200 New Jersey estate tax. A transfer of this amount though is also subject to a $150,000 New Jersey inheritance tax. In such an instance, New Jersey would only collect only the higher tax, the 15% inheritance tax in this case.

The NJ estate tax is due within 9 months from the date of the decedent's death. This is different than the NJ inheritance tax, which is due within 8 months from the date of the decedent's death.

The NJ estate tax should not be confused with the federal estate tax. Unless Congress acts to extend the repeal of the federal estate tax (which I think to be highly unlikely), the United States will have a separate and additional tax on death.

Lawyer's CARE Legal Clinic

2010-09-28T17:42:00.002-04:00

From time to time, a number of attorneys, including myself, get together to volunteer our time helping those who might need free legal advice. Anyone who wishes to receive free legal advice can see an attorney for 15 minutes.

There are usually attorneys who can advise people on a range of legal topics including Wills, Trusts and Estates, Bankruptcy, Foreclosure, Real Estate, Family Law, Personal Injury, Sports and Entertainment, and Business matters.

The next clinic is scheduled for Thursday, October 7, 2010 at the Lawrence Library Branch, Room 1. The Library is located at 2751 Brunswick Pike, Lawrenceville, New Jersey 08648. The clinic starts at 5:30 pm and lasts until 7 pm.

The Lawyer's CARE clinic is sponsored by the Mercer County Bar Association.

Estate and Trust Litigation

2010-09-03T10:04:00.005-04:00

Unfortunately I have been given another reminder of how important it is to select appropriate executors for your Will, trustees for your trusts and agents in your financial powers of attorney.

No matter how good an attorney does in drafting your estate planning documents, if there is a person in charge of the money who is not honorable, a large portion can be easily stolen. The person who you put in control of such money is known as a fiduciary.

When you name someone as a fiduciary, you must realize that while they are legally forbidden from taken this money for their own personal benefit, mechanically it is very easy to do. For this reason I always recommend that when deciding on who should be in charge of your finances you always choose someone who is trustworthy rather than someone who is good with money. A trustworthy person can always hire others to help who are good with money. You would be hard pressed to discover the money from someone who is smart and sneaky.

For people who want to do everything they can to avoid probate - just realize that by avoiding probate you are also avoiding oversight. So if you have named a bad trustee, it will just be that much harder to prove that they in fact stole the money.

If your heirs find themselves in a situation where they think that money has been stolen from an estate or trust, the first remedy is an accounting. Unfortunately there is very little satisfaction in this because it can take years and can be very costly. It is not uncommon for this type of litigation to start at about $40,000.

The best way to avoid estate and trust litigation after you are gone is to really think about the people you name as fiduciaries. If you can't trust anyone, there are plenty of independent fiduciaries that you can hire.

Termination Clause in Special Needs Trust

2010-08-20T22:42:00.000-04:00

The Social Security Administration has issued new rules, SI 01120.199, related to the early termination of Self Settled Special Needs Trusts created on or after January 1, 2000. Self Settled Special Needs Trusts, also known as First Party Special Needs Trusts established under Section 1917(d)(4)(A) of the Social Security Act. are designed to avoid being counted as a resource that would affect the trust beneficiary's right to receive Supplemental Security Income (SSI) and Medicaid.

Typically, a Self Settled Special Needs Trust does not terminate until the death of the beneficiary. The new rules provide guidance on how beneficiaries of these trusts can still qualify for government benefits in the event the trusts contain an early termination provision.

An early termination provision is a clause that would allow the trust to terminate before the death of the beneficiary. A termination clause is very important to have in a special needs trust in case the trust beneficiary is no longer disabled, becomes ineligible for SSI and Medicaid, or when the trust fund no longer contains sufficient assets to justify its continued administration.

The most common need for an early termination clause comes when a child wins a very large personal injury settlement. Settlement agreements will routinely require that a special needs trust be established. However, if in twenty years the child is fully functioning and not in need of SSI or Medicaid, a special needs trust will be overly restrictive.

A special needs trust with a termination clause will qualify under the new rules if the trust:

has a payback provision on the date of the termination. This means that the trust has to pay to the State all amounts remaining in the trust up to an amount equal to the total medical assistance paid on behalf of the beneficiary by the State;
only makes payment of the balance remaining directly to the trust beneficiary (reasonable administration expenses and taxes are allowed to be paid to other parties); and
gives the decision on whether or not to terminate the trust to a person other than the trust beneficiary.

In the event you have an existing trust that does not meet the termination standards set forth by this new rule, such trusts will be evaluated under Section 1613(e) of the Social Security Act.

SI 01120.199 also apply to Pooled Trusts established under Section 1917(d)(4)(C) of the Social Security Act. SI 01120.199 will take effect October 1, 2010.

Are Contributions Made to a Non-Profit Organization Tax-Deductible if 501(c)(3) Status Has Not Yet Been Received?

2010-08-19T10:41:00.003-04:00

The classic chicken and the egg problem as it relates to charities. You want donors to give money to a non-profit so that you can have money to pay for the legal fees and filing fees associated with forming the non-profit. However, how do you convince people to donate money to the non-profit if they can't get a tax deduction?

IRS Publication 4220 provides the answer. Generally, if the non-profit organization files Form 1023 (an application to be recognized as a tax-exempt entity) within 15 months from the date the non-profit was created will be considered to be a tax exempt organization as of the date of creation.

The practical impact of this is as follows:

An organization may have fundraisers prior to receiving proof that it has been declared tax-exempt by the IRS;
The non-profit MUST advise potential donors that the 501(c)(3) status is pending.
If the tax-exempt status is granted by the IRS, contributions by donors will be tax deductible.
If tax-exempt status is denied, contributions made by donors will NOT be tax deductible. Additionally, the organization may be liable for paying taxes on money it has received.

Self Settled Special Needs Trusts

2010-08-18T11:38:00.001-04:00

There are generally two types of private special needs trusts:

1) Third Part Special Needs Trusts; and
2) Self Settled Special Needs Trusts (also known as First Party Special Needs Trusts or D-4A Trusts).

A person who is receiving (or about to receive) Medicaid and Supplemental Security Income (SSI) may wish to consider establishing a Special Needs Trust just before he or she is about receive a substantial gift, inheritance or personal injury award. By receiving money outright, the person will no longer be eligible to receive SSI and Medicaid.

The Social Security Act (Section 1396p(d)(4)(A)) specifically allows a Special Needs Trust to be created for a person so that the person can continue to qualify for Medicaid and SSI. This particular trust is called a Self Settled Special Needs Trust because it is being funded with the person's own money (as opposed to money given to a trust by a third party).

The prime difference between the terms of a Self Settled Special Needs Trust and a Third Party Special Needs Trust is that when the beneficiary of a Self Settled Special Needs Trusts dies (or the trust terminates), the balance in the trust must pay off any Medicaid liens that have been built up. If there money left in the trust after that, the balance can be paid to the beneficiary's relatives. With a Third Party Special Needs Trust, there is no payback provision necessary.

The reason why a beneficiary of either a Self Settled Special Needs Trust or a Third Party Special Needs Trust can qualify for SSI and Medicaid is because those trusts are limited in what they can pay for. In general, the trust may not pay for food, shelter, electricity, gas or water and it may not pay for anything that can be converted into food, shelter, electricity, gas or water. So cash should almost never be distributed to a beneficiary from the trust. (Note: there are special rules about a trust owning a home)

A Self Settled Special Needs Trust can be created on behalf of the individual who receives the money by the person's guardian, the person's parent or grandparent, or by a court (as often happens in personal injury settlements). The beneficiary must be under the age of 65 when the trust is created and funded and the trust must be for the sole use of the beneficiary.

The costs of creating a Special Needs Trust vary from attorney to attorney, however, hundreds of thousands can be saved by setting up one properly.

Organ Donation

2010-08-16T18:36:00.002-04:00

Clients occasionally ask me to put in language into their health care powers of attorney and advanced health care directives regarding donation of their organs. In New Jersey, this is not really necessary for most people.

On July 22, 2008, then Acting Governor Richard Codey signed the "New Jersey Hero Act" into law. The New Jersey Hero Act requires that all individuals applying for a driver's license to make a pro-active decision as to whether you wish to be an organ donor or not.

The choice is obviously still yours. For more information on how to be an organ donor in your state, and the ramifications of being an organ donor, please visit: http://organdonor.gov/donor/registry.shtm

The "Gift" of Health Insurance

2010-08-03T11:27:00.002-04:00

I frequently come across clients who want to help their children financially, but they do not want to give them money directly. There are numerous ways to do this, including:
1) gifting an interest in a limited liability entity (such as an LLC, an S-Corp or a limited partnership);
2) making gifts to a child via a trust;
3) paying for a child's or grandchild's tuition; and
4) paying for a child or grandchild's medical expenses.

In the first two categories, there is a limit to the amount that can be given tax free. This amount is known as the 2503(b) exemption amount, and it currently stands at $13,000. However, for the third and fourth categories, a parent can pay educational and medical expenses for a child, regardless of amount, and not have to worry about paying a gift tax at all.

When many people consider making a gift for medical purposes, they think that they have to pay the doctor directly on behalf of the child. There is something else that can be done though - they can also pay their child's health insurance premiums. According to Treasury Regulation 25.2503-6(3), "the unlimited exclusion from gift tax includes amounts paid for medical insurance..."

Since insurance premiums have been increasing by double digit percentages almost every year, wealthy parents should take advantage of this option to help out their children and provide piece of mind to themselves. This is particularly true if their child has been laid off in this down economy.

By directly paying the insurance company for their child's health insurance bills, parents can also make an additional $13,000 gift (either in cash or indirectly), to help out their child or minimize their estate for estate tax purposes.

Choosing an Attorney to Help Probate an Estate

2010-07-02T17:25:00.005-04:00

Did you know that if you are an executor or personal representative of an estate that you do not have to hire the attorney that drafted the Will to handle the probate of the estate?

Many times, attorneys will do a simple will as a favor to a neighbor or relative. This is all fine and dandy as long as all that is needed is a simply Will. However, frequently, many tax forms must be filed when administering an estate and clients need advise on when NOT to accept money. A good attorney should also be able to act as the "bad guy" when an executor must deliver bad news to the beneficiaries. An attorney that does not focus on estate administration may not be able to help.

I'm often amazed at the number of times that I meet with a client who was unhappy with the attorney that administered a parent's estate. I ask why they didn't switch and I am told that they did not realize they could. Remember this - you always have the choice of who you wish to represent you. It may not be cost efficient to change if you are too far along, but you always have the right to change.

My best advise is that before you start the process of estate planning or estate administration, make sure you hire someone who practices frequently in the field. You are far less likely to encounter problems.

Giving to Charity Using Life Insurance

2010-06-07T17:32:00.005-04:00

When I meet with clients who are charitably inclined, I frequently advise them that, for tax reasons, the last money they give to charity should come from life insurance. Typically, the first money that should go to charity on death should come from your retirement account or from some asset which has a low basis and is not entitled to an increase in fair market value as a result of death because receipt of these assets can often result in estate, inheritance and income taxes.

Recently, I was having this discussion with a colleague of mine, Adam Altman, about this topic. He advised me that AXA has a special life insurance policy that encourages charitable giving. Apparently, this policy contains a rider that allows for an additional death benefit, whereby AXA agrees to pay an additional 1% of the death benefit, up to $100,000, to the 501(c)(3) organization of your choice. The best part - there is no additional charge and it does not reduce the cash value of the policy.

This program is ideal for those of you who wish to give something to charity, but do not want to take away from anything your relatives will receive.

If you are interested in this program, please contact my fellow Tulane alumnus, Adam at: 732-326-5230.

Business Organization and Succession Planning

2010-05-25T14:45:00.001-04:00

In 2007, I wrote about the importance of business succession planning. Nothing has changed. Having a clear plan as to how to transfer the ownership of a business is crucial. However, merely transferring your interest in a business to your next of kin is only part of the equation. A good business succession lawyer will also try to make sure that you are comfortable with who will actually run your business when you no longer capable of doing so. If you are not really sure whether any of your family members can run the business, and you have not been mentoring someone to take the reins from you, it is probably a good idea to meet with a business consultant.

Tom Reinhard of the Juncture Group suggests that owners should document and make flow charts for key business processes and develop position descriptions for key employees. If a key person dies or suddenly becomes ill, this information can be vital to the continuity of a business. Tom also notes that by going through this process, owners and managers often find ways to improve their business.

Tom specifically recommends:

1. Document organizational roles and responsibilities along with a chart of organizational reporting relationships. Writing clear descriptions of each employees roles and responsibilities, has a side benefit besides making a new employee’s job clear. It can also help uncover when employees are duplicating their efforts or when there are gaps in responsibilities. These descriptions can be very helpful in searching for and identifying suitable candidates to fill vacant job positions.

2. Developing base line documentation of core business processes. After members of your staff describe the tasks for which they are responsible and write down the details of how they accomplish their duties, these written descriptions can be improved though the development of work flow diagrams and flow charts. The process descriptions and charts often reveal opportunities to improve the quality and efficiency of the business. It is also a great way for a new senior executive to obtain a quick understanding of how the business runs.

3. Engage the key members of the organization in periodic review and update of the aforementioned documents to adjust for changes and process improvements. Getting your staff involved in maintaining process documentation is a great way to involve them in improving the efficiency and productivity of the business.

There are many things that are out of your control as a business owner. However, by working with a business succession attorney and a business consultant you can better ensure your enterprise continues to move forward if tragedy hits.

Thomas Reinhard and the Juncture Group may be contacted at 609-799-3386. For more information about Tom, please see: http://www.bni-tigers.com/tom_reinhard.htm

New Jersey Estate Tax for Non-Residents Coming?

2010-05-21T10:17:00.005-04:00

New Jersey State Senator Andrew Ciesla, a Republican from Brick, has introduced legislation to modify the New Jersey estate tax so that non-residents, in addition to residents, are responsible for paying the tax.

Currently, New Jersey has two types of death taxes. There is the New Jersey estate tax, which generally imposes a tax of 6-12% on all estates over $675,000. The New Jersey estate tax is currently only imposed upon the estates of decedents who are residents of New Jersey.

Additionally, New Jersey has an inheritance tax of 0-16%, depending upon whom assets are transferred. The New Jersey inheritance tax is imposed on the estates of all New Jersey residents as well as non-residents who own real or tangible personal property in New Jersey.

If the assets pass to a spouse, civil union partner, lineal ascendant, lineal descendant or charity, then the transfer is exempt from the inheritance tax. If the assets pass to a sibling, a son-in-law, daughter-in-law or civil union partner of one of your children, there is an inheritance tax of 11-16%. New Jersey does exempt the first $25,000 of the transfer though.

If the assets pass to anyone else, there is an inheritance tax of 15-16%, but the first $500 is exempt.

The proposed law is designed to target people who die owning homes in New Jersey but are residents of other states. Most of the estates of these decedents currently do not pay any estate or inheritance tax to New Jersey because the estate tax does not apply to them as a non-resident and the inheritance tax will only affect those who leave money to someone other than immediate family or charity.

If enacted, the modified New Jersey estate tax will require the representatives of people who die as residents outside of New Jersey to file a New Jersey estate tax return and pay a proportional share of taxes. For example, if a person's estate is $1,000,000 and they owned property in New Jersey worth $500,000. Normally, if the person was a New Jersey descendant, the tax would be $33,000. In this situation though, since 1/2 of the assets are outside of New Jersey, the tax would most likely be 1/2 of the $33,000.

The proposed tax would surely raise a significant amount of money in this cash strapped state. However, with a Governor highly opposed to any new taxes, I would be surprised it passes.

Follow up to Articles on Expatriation

2010-04-27T11:59:00.004-04:00

The New York Times had an interesting article online today about how more and more people are giving up their citizenship. It did not surprise me that many give up their citizenship to save money on income taxes. However, I was surprised to learn that the Patriot Act is also partly to blame.

Apparently, the Patriot Act makes it very difficult for citizens to maintain bank accounts in the United States if they have lived overseas for a long time because the Patriot Act requires a United States residence. Since overseas residents cannot provide a US address, they are being treated the same as terrorists and the banks are closing the accounts.

In the short term, giving up your citizenship may make things easier, but remember, there can be serious income tax and inheritance tax ramifications to giving up your citizenship.

Pennsylvania (and Philadelphia)Tax Amnesty Programs

2010-04-21T09:35:00.005-04:00

Starting April 26, 2010, Pennsylvania will offer partial amnesty for taxpayers who are delinquent in paying their taxes. The program runs through June 18, 2010. Frankly, this is an incredibly generous amnesty because Pennsylvania is agreeing to waive 100% of any penalties plus 50% of the interest.

The city of Philadelphia is also showing a little brotherly love by offering its own tax amnesty program, starting on May 3, 2010 and ending on June 25, 2010.

For those of you who owe back taxes, it is usually advisable to try and take advantage of the amnesty programs to reduce your overall tax liability and clean up your credit. Moreover, the government will frequently issue additional penalties to those who do not come forward during the amnesty.

How to Avoid Estate Litigation - Communication

2010-04-16T10:09:00.005-04:00

Sometimes there is no preventing an estate litigation. When a family member steals items from the estate, or when the Will is poorly drafting making it confusing, litigation is sure to follow.

However, most good estate attorneys will tell you, one of the biggest reasons that unnecessary litigation results is due to family members not communicating with each other. Lack of communication by the person in charge of the estate leads the other family members to believe that the executor (or administrator) is hiding something. More often than not, the person in charge is just too busy or overwhelmed. Things get said which are better left unsaid, and then the worst of all situations arises - it no longer is about getting what you are entitled to under the Will, but about how Mom or Dad always loved the other one more.

Once the administration of an estate is no longer about getting through the difficult administration process, but about opening old family wounds, people seem more than happy to hire aggressive litigators to settle the score. In the long run, this ALWAYS costs the estate far more. It costs the estate more money in attorneys' fees and it costs the family any semblance of family unity. It is rare that siblings, or cousins, will ever get along again after there has been an estate litigation.

Many times, you do not need to hire an attorney to handle the probate and administration of a loved one's estate. However, if you find yourself overwhelmed, you must not just sit and wait. It will cost you far more than money. A qualified estate administration attorney can guide you through the process. Moreover, the person named as executor is not individually responsible for paying for the fees - it comes from the estate off the top. After all, it is in everyone's interest to make sure Mom and Dad's wishes are carried out.

Who exactly is a Covered Expatriate?

2010-04-09T14:35:00.004-04:00

In 2008, President Bush signed the Heroes Earnings Assistance and Relief Tax (HEART) Act. One of the major provisions of the Heart Act was to collect substantial taxes from certain United States taxpayers (whether a citizen or a permanent resident alien) who expatriated from the United States after June 16, 2008. The individuals that this law applies to are known as "Covered Expatriates."

There can be harsh federal income tax and federal inheritance tax consequences if you are deemed to be a Covered Expatriate.

A person is considered a Covered Expatriate if he or she:
1) is a US citizen who renounced his or her citizenship OR a permanent resident alien who relinquishes his or her status after being a permanent resident alien for 8 of the last 15 years; AND
2) has had an average annual net income tax of more than $124,000 ($136,000 adjusted for inflation) in the preceding five years OR has a net worth equal to or more than $2,000,000 OR such person fails to certify, under penalty of perjury, that he or she has met the income and asset requirements.

Additionally, this statute does not apply to dual citizens who became a citizen of the United States by birth, but have never had substantial contacts with the United States. A person is considered to have substantial contact with the United States if he or she was ever a resident of the United States, ever held a passport OR was present in the United States for more than 30 days during any calendar year 10 years prior to the person giving up their United States citizenship. There is a slight variation on this rule for dual citizens who give up their US citizenship prior to age 18 and 1/2.

To learn more about who is a Covered Expatriate, wee Internal Revenue Code Section 2801 and Section 877A(g)(1).

Income Tax Consequences of Expatration

2010-04-09T14:00:00.005-04:00

In this down economy, many companies are laying off employees. While this could be deeply troubling for those who get laid off, imagine if you were also subject to a huge income tax penalty as a result. This could be happening to you now if you are a permanent resident alien who decides to leave America after losing your job.

In 2008, President Bush signed the Heroes Earnings Assistance and Relief Tax (HEART) Act. This ironically named Act was designed to prevent wealthy people from leaving the United States before paying what Uncle Sam thinks they owed.

The Heart Act applies to citizens and permanent resident aliens who meet certain income and asset requirements. These individuals are known as "Covered Expatriates". To see who exactly Covered Expatriates are, read here.

The Heart Act created Section 877A of the Code. Section 877A takes a snapshot of your assets the day before you expatriate. Then, on the day you expatriate, you are then immediately taxed on the net built in gain which is in excess of $600,000 (indexed for inflation - so this amount is $627,000 in 2010). So, if you are a Covered Expatriate and own several real estate properties with built in gain of $1,000,000, there would be a deemed gain of $363,000, and you would have to pay a tax on that gain.

In the case of an IRA, but not most other retirement accounts, expatriates are also deemed to have received a distribution equal to their entire interest. Luckily, there is no early distribution penalty unless you actually do take the money out early. For most qualified and non-qualified retirement accounts, the IRS will continue their existing practice of requiring the employer to withhold 30% when the money is actually distributed from the account.

Perhaps the only positive feature of this law for those affected is that it does allow certain taxpayers to defer making payments on their tax obligations.

Note: There is an open question about whether Section 121 of the Code, which allows a capital gains tax exclusion on sale of primary residence, still applies to Covered Expatriates. It would probably be advisable to sell your primary residence before expatriating to avoid this issue and also to avoid having to obtain a valuation report for the property.

There is a Federal Inheritance Tax?

2010-04-09T11:46:00.006-04:00

It's true. Most people think that the United States only has a federal estate tax (and yes, I know that technically there is no federal estate tax this year). However, the United States also has an inheritance tax that taxes certain inheritances that are received by United States citizens and permanent resident aliens if the inheritance came from a "Covered Expatriate". To see who exactly a Covered Expatriate is, see my article here.

Moreover, the inheritance tax can be an extremely expensive tax as it is taxed at the highest federal gift or estate tax rate. Currently the highest rate is 35%, but this could potentially go as high as 50% after 2010. Unlike the estate tax, which has a large exemption amount (i.e. you can pass on a lot of money before the tax hits), the inheritance tax exemption amount is minimal. You can only pass on an amount equal to the maximum amount that a person can gift annually under Section 2503(b) of the Internal Revenue Code, currently $13,000.

The federal inheritance tax became law when the Heart Act was passed in 2008. The Heart Act created Section 2801 of the Internal Revenue Code to try to collect a tax on the inheritance that United States persons received from wealthy relatives who had fled the United States for tax avoidance reasons.

Since this is an inheritance tax, the tax is paid by the recipient, not the estate. This was done for jurisdictional reasons. It should be noted, however, that the recipient of the inheritance can receive a credit if an estate or inheritance tax was paid in another jurisdiction.

Spouses and charities are specifically exempt from paying this tax, so this tax is mainly going to apply to the children of wealthy parents who have expatriated from America. Due to the number of permanent resident aliens who are returning to their native country in this economy, and leaving adult children in America, it may actually affect a lot of people.

It should be noted that you can not simply get around this tax by giving money to a trust (foreign or domestic). Moreover, indirect gifts and bequests will also be taxed. It is a far reaching act that can also have massive income tax repercussions. To see more about this, read Income Tax Consequences of Expatriation.

If you are thinking about expatriating from the United States, there is some planning that can be done to avoid being treated as a Covered Person. At a minimum, there is planning that you can do to lessen the tax burden.

IRA Planning in Light of Robertson v. Deeb

2010-04-07T10:46:00.005-04:00

In December of 2009, the Florida Court of Appeals concluded in Robertson v. Deeb, 16 So. 3d 936 (Fla. 2d DCA 2009), that the beneficial interest that a person owns in an inherited IRA may be subject to garnishment. In other words, an IRA that you inherit may be taken by your creditors. This is different from an IRA that you establish yourself, or a retirement plan like a 401(k) or 403(b), which are all protected against creditors.

The result itself did not surprise me much until I read and article by Kristen M. Lynch and Linda Suzzanne Griffin in the April 2010 Florida Bar Journal. Intuitively, it made sense that a creditor can go after an asset that you inherit. Usually, the rule of thumb is that unless an asset is specifically exempted, a creditor can sue to get it.

What made this case unusual, and what I was not aware of, is the fact that there was a specific statute on point, F.S. Section 222.21, which seems to indicate that money payable to the "beneficiary" of an IRA is exempt from all claims of creditors. The Court, however, stated that a beneficiary who inherits an inherited IRA is not entitled to the same protection as a beneficiary who contributes to his or her own IRA.

I do not wish to argue the merits of the Court's decision, but I will point out that as a result of this case, anyone who has a substantial IRA should seriously consider establishing a trust for their loved ones which has "stretch" and asset protection provisions.

For many people, their IRAs are their biggest asset. It is clear, now more than ever, that if you wish to protect your IRA from creditors, you cannot simple name your loved ones as the beneficiaries without risking it being taken. Moreover, you cannot simple name a traditional trust as the beneficiary without incurring large income taxes. You need to do comprehensive IRA planning.

Mercer County

2010-03-31T13:12:00.004-04:00

As most of you may know, I am an attorney with clients based primarily in Mercer County, New Jersey. Accordingly, I was curious how much in estate taxes the residents of each county pay. While having trouble finding that information, I did stumble across some data on the www.taxfoundation.org web site which breaks down how much the residents of each state paid in state estate taxes in 2007.

Not surprisingly, New Jersey residents paid the most per resident, with Pennsylvania residents paying the 2nd most and New York residents paying the 3rd most. What does this mean in real numbers? New York, which received the most in terms of total dollars collected, only received $1,053,384. Pennsylvania collected only $736,610 and New Jersey only collected $586,589. In the scheme of things, this is represents less than .02% of each state's budget.

To be honest, I was a bit surprised by how little was collected, both on a percentage basis and in terms of total dollars. If anyone could send me additional information on other estate tax facts, such as breakdown by county, I would appreciate it.

The Importance of Planned Gifting

2010-03-24T12:08:00.008-04:00

One of the best ways to minimize your taxable estate is through planned gifting. Anyone who may be subject to a federal or state estate tax, or a state inheritance tax, should at least consider a gifting plan.

The first item to think about is - can you afford it? This is not always an easy question because you may be worth a lot of money, but you might not have a large income to cover your annual expenditures. Accordingly, sometimes the best items to gift are items that do not produce a lot of income, but are worth a lot of money for estate tax purposes. Vacation homes, valuable art collections and a minority interest in a business are all perfect examples of this.

Once you figure out whether you can afford to make a gift, the second question is how much to gift and who do you wish to benefit. These go hand in hand because often times you only wish to benefit certain people or certain charities by a set dollar amount rather than by everything you can afford to give away.

When trying to calculate how much to gift, valuation of the gift becomes crucial. It is beyond the scope of what I wish to discuss here, but be aware that certain gifts may valued at less than you think because discounts should be taken if the gift is not freely marketable and/or the donee does not have much control over the asset after it is received.

Additionally, tax law often plays a key role in how much you give away. Even if you can afford to give away $2,000,000 to charity or to your grandchildren, it may be more beneficial for tax reasons to make smaller gifts over a number of years rather than a large lump sum gift.

This leads us to the third item that we must think about in a gift plan is the timing of the gift. (For more information on this, see my earlier blog post on timing.) You may be aware that the federal government allows you to gift away a certain amount every year (currently $13,000) without a gift tax consequence. Moreover, you may gift away up to $1,000,000 before there is any out of pocket gift tax consequence because you are entitled to a $1,000,000 federal gift tax exemption.

Any good gifting plan is going to try and make maximum use of your lifetime gift tax exemption, annual exclusion amounts as well your ability to pay for another person's educational or medical expenses without incurring any tax consequences. (There is technically no gift if you make payments, for the benefit of another person, when such payments are made directly to certain educational institutions or medical care givers.)

Due to the annual exclusion allowance, practitioners frequently encourage clients to make gifts to their loved ones over the course of many years.

The final item to think about, is the manner in which the gift is made. There are thousands of different ways to make gifts. You can make gift directly to the person or charity you wish to benefit. You can make a gift via a trust (and there are many different trusts such as insurance trusts, charitable lead or remainder trusts, dynasty trusts with or without withdrawal rights, qualified personal residence trusts, etc.). You can make gifts to a 529. You can give away partial ownership of a property. You can have an indirect gift by "giving" money to a company in which you are not the sole owner and not getting anything in return for that extra contribution. You can give up a power that you were entitled to.

Once you have figured out what you can afford, who you want to benefit, how much you want to give, when to make the gift and how to make the gift - then you have a truly planned gift.

NOTE: All items discussed here assume that you are a US citizen or permanent resident alien.

Timing of a Gift

2010-03-24T10:02:00.002-04:00

When doing gift planning, it is imperative to have the gifts completed on the schedule that you want otherwise you may accidentally gift too much one year, causing a tax, or you may gift too little, and lose your annual gift tax exclusion for the year.

Therefore, you must know the answer to this question: When is a gift complete for purposes of the federal gift tax?

Unfortunately, tax law is much like a magic trick - what may appear to be true is not always true. If you give someone cash, is the gift is complete the moment the other person receives the cash? What about a check? What about a transfer of real estate by deed?

Would it make a difference if, when giving you the cash, I told you that you could only spend it on a new car, otherwise I want it back? What if there was not enough cash in the account to cover the check? What if after making the deed I held it and did not show it to anyone else or record it? Things get trickier then...

Three elements are required to establish a gift: "(1) donative intent on the part of the Donor; (2) an actual or symbolic delivery of the subject matter of the gift; and (3) an absolute and irrevocable surrender by the donor of ownership and dominion over the subject matter of the gift, at least to the extent practicable or possible, considering the nature of the thing to be given." (Jennings v. Cutler, 288 N.J. Super 553 (App. Div. 1996)

Donative intent means that the person making the gift (or the Donor) believes in his own mind that he is giving something away. For example, if I give you cash, but I expect you to repay it, it is not a gift - even if I do not tell you at the time that I want to be repaid. Since I expect to be repaid, I do not have the proper mindset, or intent, to qualify this as a gift.

The moment that I no longer wish to be repaid, then that transfer can be a completed gift if the other requirements are met. Often times practitioners make positive use of this intent requirement. We can draft a promissory note for a parent transferring a large sum of money to a child, whereby the child agrees to pay back $X per year. The parent can then forgive that annual repayment, thereby completing a gift as to $X. This technique is commonly used by a parent who wishes to help a child make a down payment on a house, but does not want to use up their lifetime $1,000,000 gift tax exemption. The payments of $X can be structured to be less than or equal to the annual exclusion amount, thereby passing on additional money free of gift and/or estate taxes.

To have actual or symbolic delivery is important because it puts the person receiving the gift (the donee) on notice that they are receiving something. Let's go back to the example of a person making a deed for the benefit of their child and then keeping hidden away from the world. It would be similar to make saying to myself that I'm going to give each of my blog readers $100,000, putting the money in my sock drawer, but not telling you about it. I may have the proper intent, but unless there is some further act, it is not enough.

What further act is necessary puts us into a gray, mushy area of the law. I do not physically have to give you the gift. Some sort of act in furtherance of the gift is enough. Three situations that come up frequently are the writing of a check, the preparation of a deed and the transfer of a business ownership interest, so I will discuss them a bit further.

If you write a check to another person, the gift becomes complete when you've gone that extra step to ensure the other person receives the check. This could mean physically handing it to them or putting it in the mailbox. If there is not enough money to cover the check in your account, the gift would not be complete until there is enough money in the account to cover it. (This gets into another gray area however if bank covers your check.) If, however, you tell the donee not to cash it yet, and they obey, then the gift is not complete until they receive permission to cash the check.

For the gift of real estate, the donor does not necessarily have to record the deed, but the recording of a deed clearly proves the gift was made. (see Fischer v. Gerndt, N.J. Eq. 53, 55 (Ch.1922). Anything short of the deed being recorded puts us in yet another mushy gray area of the law. You could give the deed to the donee to record, which would complete the gift, but then take out a mortgage, negating the gift. You could give the deed to the donee's agent, which would complete the gift, but then sell it that same afternoon to another party, negating the gift. Ultimately, it would be an after the fact determination. Accordingly, when doing gift planning, you should not wait until the end of the year to transfer real estate, because it can take up to a month to record the deed. As stated in the beginning, timing is everything for proper gift planning.

For a gift of a business interest, the donor does not necessarily have to enter something in the stock book or file something with the state, but doing so clearly completes the gift. A letter by the donor to the donee stating, "I hereby give you 10% of XYZ business" could be enough, unless the donor turns around quickly and sells it to someone else. As with the deed, for proper planning, it is best just to take the appropriate steps to make the gift clearly complete.

With respect to the final requirement, "an absolute and irrevocable surrender by the donor of ownership and dominion over the subject matter of the gift, at least to the extent practicable or possible, considering the nature of the thing to be given", it is actually a mouthful but easy to show by example. If I tell you that you can have my art collection when I am done with it - it is not a gift until I tell you I'm done with it. In the example at the beginning, the gift of cash subject to the fact that you can only use it for a new car, the gift is not complete until you either use it for the new car, or I change my mind and agree you can have it no matter what. Generally, you have to give up control of what you are gifting. When you have done that, this element is satisfied.

For more on the importance of planned gifting, see: The Importance of Planned Gifting

Note: Thanks to Paul Kostro for keeping me up to date on much of this information. Paul's Blog can be found at: http://www.kostrolaw.com/NJFamilyIssues/

Time to Start Expecting Congress Will Do Nothing on the Estate Tax

2010-02-19T11:47:00.003-05:00

Having an estate plan in place gives you control over your assets, but only if it is up to date. It is important to review your estate planning documents every few years due to changes in personal circumstances and also due to the frequent changes in the tax and probate laws.

As you may be aware, in 2001 there was a major change in the federal estate tax law eliminating the estate tax for the 2010 calendar year. Most professionals, myself included, thought that Congress would modify this law before the estate tax was actually repealed. I guess we should never be surprised though when our government does not behave the way we expect.

It is still unclear what will happen with federal estate tax, but unless Congress acts, by the terms of that same 2001 law, the federal estate tax will be reinstated on January 1, 2011 with an exemption amount of only $1,000,000 per person (indexed for inflation). Moreover, the federal estate tax rate will return to a graduated rate, generally between 41% - 55% depending upon the amount of your assets.

Additionally, the change in the federal estate tax law in 2001 caused New Jersey, and many other states, to modify their respective state estate tax laws. New Jersey, in particular, decided to lock in a state estate tax exemption amount of $675,000.

Accordingly, if your Will contains a formula provision to fund certain trusts or bequests, the change in the tax laws could greatly affect where your money goes upon your death and may result in unnecessary taxes being owed.

My recommendation is that anyone who has assets in excess of $650,000 have their Will reviewed. If necessary, they should be revised to build in maximum flexibility to take into account as many reasonably foreseeable outcomes that we might have if the Congress decides to pass a new law or decides not to do anything.

Free Seminar

2010-02-05T19:45:00.003-05:00

Aging: Myths, Facts and Superstitions

Wednesday, February 17, 2010
4pm until 5pm

Join us! The Stony Brook Assisted Living Community is hosting three experts in the field of aging who will discus need-to-know issues critical to your loved one's medical, legal and emotional health.

Polypharmacy: Multiple prescriptions + multiple medical conditions = medical disaster. Learn ways to avoid this serious health threat. By Dr. Priti Gujar, a physician with Geriatric Treatment Resources LLC in Pennington, NJ.

Legal Superstitions: Key legal documents and the superstitious reasons people avoid creating them. What are the criteria for judging competency to sign such documents? By Kevin A. Pollock, J.D., LL.M., an attorney with the Law Office of Kevin A. Pollock LLC in Pennington, NJ.

Myths about Aging: Exploring myths about aging and the truth about cognitive and functional changes. The important conversations that you must have with family members and how to approach them. Presented by Mary Kay Krokowski, a geriatric care manager with Aging Advisors, LLC in Pennington, NJ.

If you are interested in attending, please RSVP to 609-730-9922 by February 12.

Location: Stony Brook Assisted Living, 143 West Franklin Avenue, Pennington, NJ 08534

2010 SSI Monthly Payment Amounts

2010-01-13T15:31:00.002-05:00

Last year was a difficult economic year for many, including the government. As a result there will not be any cost of living adjustment to anyone's monthly payments this year.

For a detailed lists of New Jersey payout amounts, click here.

For a detailed lists of Pennsylvania payout amounts, click here.

For a detailed lists of New York payout amounts, click here.

For a detailed lists of Florida payout amounts, click here.

So, Will there be a Federal Estate Tax in 2010?

2009-12-28T13:00:00.000-05:00

On December 3, the House of Representatives passed a bill to permanently extend the Federal Estate Tax Exemption (H.R. 4154). The current exemption is $3.5 Million per person, or $7 Million for a couple, with a 45% tax on the decedent's assets over the exemption amount.

As of yesterday though, the Senate has yet to act, which means that the law passed by President Bush in 2001 remains in effect. If Senate does not pass bill to deal with this by New Year's, that will mean that on January 1, 2010 there will be no federal estate tax - maybe.

Why do I say maybe? Because it is still very likely that Congress will act after the new year to reinstate the tax, and make it retroactive to January 1st. They've done it before, with the permission of the Supreme Court. (see U.S. v. Carlton)

Even more troubling, the repeal would only be for one year, and then the exemption amount would come crashing back down to One Million Dollars (indexed for inflation) in 2011. This does not make for easy planning and will most adversely affect individuals who have children from one relationship and are now married to a different person. People who are in this situation should seek out an estate planning attorney immediately because it is likely the formulas in their Wills may cause a disastrous result. Many formulas can be read so that either the children from the prior relationship are completely cut out or the new spouse is completely cut out. There is an easy fix to this by setting caps on how much a spouse or child can get, but I reiterate - many old formulas will not work.

Most estate planning practitioners that I know still strongly believe that the government will pass a law to keep some form of estate tax - mainly because we find it hard to believe that the government will give up so much money from the people who can most easily afford to pay it. However, for those of you who have been completely ignoring the issue, it is time to start paying attention because a complete repeal of the federal estate tax will actually have a large capital gains tax consequence.

To understand this capital gains tax consequence, you must first understand and appreciate the incredible importance of "Basis". If the federal estate tax is indeed repealed, executors will be entitled, for an individual decedent, to allocate to the decedent's assets up to $1.3 million in basis plus the sum of the decedent's unused capital loss carryovers, net operating loss carryovers and unrealized losses on property owned at the date of death (IRC Section 1022(b)). No asset may be increased in excess of fair market value though.

In addition to the $1.3 million basis increase available to all beneficiaries of an estate, the executor may allocate another $3 million of basis to assets passing to a surviving spouse. (This benefit only applies to heterosexual couples.)

As a practical matter, the repeal of the estate tax will most negatively affect those few individuals who have a lot of highly appreciated assets and those individuals who might not have had to file a return at all. The reason that it negatively affects the people who might not otherwise had to file a return is because I believe that a return will have to be filed to properly allocate basis to your assets. This will result in extra attorney fees for many.

The pessimist in me says that the government will wait until about August of 2010 or so and make a retroactive law, making estate planning and administration most cumbersome and costly.

Understanding Basis

2009-12-28T11:23:00.005-05:00

If you want to sell an asset, particularly a valuable asset, no one should do so without first understanding what the tax consequences of that sale might be. The tax that most often affects the sale of a valuable asset (in a non-business setting), is the capital gains tax. To understand this capital gains tax consequence, you must first understand and appreciate the incredible importance of "Basis".

An asset's basis is often referred to as the amount an asset cost when you buy it. For example, if you buy stock at $20 and sell it at $100, the basis of the stock is $20 and the gain on the sale is $80. If the stock was held for an appropriate time amount, the gain would be considered capital gain and taxed at the capital gains tax rate.

Now, the basis in an asset can change for a variety of reasons. For example, let's say that the stock that you bought split, you would have to split the basis in the stock in the same way that the stock split. Additionally, let's say the asset is a house, or some other type of depreciable asset. Every time you depreciate the asset, the basis is reduced. If, on the other hand, you make capital improvements to the asset, like putting an addition on to a house, that increases the basis of the asset.

So, let's assume that you buy a rental property for $200,000. You spend $100,000 improving it, depreciate it by $80,000, and then ultimately sell it for $750,000. The basis in the property would be $220,000 ($200,000 + $100,000 - $80,000). The gain would be $530,000, and most likely taxed at the capital gains rate of 15%.

Another major factor in determining the basis in property is whether, under current law, a person holds that asset at the time of his or her death. Currently, when a person dies, the heirs take the assets of the decedent with a basis equal to fair market value. (Often times this is called a step up in basis - but that is a bit of a misnomer as the basis can actually be lower in a bad economy.)

So for example, let's say that Dad dies owning a house that he purchased for $350,000, and at the time of his death it is worth $550,000. If the heirs sell the house shortly after his death for $560,000, there is only $10,000 of gain, not $210,000 of gain because of the increase in basis due to Dad's death.

Now let's complicate matters. Dad and Mom own that same property that they bought for $350,000. Dad dies when the value of the property is $400,000 and Mom dies when the value is worth $550,000. The basis in the property will be determined by whom the property was left to. If Mom inherited the property from Dad and then died, the basis of the property is the full $550,000.

If Dad left the property to daughter, and the other half the property went to daughter when Mom died, the basis will be split. The basis will be $475,000 in the hands of daughter. (1/2 of the property with a $200,000 basis as a result of Dad's death and 1/2 of the property with a $275,000 basis as a result of Mom's death.)

I emphasized "under current law" earlier because that may all change on January 1, 2010. In 2001, President Bush passed a law that eliminates the federal estate tax and eliminates the fair market date of death basis rule. There will be another form of capital gains tax exemption that will go into affect that I review in another post.

Lost in the debate over the estate tax is the importance of the rule revaluing property so that it takes on a date of death basis. One of the big problems that people have is keeping proper records of the basis of their assets. Sometimes, assets can be passed down for generations before they are sold. If the owner cannot provide proof of an assets basis, the government will assume the basis is Zero, causing a potentially very large tax.

So while keeping track of the basis of your assets was always important, it may be even more important to safeguard your paperwork pertaining to your valuables if the estate tax is truly repealed.

A Good Time to Buy that First House – But How?

2009-12-03T14:56:00.001-05:00

Many experts think this is a great time to buy a new house, especially if you are a first time home-buyer. Interest rates are low and home values are depressed. The problem, however, with this credit crunch is having enough cash for the down-payment. There are programs out there so that you can buy a home with almost no money down, but that can lead to the monthly payment of Private Mortgage Insurance (PMI), which is expensive, and opens the homeowner to the possibility of owing more than the home is worth if the value declines.

In order to put have an adequate down-payment, many prospective homeowners will consider dipping into their IRAs, 401(k)s or 403(b)s for the down payment. Tapping into these retirement accounts options have significant drawbacks and the cost of such withdrawals should be carefully considered.

IRAs

Best features:

* You can withdraw up to $10,000 without a 10% early withdrawal penalty. (A husband and wife can each withdraw $10,000 to make a $20,000 down-payment.)
* You may withdraw for immediate family such as a spouse, child, grandchild, parent or other ancestor.

Pitfalls:

* The withdrawal amount will be taxable as ordinary income.
* There is no ability to re-contribute money.
* Funds can only be used towards: buying, building or rebuilding the primary residence; and any usual or reasonable settlement, financing or other closing costs.

401(k)s/403(b)s

401(k)s and 403(b)s function in very similar fashion to each other. There are 2 ways to access your retirement fund to purchase a home: withdrawing it outright, or taking a loan out against it. It is usually a far better option to borrow against a 401(k)/403(b) than to withdraw from it due to the pitfalls.

1. If you withdraw money from your 401(k)/403(b):

Best features

* You do not have to be a first-time homebuyer to withdraw 401(k)/403(b) funds (any financial hardship as described by the IRS will suffice).

Pitfalls

* You need to be purchasing a primary residence, as withdrawals are only permitted under “hardship” circumstances. (The government considers the need to purchase a primary residence as a hardship circumstance.)
* The withdrawal amount will be considered taxable income.
* You will be assessed a 10% early withdrawal penalty if you are under age 59.5.
* You lose the compounding interest.
* You may also be prohibited from making any additional contributions for a period of one year.

2. If you borrow against your 401(k)/403(b):

Best Features

* You may borrow the lesser of $50,000 or ½ of your account balance. However, if ½ your account balance is less than $10,000, it may be possible to borrow $10,000.
* A loan from a 401(k) allows you time to pay it back. (This is usually at prime + 1% and the typical payback period is 10-15 years, but it may be as long as 30 years.) A 403(b) typically has a payback period equal to the duration of the first mortgage. However, you should check the specific payback period identified in your plan.
* There is no penalty for borrowing against your 401(k).
* Assuming that you pay the loan back in a timely manner, there are no adverse income tax consequences to receiving the loan.

Pitfalls

* If you lose your job, any unpaid loan amount would either be due in a period as short as 60 days. If you do not pay back the loan, the unpaid amount will be considered income, which is then both taxable and possibly also subject to a 10% early withdrawal penalty.
* Most plans prevent you from contributing extra savings until the loan is repaid.

Conclusion

While IRA, 401(k) and 403(b) funds could be used to fund the deposit on a first time home purchase, the tax drawbacks and risks are significant. You will want to consider how use of these funds will affect your retirement and your estate and the tax implications before taking such drastic measures. Obviously, if you are in your 20s with many years until retirement, and perhaps not at the peak of your earning potential, the use of your IRA and/or 401(k) and/or 403(b) funds can help you buy a piece of the American dream. However, if you are looking towards retirement or the rate of return on these funds makes withdrawing funds a particularly costly proposition, it is best to look elsewhere for your down-payment.

Special thanks to Nancy McMillin in the preparation of this post.

Special Needs Planning in NJ - Part 4 of 4

2009-12-02T18:38:00.000-05:00

Special Needs Trusts and Supplemental Needs Trusts

In Part IV of this Series, I want to discuss the role of Special Needs Trusts and Supplemental Needs Trusts in estate planning.

"Special Needs Trusts" and "Supplemental Needs Trusts" are terms to describe trusts designed to provide benefits to a person in a way that will preserve the public benefits that he or she is entitled to receive. The person who benefits from the trust is called the beneficiary.

Each special needs trust can be intended to protect different public benefits. Most commonly, special needs trusts are intended to permit Supplemental Security Income (SSI) and Medicaid recipients to receive some additional services or goods. Other common benefits include vocational rehabilitation, subsidized housing and food stamps. The trusts are always created as discretionary trusts, which means that money can only be paid out in the discretion of the trustee. The trustee can NEVER be the special needs person.

There are actually few rules governing Supplemental Needs Trusts (also commonly known as third-party special needs trusts). Since government benefits are available only to those with financial need, the most important rule is that the beneficiary should never be entitled to the money in the trust. If the trustee has complete discretion whether to make distributions for the beneficiary, the trust principal and income will usually not be counted as available to the beneficiary for purposes of obtaining government benefits.

The most important rule for special needs trusts is that the trust may not provide food, shelter, any asset which could be converted into food or shelter (including cash), or any items or services that are available from public benefit programs, to the beneficiary. In other words, the trust can provide for physical therapy, medical treatment, education, entertainment, travel, companionship, clothing, furniture and furnishings (such as a television or computer), and some utilities (like cable television and a telephone, but not electricity, gas or water). Distributions of cash to the special needs person outright are almost never permitted.

There are dozens of different ways to draft a Supplemental Needs Trust. In addition, the administration of a special needs trust can be extremely difficult. A seasoned lawyer, familiar with public benefits programs and special needs trust provisions, should always be involved in preparation of a third-party special needs trust. While many legal matters can be undertaken without a lawyer, or with a lawyer with general background, special needs trusts are complicated enough to require the services of a specialized practitioner.

Sometimes a person may be entitled to public benefits, but he or she has too many assets to qualify for those benefits. This is common for people like accident victims or disabled children who inherit money. In such cases, it is often possible and advisable to place assets into a special needs trust to gain, regain or continue eligibility for government benefits. Because the person is using their own money to fund the trust, there are numerous restrictions regarding how the money can be used.

Self-settled special needs trusts are much more complicated than their third-party equivalents. Usually (but not always), a self-settled special needs trust must comply with a federal law first enacted in 1993. That law requires that most self-settled special needs trusts actually be established by a judge, a court-appointed guardian or the parents or grandparents of the beneficiary (Social Security regulations may limit creation of trusts to the first two categories in most circumstances). In addition most self-settled special needs trusts will have to include a provision repaying state Medicaid agencies for any benefits, payable upon the death of the beneficiary.

In summary, Special Needs Trusts and Supplemental Needs Trusts are both Discretionary Trusts. A Special Needs Trust is established using funds of Special Needs Person. A Supplemental is established using funds of someone other than Special Needs Person. A Special Needs Trust requires that the government be paid back for Medicaid liens upon death of the Special Needs Person There is no government payback upon the death of Special Needs Person in a Supplemental Needs Trust.

Special Needs Trusts and/or Supplemental Needs Trusts are all part of a larger strategy to make sure a special needs person's financial and personal needs are met. For individuals who cannot afford these types of trusts, many charities, like Plan NJ, do have pooled funds to which you can contribute. These pooled funds offer you less control, but it does provide for a means of taking care of your loved one.

Special Needs Planning in NJ - Part 3 of 4

2009-12-01T18:28:00.001-05:00

ESTATE PLANNING FOR A SPECIAL NEEDS CHILD

In Part III of this Series, I want to discuss estate planning issues for parents of a special needs child.

A typical estate plan for parents without a special needs child includes:

Will;
Financial Power Of Attorney;
Health Care Power of Attorney;
Advanced Health Care Directive; and
Naming Beneficiaries of Retirement Plans.

The parent of a special needs child must also do everything possible to avoid giving money outright to the Special Needs Child. This includes arranging for care and financial resources for the Special Needs Child.

In order to do everything possible to avoid giving money outright to the Special Needs Child, there are certain steps that can be taken:

1) Setting up a special trust for the Special Needs Child that will not be counted against the child's income for purposes of eligibility for government programs;
2) Redoing beneficiary designation notices on life insurance contracts and retirement plans; and
3) Telling family members to either leave money to a special needs trust for the child or specifically exclude the Special Needs Child from their Wills.

There are also specific arrangements that need to be made to ensure that your special needs child is cared for after your passing. This includes:

1) Arranging for a guardian to be named for the Special Needs Child;
2) Arranging for government services (SSI, SSDI, Medicaid, etc.); and
3) Arranging for living arrangements for the child.

Parents of special needs children always have a lot to deal with, but much of this planning should be done shortly after you find out that you have a child with special needs. Most importantly, life insurance planning should be done as soon as possible. If you wait too long, you may no longer qualify for insurance - and special needs parents, more than most, need to guarantee that money will be there after they pass.

Special Needs Planning in NJ - Part 2 of 4

2009-11-26T18:14:00.000-05:00

Guardianship

In Part II of this Series, I want to discuss why formal guardianship is important and how to go about being recognized as the legal guardian of a special needs individual.

Until the person turns 18, a parent can legally make decisions for the child. However, once a person turns age 18, he or she is an adult. As an adult, a person is entitled, and in fact obligated, to make his or her own decisions. If that person needs help making his or her own decisions, but is still competent, that person can execute a Power of Attorney.

If the person is not competent to make their own decisions, then another person can only have the legal authority to act on behalf of the incapacitated person if a court appoints them as Guardian.

The Guardian can:
1) make health care decisions for the child;
2) handle the finances of the child;
3) enter into contracts on behalf of the child;
4) deal with government agencies on behalf of the child; and
5) make decisions regarding living arrangements.

What is the process for naming a guardian?

Step 1: Determine if there is a need for a Guardianship, or if there is a better alternative (such as a Power of Attorney).

Step 2: Meet with an attorney to discuss all the information needed to help the attorney file any legal paperwork on your behalf. (E.g. Who will be the guardian, who would be a good backup guardian, what is the disability of the child, what are the living arrangements and needs of the child, who are the doctors, caregivers, does the child have any money in his/her name, etc.)

Step 3: Get the doctors to sign affidavits confirming child's inability to handle his or her own affairs.

Step 4: File the paperwork with the Court to have the child declared an incapacitated person and have the Court order an attorney be appointed for the child.

Step 5: Work with the Court appointed attorney to make sure that they have the information they need to file a report with the Court. The attorney for the child will need to interview the child and the proposed guardians.

Step 6: The court appointed attorney will need to file a report with the court either recommending guardianship, limited guardianship or that no guardian be appointed.

Step 7: The Judge will then rule on the matter.

If the guardianship is uncontested, the process usually takes about two months and can cost about $3,000 to $6,000. If the guardianship is contested by either the child or another person who wishes to act as guardian, the costs can become quite high. Accordingly, it is usually best to make sure that the child and immediate family members are in agreement with the guardianship plans.

Special Needs Planning in NJ - Part 1 of 4

2009-11-24T16:27:00.003-05:00

PART I - GOVERNMENT BENEFITS

Many parents of a special needs child have an overwhelming concern: How (and by whom) will their child be taken care of when I die? In this series, I would like to explore the options that exist to ensure that your child will be provided for.

In order to understand the planning options available to your child, you first need to understand the government benefits that might be available to your child. There are 5 types of government benefits commonly available:

1. Supplemental Security Income (SSI) – provides money for low-income individuals who are disabled, blind or elderly and have few assets. SSI eligibility rules form the basis for most other government program rules, and so become the central focus for much special needs trust planning and administration. You must live in the United States or the Northern Mariana Islands to get SSI. Non-citizen residents may be able to get SSI. Once a person qualifies for SSI, he or she is automatically eligible for Medicaid in New Jersey and most other states.

To qualify you must have little or no income and few resources - the value of the things you own must be less than $2,000 if you are single or less than $3,000 if you are married. The value of your home does not count. Usually, the value of your car does not count. And the value of certain other resources, such as a burial plot, may not count either.

To get SSI, you also must apply for any other cash benefits you may be able to get.

The amount a person is entitled to receive in 2009 is:

Person living alone or with others in own household $ 705.25
Person living with spouse who is not eligible for SSI $ 1,018.36
Person living in someone else's household and receiving
support and maintenance $ 493.65
Person living in licensed residential health care facility $ 884.05
Person living in public general hospital or Medicaid
approved long-term health facility $ 40.00
Couple living alone or with others in own household $ 1,036.36
Couple living in someone else's household and receiving
support and maintenance $ 767.09
Couple living in licensed residential health care facility $ 1,730.36

The above includes both federal and state payments.
The benefit is reduced dollar for dollar for any other income the beneficiary may receive. This means that once an SSI beneficiary's income reaches a certain level, his or her SSI benefit will terminate.

2. Social Security Disability Income (SSDI) - provides money for individuals with a disability who qualify for Social Security based upon their own work history or the work history of such person's parents.

The SSDI program pays benefits to adults who have a disability that began before they became 22 years old. The government considers this SSDI benefit as a “child’s” benefit because it is paid on a parent’s Social Security earnings record. For a disabled adult to be entitled to this “child” benefit, one of his or her parents:

• Must be receiving Social Security retirement or disability benefits; or
• Must have died and have worked long enough under Social Security.

SSI v. SSDI

a. SSI is a needs based program and SSDI is an entitlement program. There is no “means” test for SSDI eligibility.

b. SSDI can be a much higher income level than SSI, and with no payback.

c. Under both SSI and SSDI, the child must not be doing any "substantial" work, and must have a medical condition that has lasted or is expected either to last for at least 12 months or to result in death.

d. In order to qualify for SSI, individuals must first apply for SSDI if eligible as SSI is a last benefit of last resort. A person switching to SSDI from SSI can still qualify for Medicaid.

3. Medicaid - is a benefit program available to low-income individuals which makes payments directly to health care providers for medical needs over and above what Medicare will pay. The largest health and long term care program operated and funded by the government – in this case, the federal government. The fixed monthly income cap for Medicaid in 2009 is $2,022.

4. Medicare - is a federal program that makes payments directly to hospitals, doctors and drug companies. People can qualify for benefits if they are 65 and over (and are entitled to receive Social Security benefits, whether or not they have actually retired) and those who have been receiving SSDI for at least two years.

Part A - Covers most medically necessary hospital, skilled nursing facility, home health and hospice care.

Part B - Covers most medically necessary doctors' services, preventative care, durable medical equipment, hospital outpatient services, laboratory tests, x-rays, mental health care, home health care and ambulance services. (There is a monthly premium for Part B based upon a person's income.)

Part D - Covers prescription drugs.

Medicaid v. Medicare

Medicaid differs from Medicare in three important ways:

1) Medicaid is run by state governments (though partially funded by federal payments);

2) it is available to those who meet financial eligibility requirements rather than being based on the age of the recipient, and

3) it covers all necessary medical care (though it is easy to argue that Medicaid’s definition of “necessary” care is too narrow).

Because Medicaid is a “means tested” health care program and Medicare covers a smaller portion of long-term care costs, maintaining continuous Medicaid availability is often the central focus of special needs trust administration.

5. SCHIP - State Children's Health Insurance Program. This program has higher income eligibility limits and provides health insurance for many who earn too much to qualify for other programs.

What Happens When a Pennsylvania Resident Dies Without a Will?

2009-11-03T17:13:00.000-05:00

If a Pennsylvania resident dies without a Will, that person is said to have died "intestate". The Pennsylvania intestacy scheme is governed by statute (20 Pa.Cons.Stat. 2101 et. seq.). Where the money goes depends in large part who survives the decedent.

Many people think that as soon as they get married that if they die, everything that they own will go to their surviving spouse. THIS IS NOT TRUE!

1) Scenario 1: A person is only survived by a spouse - If the decedent is survived by a spouse and does not have any surviving parents or issue (children or other lineal decedents) then the surviving spouse receives the entire estate.

2) Scenario 2: A person is survived by a spouse and parent(s) - If the decedent is survived by a spouse and at least one parent, but no issue, then the surviving spouse receives the first $30,000 and one-half of the balance of the probate estate. The balance would go to the surviving parent(s).

3) Scenario 3: A person is survived by a spouse and children from the marriage to the spouse - If the decedent is survived by a spouse and only children from their marriage, then the surviving spouse receives the first $30,000 and one-half of the balance of the probate estate. The balance would go to the surviving issue of the decedent. In most cases, the distribution will be made equally to a person's children, but if a child is not then living, then that deceased child's share shall go equally to that deceased child's children.

For example, let's assume Joey died with $300,000 and he is survived by his wife and one son. He also had one daughter, who died before him, but she had two children of her own. The widow would get $180,000 ($30,000+$150,000), the son would get $60,000 (1/2 of ($300K-$180K)) and each of the grandchildren would get $30,000 (1/4 of ($300K-$180K).

4) Scenario 4: A person is survived by a spouse and at least one child from another relationship - If the decedent is survived by a spouse and at least one children from another relationship, then the surviving spouse receives only one-half of the balance of the probate estate. The balance would go to the surviving issue of the decedent.

5) Scenario 5: Person is not survived by a spouse - If the decedent does not have a spouse, then his or her probate estate will first go to surviving issue, if any; then to surviving parents, if any; then to surviving siblings (or their issue), if any; then to surviving grandparents, if any; then to surviving aunts, uncles (or their children); if any. If none of these individuals survive the decedent, then the decedent's assets go to the Commonwealth of Pennsylvania.

You may have noticed that I used the term "probate estate" over and over in this entry. That is because the probate estate does not cover life insurance, retirement benefits, annuities, joint accounts, pay on death accounts or other moneys that are payable as a result of a contract. These assets are called "non-probate" assets and they do not pass according to the instructions of a Will nor do they pass via the intestacy laws. You must look to the terms of those documents to see who is entitled to what. Accordingly, when administering an estate, one must consider all assets - probate and non probate. If no beneficiary is named, then they do pass through the probate estate.

Unless you wish your assets to go according to the Pennsylvania intestacy scheme, you should draft a will so that your money can be distributed the way that you want when you pass.

Links to Important US-Japanese Tax Treaties

2009-07-29T14:48:00.005-04:00

It is not always easy to find the treaties between America and Japan, so I have decided to post them here in case you would like to read them for yourself.

Here is the US-Japan Income TaxTreaty (2003) courtesy of the IRS.

This is an official version of the US-Japan Estate & Gift Tax Treaty (1954) thanks to the Ministry of Foreign Affairs of Japanese.

Estate tax liability for Non-Citizen Non-Residents of America

2009-07-29T13:28:00.004-04:00

In this real estate market, some foreign investors may be tempted to buy property in the United States on the cheap. Overall, this may be a good idea, but I wish to caution you about one potential tax trap: When a person who owns property in America dies, and that person is not a citizen and is not a permanent resident alien, there will be a United States Estate Tax due based in part on the value of that property. What's worse is that the tax rate starts at 18% and quickly goes up to 45%!

American citizens and permanent resident aliens can pass on $3.5 million worth of assets before the estate tax hits. Non-citizen non-residents only have a tax exemption of $13,000, which shelters $60,000 worth of assets. (See Section 2102 of the Internal Revenue Code.)

So, let's assume you have a Japanese citizen (living in Tokyo) who owns a rental property in New York, and that property is valued at $500,000. Upon the death of the owner, a federal estate would be due in the amount of $57,800. Due to the credit, this is less than an 18% effective tax rate. Still, it may come as a rather large shock for those unfamiliar with US tax laws.

Even though Japan has a treaty with the United States, estate and gift tax treaties uniformly exempt real estate - so the country where the property is located gets to tax that property.

As long as you are alive though, you can still do planning to minimize or avoid this outcome by engaging in gift and trust planning.

Weird Wills

2009-07-22T10:10:00.003-04:00

I happened to come across this interesting site at www.trutv.com which has a section that posts "Weird Wills". As a bit of a practical joker, I think my favorite is the Will of Charles Vance Millar.

Speaking of unusual Wills, if you haven't seen the movie "Brewster's Millions" - I highly recommend it as it deals with three subjects I love - baseball, estate planning, and practical jokes.

What Happens When a Bond Holder Dies?

2009-06-30T15:20:00.004-04:00

I just came across this useful web site by the US Treasury Department, so I thought I'd pass along the information: US Treasury- Death of a Bond Holder

The important thing that you should know is as follows:

If only one person is named on a savings bond, and that person is deceased, the bond becomes the property of their estate.
If both people named on a bond are deceased, the bond is the property of the estate of the person who died last.
If one of two people named on a bond is deceased, the surviving person is automatically the owner as if that survivor had been the sole owner from the time the bond was issued.

United Kingdom Inheritance Tax Update

2009-06-22T10:59:00.003-04:00

The United Kingdom currently imposes an inheritance tax on assets in excess of £300,000 (slightly less than $500,000 based upon today's currency rates) when a person dies. The governing party, the Tories, had vowed to increase that threshold to £1,000,000. However, according to The Telegraph, due to the worldwide financial slowdown and mounting debt, it appears that they will not be able to keep that promise.

Thanks to the Wills, Trusts & Estates Prof Blog for bringing this to my attention.

New Jersey Tax Amnesty 2009

2009-05-21T18:30:00.003-04:00

For those of you who may have had trouble with the NJ taxman, there is some relief. New Jersey is offering "Amnesty" of sorts to those who still owe money. The benefit is that the government is willing to waive penalties, some interest and collection costs in an effort to get the money now. You will obviously still owe the base amount of the tax and some interest.

If you have the money (or credit on your credit card) and you agree you owe the taxes, this is certainly a good time to settle up. If you do not agree or do not have the money to pay now, you must still try and explore your other legal options.

For more information about the "Amnesty", you should go to: taxamnesty.nj.gov

It's Looking More and More Like We Will Keep the $3.5 Million Estate Tax Exemption

2009-04-28T09:53:00.002-04:00

With all the talks about the Democrats negotiating a budget in a way to avoid a filibuster on health care, one should not overlook the fact that the budget includes an extension of the current Federal Estate Tax Exemption. Under current law, there is an federal estate tax exemption of $3.5 Million this year, there is no estate tax in 2010 and the estate tax is scheduled to return with only a $1 Million exemption (indexed for inflation) in 2011.

With the budget deficits mounting, there is no practical way the government will give up that revenue and everyone involved despises the uncertainty of the law. So, the extension of the $3.5 exemption will provide certainty to both estate planners and the number crunchers in D.C. It should be noted that it appears the 45% tax on estates over the $3.5 Million threshold will remain intact also.

Who has an Estate and Gift Tax Treaty with the US?

2009-04-28T09:01:00.001-04:00

I just noticed a helpful link at the IRS that gives a nice chart detailing which countries have an Estate and Gift Tax Treaty with the US: Estate and Gift Tax Treaties.

Change to New York Power of Attorney Form

2009-03-11T10:16:00.000-04:00

On January 27th of this year, New York changed its law regarding the requirements necessary to have a valid financial power of attorney. Some the more important changes include:

Two people must now witness the Grantor's signature;
The agent must now sign the power of attorney and have his/her signature notarized;
If you want your agent to make gifts for tax planning (or any other purpose), you must execute a Major Gift Rider; and
You may now have an independent person act as a monitor for the agent.

These changes become effective September 1, 2009. (NOTE - Original bill noted an effective date of March 1.)

Thanks to the Wills, Trusts & Estates Professor Blog for bringing this to my attention. Thanks to Frank Farkas of the Jewish Association for the Aged for bringing the change of the effective date to my attention.

Perfect Time to do Estate Planning for that Vacation Home

2009-02-20T11:45:00.002-05:00

Sometimes in a bad economy, opportunities present themselves. One great planning opportunity that currently makes a lot of sense is a special trust known as a QPRT (Qualified Personal Residence Trust). A QPRT is great way to pass on wealth to your heirs in a tax efficient manner and without affecting your more liquid assets.

Here's generally how it works:
1) The owner of a property places a personal residence (or vacation home) in trust. The owner can continue to live in and use the property for a set number of years. At the end of the term, the property goes to whomever the owner wants, typically the owner's child or into another trust for the benefit of the child.
2) This gift is a legally enforceable promise to make a gift of the property to the child in X years from now. So, if the house is worth $500,000, and you promise to give it to your daughter 7 years from now, it is not really a $500,000 gift due to the time/value of money. The actual amount of the gift depends upon a variety of factors including the age of the donor and the current interest rate.
3) This plan can produce large estate tax savings. Giving away property while you are alive is an estate planning tax strategy known as an estate freeze. You are giving away property now so that future growth occurs in the estate of your heirs, rather than in your own estate. A QPRT leverages this strategy so that you are combining a discounted gift with an estate freeze.

Assume the following hypothetical. A wealthy 70 year old woman (worth $3,500,000) lives in New Jersey and has one adult son. She owns a shore home worth $1,000,000. Now, upon this woman's death, in New Jersey, she may bequeath $675,000 before having a NJ estate tax. Under current federal law, she can bequeath $3,500,000 before she has a federal estate tax. There is no limit to what she may gift away during life according to NJ, but the federal limit is $1,000,000. After that, there is a federal gift tax.
This woman decides to give away her shore home, worth $1,000,000, to her daughter. She structures the transaction so that the term of the QPRT is 7 years. This results in a taxable gift for federal gift tax purposes of $657,300 based upon the woman's age, the term of the trust and the March 2009 Section 7520 rate. There is no NJ gift tax.
Now, let's fast forward 7 years and 1 day, when the woman passes. I will assume the value of the shore property increased to about $1,300,000 and the rest of her estate only modestly increased from $2.5 Million to $2,700,000. If she had not given anything away, then at the time of her death her estate would have equaled $4,000,000. Assuming that the federal estate tax exemption remains at $3,500,000 and the New Jersey Estate tax exemption remains at $675,000, then her estate would have a combined estate tax liability of approximately $505,400 ($225,000 federal and $280,400 New Jersey). By making this gift via a QPRT, we completely elimiate the federal estate tax and the New Jersey estate tax would be reduced to approximately $155,600 - a savings of $349,800. (To compare with an outright gift of property, the combined estate tax would be $245,600, a savings of only $259,800.)

Traps to be wary of:
1) Be careful about giving away highly appreciated real estate unless you are quite sure the donees plan to keep it in the family for a long time. This is because the donees receive the gift with a carryover basis and could be subject to a very large capital gains tax upon the sale of the property.
2) Do not use this technique if the donor is in poor health. Setting up a QPRT is most effective when the donor survives the term of the trust. If the donor does not survive, then the property is included in his gross estate for both federal and state estate tax purposes.
3) For the same reason as Trap #2, it is best not to set up too long of a term. The longer the term, the greater the risk that the donor will pass. In my opinion, a term longer than 10 years usually produces a risk that outweighs the benefits of obtaining a discount on the gift. This is especially true now that the federal estate tax exemption has increased.
4) If the donor is married, it is usually best to set up two QPRTs, with the wife giving away her half in one QPRT and the husband giving away his half in the other. This technique increases the chance that at least one person will survive the term.
5) This technique works even better when there is a high interest rate, so if the owner has an estate subject to the federal estate tax, the best time to do a QPRT is when the value of the property value is low, but the AFR (applicable federal rate) is high.

In conclusion, this is still a great time to do gift planning, but you should consider doing so with assets that are not as liquid.

Note: QPRT calculations done courtesy of Adam Epstein at Bernstein Wealth Management.

Beware the Compromise Tax

2009-02-11T12:27:00.004-05:00

One area of estate administration that often gets overlooked on tax returns is the compromise tax. When a decedent transfers assets that are subject to a contingency or are otherwise difficult to value, the taxing jurisdiction and the estate must compromise on the tax due.

There are a variety of reasons an asset may be difficult to value, but the most common reason is because the asset is subject to a lawsuit. For example, if Decedent died owning a 60% interest in a closely held company, it is relatively easy to determine the value (although people may disagree as to the true value). If however, Decedent's surviving business partner claimed that Decedent really only owned 20% and that Decedent "cooked the books", Decedent's estate will be very difficult to determine until the matter of Decedent's true ownership is resolved. The government, however, wants its money now. This is one area in which the estate and the taxing authority can compromise on the tax due. Oftentimes, this type of situation is difficult to avoid even with great planning.

As for transferring assets subject to a contingency, this is something that can be planned for. Let's say there is a man who wants to leave money in trust for his wife, or Civil Union Partner, and then when the wife or Civil Union Partner dies, the money will go to the man's brother. In a states like New Jersey and Pennsylvania, the transfer to the brother would give rise to an inheritance tax of about 15%. So the question then becomes how do we value the likelihood that the brother will receive the money. In essence, we will have to use life expectancy measurements for the surviving wife or Civil Union Partner to determine that person's interest, and then we can determine the remainder interest. This can get very complex depending upon what, if any, rights to principal the survivor has - hence, a compromise tax.

So when does all this knowledge become really important? When filing the tax return, if the proper amount of taxes are not remitted, then large interest and penalties will be due.

New Jersey Estate Administration Update

2009-02-11T12:11:00.004-05:00

I just got back from an interesting lecture sponsored by the Mercer County Estate Planning Council. The keynote speaker was a representative from the New Jersey Department of Inheritance and Estate Taxation. Unfortunately I can't remember his name, but he mentioned a few things that I thought were important enough to highlight and share.

It turns out that approximately 50% of all estate and inheritance returns that get filed are audited. They are especially aggressive in auditing returns in which the decedent owned a business, if there are valuation discounts claimed, if a compromise tax is made, or if the numbers just don't add up. (Note: For more on the compromise tax, please see: Beware the compromise tax.)

The other noteworthy item the representative mentioned that they are more aggressively going after estates where no tax return is filed. They receive information about taxable estates from insurance companies who pay out death benefits and from the Surrogate when wills are probated.

Gifting to US residents - who pays the gift tax?

2009-02-09T15:07:00.000-05:00

I am frequently asked some variation of this question: "My father is a citizen of country X, and wants to make a gift to me. Is there any tax?"

I then get to give a lawyer's favorite answer. It depends.

It depends:

Where is the person making the gift (the "Donor") domiciled?
What is the citizenship of the donor?
Is the donor a permanent resident alien of the US?
Where is the person receiving the gift (the "Donee") domiciled?
What is the citizenship of the donee?
How much is being transferred?
Is it being transferred all at once, or over time?
Is it real estate, stock or some other type of property?
If it is real estate or stock, where is it located?

As a general rule: If the donor is a US citizen or a permanent resident alien, then the gift is subject to US tax laws. It will then be considered a taxable gift if it exceeds the annual exclusion amount. As of 2009, this is $13,000. If the donor is neither a US citizen nor a permanent resident alien, and the gift is being made from assets outside of the US, then US tax law will not apply. In such a case, we must look to the citizenship and domicile of the donor and donee plus we must look where the property is located to determine which tax law applies.

There is a special rule for real estate and stock. This is a three step process:

If the real estate or stock is located in America, it is subject to US gift tax regardless of where the donor or donee live.
If the real estate or stock is not located in America, we must then determine the whether there is a gift tax treaty with the country where the property is located and the Donor and/or the Donee. If there is a treaty, gifts of real property are usually governed by the law of the country where the property is located, regardless of the citizenship of the donor or donee.
However, if the property is located outside of the US, and there is no treaty, or if the treaty is silent regarding taxing rights, then it gets to be much trickier and no rule can suffice. A knowledgeable attorney and tax adviser must look at the laws relevant to the donors, donees and property to determine which country's tax laws apply. Keep in mind, more than one country might have the right to tax this transaction.

For example, let's say a Japanese national wishes to make a cash gift ¥11,100,000 (or about $110,000) to her daughter who lives in America, then Japan has a right to tax this gift. Under Japanese law, a person receiving the property (the donee) will be taxed on the transfer. (Note: I am assuming the daughter is still a Japanese citizen) A gift of this amount would be entitled to a tax exemption of ¥1,100,000 and the remaining ¥10,000,000 would be subject to a tax of ¥2,750,000 (or about $27,000).

Another example would be where a citizen of India makes a gift of US real estate to their child in America. Since the property is in the US, and there is no gift tax treaty between the US and India, the United States has the sole right to tax this gift. If the house was worth $263,000, then $13,000 of the gift would be tax free. The remaining $250,000 will be subject to a US gift tax of over $70,000. See Section 2511 of the Internal Revenue Code. (In this case, although a donor is normally responsible for the tax, the donee will become responsible as the US does not have the right to collect from a citizen of India. However, if the donee does pay the tax, it will be considered another taxable gift.)

The bigger the gift, the harder it is to completely eliminate the tax. However, regardless of which country has the legal authority to tax the gift, most gifts can be structured in ways to reduce or eliminate the taxes with proper planning.

Gift planning can be especially valuable if the donor is over the estate or inheritance tax threshold in the United States or the donor's home country. By making planned gifts, this reduces the overall tax and could save anywhere from 5 cents on the dollar to 55 cents on the dollar.

Most of the planning can be done with little cost or no cost. Feel free to contact us if you would like more information.

No MRD for most IRAs in 2009

2009-01-26T17:52:00.002-05:00

In case you hadn't heard already, there is a recently enacted law in which most beneficiaries of an IRA (inherited or otherwise) can choose to NOT take their minimum required distribution (MRD) for calendar year 2009. (There are some exceptions for people who were supposed to take their MRD in 2008 and were postponing it until 2009.)

Note, this law also applies to beneficiaries of ROTH IRAs, 401(a),401(k) and 403(b) plans. The purpose is to help people save money in this dreadful economy. (Although, as a practical matter it seems to be a benefit only to the wealthiest few as poorer beneficiaries will likely have withdraw it anyway. So, the government may have been better off not offering this tax break as it could really use the revenue.)

You should consult with your plan administrator if you have any questions regarding your ability to avoid taking your MRD this year.

FEDERAL ESTATE TAX LIKELY TO BE CAPPED AT $3.5 MILLION

2009-01-19T16:19:00.012-05:00

On January 9, 2009, Representative Pomeroy introduced a bill, H.R. 436, that will cap the federal estate tax exemption at $3,500,000. A few thoughts on this bill:

1) For individuals with estates over $3.5 million, the tax on the excess will be as follows:

a) There will be a 45% tax on the an estate over $3.5 million, but under $10 million.
b) There will be an additional 5% surcharge on estates over $10 million (this surcharge will be eliminated when the estate hits about $41.5 million)

2) There is no provision for COLA adjustments;

3) The notion of carryover basis is repealed. In other words, we will maintain the common practice of valuing assets at the value they had on the Decedent's date of death. (I won't go into a long diatribe about this other than saying that getting rid of the estate tax and instituting a system of carryover basis coupled with a capital gains tax is a very difficult system to implement mechanically as people often do not maintain good records regarding the basis that they have in property - especially for property held for generations.)

4) There are no provisions for carry over of a decedent's exemption amount to a surviving spouse; and

5) The bill aggressively attacks valuation discounts for minority discounts of non-business assets.

As discussed before, it is highly likely that some form of this bill will pass in which the federal estate tax stabilizes at $3.5 million dollars. As for the other features, those are still open to negotiation.

'Tis the Season to be a Snowbird

2009-01-12T12:07:00.007-05:00

Ah, the weather outside is frightful.
And Florida is so delightful.
You've packed up your things to go...
Let it snow, let it snow, let it snow.

Seriously, weather aside, have you ever wondered why so many older wealthy people retire to Florida. Well, maybe this answer will help - a relatively affluent person can buy a second house in Florida with the tax savings ALONE!

Let me give you an example: Let's assume that you have a couple in their 70's with about $4 Million in Assets. They have an IRA of $1 million, brokerage assets of $1,000,000, Life Insurance of $1,000,000, a house worth $600,000 and miscellaneous other assets of $400,000. They are leaving everything to their children.

If this couple died as residents of New Jersey, EVEN WITH adequate estate planning other than a life insurance trust, there would still be a NJ estate tax of about $210,000 on the second to die of the husband and wife.

If this couple died as residents of Pennsylvania, EVEN WITH adequate estate planning other than a life insurance trust, there would still be a PA inheritance tax of about $135,000 on the second to die of the husband and wife. (Note, with a $4 million dollar estate, a small state inheritance tax may be due on the first to die in order to avoid a much larger federal estate tax on the second to die.)

If this couple died as residents of New York, EVEN WITH adequate estate planning other than a life insurance trust, there would still be a NY inheritance tax of about $190,000 on the second to die of the husband and wife.

If this couple died as residents of Florida, then there is ZERO Florida estate or inheritance tax.

Now, factor in the additional benefits. In addition to lower property taxes in Florida, Florida is also the only one of these three states not to have an income tax. (It should be noted though that Pennsylvania does exempt IRA distributions from the state income tax.) So, let's make an additional assumption that this couple lives another 20 years and that they take out about $1 million dollars from the IRA during that time. (I'm not going to get into the time value of money.) This would produce an aggregate state income tax of approximately $70,000 for NY and $65,000 for NJ.

In total, moving to Florida would help save:

$275,000 for a NJ resident;
$260,000 for a NY resident; and
$135,000 for a PA resident.

Now, these savings may not purchase a mansion, but you can certainly find a nice house (especially in this real estate market) with the tax savings from moving. Obviously, the wealthier you are, and the more you have in your IRA, the better the result.

An attorney licensed to practice in Florida plus your home state can help you move down to Florida in a way that will be most cost efficient. This includes preparing the appropriate estate planning documents in Florida, mitigating the necessity for ancillary probate in the your original home state, and properly setting up your other legal documentation to prove that you are a Florida domiciliary.

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DISCLAIMER: All the usual disclaimers found elsewhere on this Blog plus a disclaimer that all tax calculations are approximate and made for tax year 2009.

Inflation updates for 2009

2008-12-23T15:26:00.007-05:00

Every year the Internal Revenue Service publishes new rates and tables for a variety of tax exemptions. Here are the important ones that relate to Gift and Estate Taxes:

Starting on January 1, 2009...

1) The Annual Gift Tax Exclusion will be $13,000. The old limit was $12,000. This means a person can give any other person at least $13,000 before it is subject to the federal gift tax. I won't go into the details about how and when it will qualify - just realize that as long as it is an outright gift, it will usually qualify. Also, a husband and wife may now split a $26,000 gift for tax purposes before there is a gift tax.

2) The Annual Gift Tax Exclusion for Gifts to Non-Citizen Spouses will be $133,000. The old limit was $128,000. This is the maximum amount a person may transfer to a non-citizen spouse before the gift is subject to a gift tax. In order for US law to apply, we will usually be talking about a gift being made to a permanent resident alien spouse. One place where this gets triggered unexpectedly by many is retitling of real estate - so be careful with changing ownership before giving this some thought.

3) The Federal Estate Tax Exemption will be $3,500,000. We've talked about this before, so it should not be a surprise to anyone that the estate tax exemption amount is going up from $2,000,000 up to $3,500,000. The real question will be what happens in 2010 under a Democratic Congress and President. All rumors that I am hearing at this point lead me to believe that the $3,500,000 will stay, but be indexed for inflation.

Source: IRS Rev.Proc. 2008-66, 2008-45 IRB1
I.R.C. Section 2010

Why Should I Hire an Estate Planning Attorney?

2008-10-22T16:29:00.002-04:00

The short answer is: control. Proper estate planning is essential to controlling how much of your estate you pass on, to whom you pass it on, and when it is passed on. Back in March, I listed the Top 10 Reasons to Have a Will. However, not only should you have a Will, but in most instances it should be drafted by a qualified estate planning attorney.

“Do it yourself” will kits seem easy enough, but they can’t advise you. If you have children and will be naming guardians or setting up trusts, you need the advice of someone who knows the intricacies of estate planning laws. While providing for your children's protection, you need to consider how your money will be transferred to them. Who will control the money until the kids are old enough to take care of it themselves? Will they get staggered amounts as they hit certain milestone birthdays, or get it all at once? What if one of your children is a spendthrift (i.e. a reckless spender)? In this day and age, the issue of blended families can make drafting a will for your loved ones even more complicated. However, an estate planning attorney can not only draft a Will to provide for your wishes, but can also serve as a counselor, suggesting customized trusts that can be used to provide for your spouse and children on various levels. An estate planning attorney can even set up trusts that direct assets to someone other than family in a way that ensures your family has access to the money when that non-family member no longer needs it.

Moreover, tax and trust planning go hand in hand and should be considered simultaneously. In order to maximize how much of your estate stays intact and is passed to your family, you need to minimize the amount paid to the government and maximize the investments held in trust. This requires a considerable amount of coordination among your assets. In order for the trusts to work as intended, all assets must be accounted for, both at the time the trust is established and moving forward. I’ve written before about tax exemptions, but the short version is that if your estate is properly planned, you (and your heirs) can potentially avoid tax liability altogether.

So - pardon the pun, but if there is anything even remotely complicated about your plan, then a do it yourself Will will not do. Finally, this area has become some complex due to the ever changing tax laws, you really do want to have someone who does this work frequently, otherwise you really are just paying an attorney to fill out a Will kit for you.

Written by: Nancy McMillin & Kevin Pollock

Should I Tell My Family About What's In My Will?

2008-09-17T09:25:00.004-04:00

I must say, I get this question quite a bit. Accordingly, I was very happy to read this article in the New York Times discussing the benefits of an open and honest dialogue with your heirs about the inheritance that they should expect.

Many older clients feel that their kids should learn about their inheritance the same way that they did - only after the surviving parent died. There are several good arguments why clients tell me that they don't want their children to know about their inheritance, with sloth being the biggest one. They want their children to work hard and not rely on getting a large sum of money.

I, however, must generally agree with the article written by David Cay Johnston. I have always felt that, except in limited circumstances, it is usually better to advise your family of what they should expect. I have seen too many estates go into litigation because the elder parents did not properly advise their heirs of their testamentary plans. This is especially true when their is an unequal distribution or if the decedent had been married more than once.

Now, this does not mean that you need to give all the details, and certainly many of the details should be age appropriate. For example, I would tend to advise against telling a 19 year old that he will be inheriting a million dollars, but it would be OK to tell him that his disabled sister or his step mother will have special trusts set up for them. On the other hand, once a client has children over the age of 45, unless the children have medical or psychological problems, there is usually very little reason to keep this kind of information secret.

As with many things in life, there is a sliding scale of what is appropriate and what needs to be mentioned to the family. At a minimum, I request that parents who do not leave their money in a traditional fashion write a letter explaining why they did what they did. I usually do not like to put the reasons themselves in a Will as that is a public document and someone may get offended.

So what do I tell clients who are still worried their children will become lazy if they inherit a lot of money? I tell them to advise their children that they can always change their Will to give the money to charity if the children do not earn their inheritance. Financial incentive can be a power motivating force - and that they can consider it a bonus for a "job" well done. (Note, If a client has multiple children, I do not recommend that a client say he or she will give all their money to only one kid. It is better to say you will give that undeserving child's share to charity or the undeserving child's children, otherwise the anger that the disinherited child feels will be directed at his or her sibling.)

Estate Planning for Americans with Assets in India

2008-06-17T11:42:00.006-04:00

New Jersey is a fairly diverse state, and I find that more and more of my clients are of Indian heritage. So, as with many of the items I write on this blog, I thought I would share some of the advice that I regularly give clients on this topic:

1) India does not have an estate or an inheritance tax;

2) There is no treaty with respect to the US and India on Estate and Inheritance Taxes;

3) As a US citizen, all of your assets, worldwide, will be subject to an estate tax;

4) If you are also a NJ domiciliary; all of your assets in NJ will be subject to both NJ Estate and Inheritance taxes (NJ cannot tax worldwide assets for estate and inheritance tax purposes);

5) There IS a treaty between the US and India with respect to income taxes (see: http://www.unclefed.com/ForTaxProfs/Treaties/india.pdf) Tax returns need to be coordinated and you will receive a deduction for income taxes paid in India. This may still result in higher taxes as you must report income on worldwide profits.

6) You can do planning to minimize the estate tax burden.

U.S. Citizens Can Vote Abroad

2008-06-09T09:53:00.003-04:00

All U.S. Citizens can vote in a general election, regardless of where they live.

YES, you can vote in the US presidential elections, even if you have no “home state” or have never lived in the US! For more information, go to this government website. http://www.fvap.gov/pubs/faq.html

Please consider forwarding this to all citizens you know who are living abroad. Many do not realize that they can vote or how the deadlines for registering.

Questions regarding the above which cannot be answered locally may be referred to the

Director, Federal Voting Assistance Program
Department of Defense
1155 Defense Pentagon
Washington DC 20301-1155

You may also reach the FVAP via email at vote@fvap.ncr.gov, telephone (703) 588-1584, DSN 425-1584, toll free at 1-800-438-8683 or from 64 countries at www.fvap.gov/services/tollfree.html.

Federal Estate Tax Reform - Not Happening Any Time Soon

2008-06-04T11:22:00.003-04:00

For a while now, I have been telling my clients (and really anyone who asked) that I did not think there was going to be any major change in the Federal Estate Tax regime until after the presidential election. A recent Wall Street Journal article that I read is in line with this thinking. For the complete article written by Tom Herman, goto: What Congress Is Likely To Do to Your Tax Bill.

Under the current federal estate tax laws, a person is allowed to pass on up to $2,000,000 to anyone they choose plus an unlimited amount to a surviving spouse (as long as he or she is a citizen). In 2009, this "exemption amount" is supposed to go up to $3,500,000 per person. In 2010, the federal estate tax is theoretically supposed to disappear, and in 2011, it goes back to the pre-Bush era exemption amount of $1,000,000.

In all likelihood, no one in their right mind will support any exemption amount of less than $2,000,000. In my personal opinion, the exemption amount will settle somewhere between $3,500,000 and $5,000,000 for the years 2010 forward.

Thoughts on Portability of Estate Tax Exemption

2008-05-07T08:40:00.006-04:00

Currently the House and the Senate are mulling a proposal to allow married couples to transfer their estate tax exemption amount to a surviving spouse on death. Under the current law, it is a use it or lose it approach.

To give an example of what this would mean, let's take a couple with $4,000,000 worth of assets. The Husband has $3 Million in his name and the wife has $1 Million in her name. Under the current law, it is possible that this family's heirs could be taxed up to $900,000 in federal estate taxes. How you ask?

Scenario 1. Regardless of whether Husband or Wife dies first, if they have a Will leaving everything to the surviving spouse before it goes to the children (an "I Love You Will"), then when the second spouse dies there will be a $900,000 tax. This is because the surviving spouse dies with assets worth $4,000,000 and an exemption of only $2,000,000. This assumes not increase in the value of the assets and the fact that the ederal estate tax rate stays at its current rate of 45%.

Scenario 2. If Wife dies first and leaves the $1 Million to their children (or in a special trust for Husband), then on the subsequent death of Husband, there will be an estate tax of $450,000. This is because Husband would die with assets worth $3,000,000 and an exemption of only $2,000,000. Same assumptions as above.

Scenario 3. This couple hires an intelligent estate planning attorney and the attorney helps them retitle their assets so that they each own $2,000,000. The attorney then sets up a special trust for the benefit of the surviving spouse so that he or she has access to all $4,000,000 ($2 Million of their own money and $2 Million in trust). However, this special structure makes full use of each spouse's estate tax exemptions - so that regardless of who dies first, there is no estate tax due and owing at the death of the second spouse.

So how would portability of an estate tax exemption affect this? Well, in each of the above scenarios, there would be ZERO tax. The proposals being bandied about would allow a spouse to transfer his or her exemption amount to a surviving spouse. So in scenarios one and two above, rather than the surviving spouse having an exemption amount of only $2,000,000, he or she would be entitled to an exemption amount of $4,000,000. Generally, this fits in line with the current thinking of most tax provisions in that the government wishes to treat a husband and wife as a single unit.

By and large, there is not much downside to this idea for people. In most proposals, the only thing one must do to take advantage of this is to file an attachment to a person's estate tax return or their final income tax return. The people who would benefit most from this proposal would be those with large assets that they cannot transfer to a spouse (e.g. people who own large retirement accounts).

My one word of caution would be that this could lull people into a false sense of security regarding their estate planning. I know that if people are not worried about taxes, they may be less inclined to get the proper documentation in place. This would be particularly worrisome in the event of 2nd marriage situations where the children of a first marriage could potentially be cut out entirely.

A final note on the status of this legislation is that it has passed the House and is currently stalled in the Senate.

Taxing Politics - Part II

2008-04-15T17:58:00.008-04:00

In an earlier post, I had mentioned that John McCain wished to eliminate the estate tax. According to his web site, the stance he is currently taking is to increase the Estate Tax Exemption amount to $10 Million per person and reduce the estate tax rate from 45% to 15%.

According to the Tax Policy Center Urban Institute and Brookings Institution, Barack Obama and Hillary Clinton plan to raise the estate tax exemption amount to $3.5 Million per person (the level it is scheduled to go to in 2009) and freeze it at that level. See: http://www.taxpolicycenter.org/taxtopics/election_issues_matrix.cfm

Top Ten Reasons to Have a Will

2008-03-24T15:20:00.004-04:00

1. To determine who gets your money (Naming beneficiaries)

2. To determine guardianship (Saying who will take care of you children)

3. To determine who controls the money (Naming of executors and trustees)

4. To minimize estate or inheritance taxes

5. To avoid the cost of an insurance bond (If you do not allow for an executor or administrator to serve without paying for an insurance bond, the court will require one. In New Jersey, this can cost your heirs $500 for each $100,000 of assets you leave them)

6. To develop a trust for your heirs (This controls the timing of payout to beneficiaries)

7. To specify the authority of the Executor and Trustees (E.g. should they run a business, sell your property, or keep certain stocks?)

8. To determine who pays estate taxes (you can actually specify this and frequently should)

9. It provides for a quicker probate process

10. It clarifies your living intentions after your death (in other words, it maximizes the chance that your heirs will respect your wishes)

Helpful Estate Planning Hints for Divorce Attorneys

2008-03-05T16:15:00.000-05:00

A. Have your client do pre-divorce estate planning (especially if the split is partially the result of financial matters)

1. Most clients are not aware that if they die during the pendency of their divorce that their soon to be ex may still inherit everything. This can be particularly important if it is likely that the ex will remarry or has kids from another relationship.

2. Generally, your client cannot write a new Will completely cutting out the soon to be ex out due to NJ's elective share statute.

a. Exceptions:

1) The soon to be ex can be cut out if your client and the soon to be ex are separated and not living together.

2) The soon to be ex can be cut out if your client and the soon to be ex have ceased cohabitating as husband and wife.

b. If one of the exceptions does not apply and your client dies before the divorce is final, the soon to be ex can elect to receive up to 1/3 of the augmented estate.

1) In a simplistic way, the augmented estate can be estimated by looking at the net estate (the value of the estate minus the bills that must be paid).

2) Do not factor in estate taxes at this point.

3) Do add back gifts made by the decedent within two years of death.

4) Do add in retained interests held by decedent at the time of death.

5) See N.J.S.A. 3B:8-3 for a true definition.

3. If your client is wealthy, he may wish to consider putting the soon to be ex's 1/3 share in a fairly restrictive trust for the soon to be ex with the remainder going to your client's children.

B. When drafting agreements between the divorcing parties, don't just say that money should be held "in trust" for the benefit of your client's children in the event one of the two die. This agreement can potentially override the terms of any will or trust agreement, so think a bit about some of the terms:

1. Typical terms include:

a. Having the children receive the money in two tiers (1/2 at age 25 and the balance at age 30 is usually good). If there is a lot of money, you can even do three tiers.

b. You should have your client think for a few minutes about who should be trustee. Better the two parties agree than have to get the court involved to appoint one.

2. Do any of the children have special needs and should special provisions be incorporated?

3. How important is it to guarantee that the ex put a provision in his/her Will stating that a certain percentage of his/her estate must go to their children? This can be contractually agreed to.

C. Don't just require that your client's ex purchase $X amount of life insurance on the ex's life.

1. Demand that your client's ex agree to pay for the policy, but have your client actually buy it. This accomplishes multiple goals:

a. It ensures that the policy is in fact in place;

b. In the event the ex runs into financial trouble, your client can continue the payments;

c. It can save a huge amount in taxes;

1) Typically if the ex owns and maintains the life insurance on his life, then regardless of who the beneficiary is, it will be subject to the Federal and State Estate tax upon his death;

2) If your client or an irrevocable life insurance trust (an "ILIT") owns the policy, then it will not be subject to estate taxes upon the ex's death (provided it was not transferred to your client or the ILIT within 3 years of the ex's death).

3) To give an example of real life savings, let's assume that ex is worth $2 million and is required to buy a $1 Million life insurance policy. That policy will cause ex's estate to be subject to approximately a $500,000 tax. This is particularly problematic if most of that is going to your client's children. By having your client or an ILIT own the policy, this estate would completely escape federal estate taxes and only be subject to minimal NJ estate taxes.

D. Do not forget about retirement assets, pension plans and life insurance

1. Most divorce attorneys remember to put a provision in the divorce and separation agreements which will require that their clients receive a portion of the ex's estate, but some forget to require/request that their client receive a portion of the ex's retirement assets or life insurance upon the ex's death. The general trend is to deal with this through a QDRO and let the chips fall where they may upon the ex's death.

2. Moreover, many divorce attorneys forget to include the client's children in this part of the planning. It is imperative for attorneys with clients who's wealth is tied up in retirement accounts deal with where these retirement accounts go on the death of the ex.

3. A common example of the above may be illustrated as follows. H and W, who have 2children, get a divorce. H has a 401(k) worth $1,000,000. The two do a QDRO and split this evenly. H should insist of W, and W should insist of H, that their children be named as the beneficiaries of this 401(k) (AND any IRA that this gets rolled into). Otherwise, if W gets remarried, the new husband could legitimately be named as the new beneficiary of this retirement account. NOTE: They attorneys should leave this open for the clients to amend in an amicable way in the event one of the children should not be named as a beneficiary due to drugs, alcohol or any other legitimate reason.

E. What about possible inheritances?

1. Except to the extent that the parties agree, you should always get the soon to be ex to disclaim all interests that he/she may have in your client's estate, non-probate assets and joint assets.

2. Many times your client's parents will include the ex as a beneficiary of their estates. You should think about trying to get the soon to be ex to disclaim these interests as state law may not always treat the ex as dying on the date of the divorce.

F. Dividing Joint Assets

1. Transfers of property incident to divorce are not treated as taxable gifts for federal gift tax purposes. To qualify, the property must generally be transferred within one year from the date the marriage ends. (Transfers made within 6 years of the date of divorce can qualify if the transfer is made puruant to a divorce or separation agreement. This time frame may be further extended for cause such as litigation surrounding the transfer of a business interest.)

a. Exceptions:

1) Transfers to a non-citizen former spouse;

2) Transfers to a trust for the benefit of the transferee former spouse of property on which liabilities exceed the transferor's basis for the property; and

3) Transfers to a trust for the benefit of the transferee former spouse of installment obligations.

b. If one of these exceptions apply, the transferor spouse may recognize gain or loss.

c. If the transfer is deemed as a transfer incident to divorce, the transferee spouse takes the property with a basis in the property equal to the basis of the transferor spouse. This is known as a carryover basis.

d. Divorce attorneys should be careful in agreeing to take property that has high built in gains as result of this carryover basis.

e. Your client may be required by the settlement agreement to transfer an insurance policy on his or her life to the ex and continue paying the premiums on the policy. It is important to know that the transferor can only deduct those premium payments as alimony (taxable to the recipient) if the transferor makes the transferee both the owner and irrevocable beneficiary of the policy.

2. In NJ there is no gift tax, but in order to avoid the real estate transfer tax for transfers incident to divorce (or the dissolution of a civil union partnership) the property must be transferred no later than 90 days after the date the divorce or dissolution decree is entered. See: http://www.state.nj.us/treasury/taxation/pdf/other_forms/lpt/rtfexempt.pdf

Everything You Ever Wanted to Know About Ancillary Probate in NJ

2008-02-29T14:23:00.004-05:00

If you have a loved one who dies owning real property in New Jersey, what do you do? The answer is - an ancillary probate. Generally, this means you will conduct a second probate action in New Jersey after you have done one in the state where the Decedent was domiciled. (If there is no reason to conduct a probate proceeding in the state where the Decedent was domiciled, you can contact the Surrogate on ways to skip steps 1 and 2.)

For most, the process is as follows:

1) If the Decedent had a Will, the named Personal Representative probates the Will in the jurisdiction where the Decedent was domiciled (if there was no Will, someone will likely have to file a complaint to declare an intestacy and request to become Administrator for the estate).

2) The Personal Representative obtains an "Exemplified Copy" of the Will and Letters Testamentary (or Letters of Administration for an intestacy action). Letters Testamentary and Letters of Administration are the documents that the Surrogate gives you to show that you have legal authority to act on behalf of the Estate.

3) You take these documents to the Surrogate of each county where the Decedent owned property and tell them that you want to conduct an ancillary probate. (The fee is nominal, currently only about $5 per page plus $5 for the backing page.)

4) The local NJ Surrogate then gives you Letters Testamentary for NJ, and you can transfer this property legally to the new owner according to the county.

5) BUT WAIT, don't transfer the property yet! You have to know who the property is going to. If all or a part the property (or money from the sale of the property) goes to someone other than a spouse, lineal descendant or lineal ascendant, it is subject to a NJ Inheritance tax! That's right, there is a 11-16% tax on this property which must be paid within 8 months from the date of the Decedent's passing. Failure to do so will result in very large interest and penalty charges which you, as the Personal Representative, may be responsible for. At least there is no NJ Estate tax on the estate of a non-resident.

6) Once the Personal Representative has determined what is owed to the State of New Jersey, he or she should pay the tax, if any, and obtain an inheritance tax waiver from the Estate and Inheritance Bureau. Forms can be found here: http://www.state.nj.us/treasury/taxation/index.html?estatetax.htm~mainFrame

7) Now can the Personal Representative can transfer the property? Probably. Again, if the property was devised to a specific party, it should either be transferred to such party or sold with the explicit consent of that party. If the property was part of the residuary of the estate, then the Personal Representative generally will have the power to transfer the property unless it is denied by the language in the Will - so make sure you check this. Few Wills that I have run into ever limit this, but frequently you do see a right of first refusal which must be honored.

Obviously a knowledgeable probate attorney can help you through these steps.

PROTECTING YOUR LIFE INSURANCE TRUST FROM TAXES

2008-01-28T17:15:00.000-05:00

The Importance of Proper Trust Maintenance

The trustee of an irrevocable life insurance trust (ILIT) must follow numerous rules and regulations laid out by the IRS in order to exclude the ILIT’s policy proceeds from federal and state estate tax. The insured and the trustee should check to see that these rules and regulations are in compliance annually because any significant mistake — even an honest one — may lead the IRS to challenge the trust and tax the life insurance proceeds.

Life Insurance Trust Basics
An ILIT holds one or more life insurance policies on your life. Each year, in order to pay the premiums on the life insurance policy, you must gift money to the ILIT and then your trustee uses this money to pay the premiums. After your death, your trustee will distribute the insurance proceeds according to your instructions.

If established properly, you will not have any control over the life insurance policy itself or any of the assets in the ILIT. Normally, if you do not have control over an asset, it is not taxable for estate tax purposes. The IRS is not happy about the ability of people to pass on vast sums of money without paying tax and they may scrutinize your ILIT for mistakes so it can collect the estate tax. Accordingly, even though you have no control over the assets in your ILIT, it is still important that it is properly maintained.

Funding the ILIT
After the trust document is drafted, the trustee will either purchase an insurance policy on your life or transfer an existing policy into the trust. In either case, the trustee must be the policy’s owner and beneficiary. For policy that is not paid in full, the trustee must open up a bank account for the trust and you must deposit money into the ILIT’s account to cover the premium.

Your gift to the ILIT -- whether cash or an existing insurance policy -- qualifies for the annual gift-tax exclusion of up to $12,000 per beneficiary (for calendar year 2007). If you decide to transfer an insurance policy to the trust via gift, you must figure out the value of the policy. A good rule of them is the value of a term policy is approximately the current year’s premium or the cash surrender value for a whole life policy. (This is not exact however and there are exceptions, so you must get an official valuation from the insurance company - this is known as the interpolated terminal reserve plus a portion of that year's premiums paid by the owner.)

If you transfer an existing policy to your ILIT and you die within three years of that transfer, the proceeds will be included in your estate for estate tax purposes. If you are insurable, the three-year rule can be avoided by gifting cash to the trust and having the trustee purchase a new policy. You can then surrender the old policy and use the cash value, if any, to pay the premiums on the new policy.

Premiums and Crummey Notices
Each year you make a gift to the ILIT, whether to pay the annual premiums or otherwise. The gift will qualify for the annual gift-tax exclusion as long as the IRS considers the gift a gift of a “present interest.” In order for the gift to be deemed a gift of a “present interest”, your trustee must give the beneficiaries a right to withdraw the gift. This is known as a demand right or a Crummey power. (If a beneficiary is a minor, your trustee should send a Crummey notice to their parents or guardians of that minor.)

This notice requirement applies to the first year’s gift as well as every subsequent year’s. If your trustee forgets to send the Crummey notices, the IRS may say that the beneficiaries did not have a “present interest” and include the gifts as part of your taxable estate.

As soon as the withdrawal period lapses -- typically after 30 days and assuming the beneficiaries don’t exercise their withdrawal rights – the trustee can use the money to pay the premium. Due to this time constraint, money should be put into the trust account at least 45 days prior to the premium being due.

There is always a danger that the beneficiary will actually take the money, so you should explain to your beneficiaries that allowing the right to lapse each year without withdrawing the cash is in their long-term best interest.

It should be noted that if the trust owns a second-to-die policy on your and your spouse’s lives, the survivor should continue to make gifts to the ILIT so that the premiums can continue to be paid.

Records and Tax Returns
If the ILIT has gross income in excess of $600 for the year, your trustee is responsible for filing annual income tax return. The trustee should also maintain certain records in the event that the IRS chooses to audit the ILIT’s operation. These records include:
· Copies of all Crummey notices sent to the beneficiaries along with any related correspondence;
· Canceled checks from your individual (or joint checking account for a 2nd to die insurance trust) showing the gifts you made to the ILIT; and
· The trust’s checking account records, showing gift deposits and premium disbursements.

Avoid Incidents of Ownership
To maintain your ILIT’s tax-advantaged status, avoid exercising any control over the trust. In IRS terms, the insured party must not have any “incidents of ownership” during the trust’s life. If you violate this rule, the IRS will include the insurance policy in your estate and tax the proceeds. Incidents of ownership include the ability to:
· Change or add a beneficiary,
· Surrender or cancel the policy,
· Assign the policy or revoke a policy assignment,
· Borrow against the policy or pay premiums with policy loans; or
· Pledge the policy as collateral for a loan.

Mistakes Can Be Costly
Any significant mistake -- even an honest one -- may prompt the IRS to challenge the trust and tax the insurance policy’s proceeds. If you or your trustee has any questions about the proper way to handle your ILIT, please call before you act.

Benefits of a Second to Die Life Insurance Trust

2008-01-12T22:20:00.000-05:00

I. General Benefits

A. Tax savings
B. Control of assets after death
C. Second to die policies typically provide guaranteed money for your heirs which is cheaper to obtain than single life premium policies.

II. Reasons to establish a Second to Die Life Insurance Trust

A. Pay taxes upon death for assets outside of trust
B. Provide guaranteed funding for disabled child
C. Guarantee liquidity (so sentimental assets are not forced to be sold in a fire-sale)

III. How does a Second to Die Life Insurance Trust Work?

A. The trust should be created prior to the purchase of the policy (otherwise there is a 3 year lookback for tax purposes).
B. The trustee of the trust then purchases the life insurance on the joint life expectancy of you and your spouse.
C. A bank account must be set up for the trust.
D. The premium should be paid into the trust’s bank account at least 45 days prior to the premium due date.
E. Immediately after the trust’s bank account is funded, a beneficiary designation notice must be sent out. (In order to make gifts to the trust tax free, the beneficiaries of the trust must be allowed a window in which to withdraw the money. This is known as a Crummey trust.)
F. Thirty days later (this time frame various depending upon the trust document), the trustee can pay the premium.
G. Upon the death of the survivor of you and your spouse, the insurance is paid to the trust.
H. The trustee then pays out the money according to the terms of the trust.

IV. Putting the Tax Savings into Real Dollars

A. Let’s assume Harry and Winny have $7,000,000 in assets. They have two kids, one of whom has autism and needs permanent care. Even with proper planning, if Harry & Winny passed now, they would have a potential tax liability of about $1,500,000.
B. By setting up a life insurance trust, 100% of the money in trust can pass free of federal estate taxes as well as state estate and inheritance taxes. Additionally, the trust can be established to benefit Harry & Winny’s autistic child in a way that he remains eligible for government benefits.
C. To revise the example above, if we properly move $1,000,000 of assets into this life insurance trust, leaving a taxable estate of $6,000,000, the potential tax liability is reduced to about $1,000,000. This a savings of about $500,000.

Taxing Politics

2008-01-04T08:55:00.000-05:00

The 2008 political season officially began last night in Iowa. Accordingly, I thought it would be helpful to look at each candidate's tax policies, especially their estate tax policies. I've listed only those who I consider to be the viable candidates. For fun, I put them in order of how they finished in the Iowa caucuses.

The Democratic Candidates

Barack Obama
Income Taxes
--> Senator Obama appears to favor a reduction in income taxes for individuals making less than $50,000. This appears to be balanced by an increase on those whose income puts them in the top 1% of the country. He voted against a repeal of the alternative minimum tax.
Estate Taxes
--> It is clear that Senator Obama is in favor of keeping a federal estate tax, but it is unclear at what level. He voted againt raising the threshold to $5,000,000 per person.
Other Tax and Probate Related Issues
--> Senator Obama is in favor of closing tax loopholes for companies that move jobs abroad and in favor of rewarding companies that create jobs in America.
John Edwards
Income Taxes
--> Senator Edwards appears to favor using a combination of credits to reduce the taxes of those earning less than $75,000. The most notable credit is a large increase for Child Care. He voted against a repeal of the alternative minimum tax. He wants an increase in the capital gains tax rate to 28% for those earning over $250,000.
Estate Taxes
--> Senator Edwards is in favor of keeping the federal estate tax at the same levels as are currently in place, $2,000,000 per person.
Other Tax and Probate Related Issues
--> Senator Edwards is in favor of closing tax loopholes for hedge fund and private equity managers (meaning that they would be taxed at income tax rates, not capital gains tax rates). He also had a very interesting proposal that would require the IRS to prepare tax returns for those people who are simply W-2 workers or receive all income from 1099's.
Hillary Clinton (No real public plan yet)
Income Taxes
--> Senator Clinton wants to keep the AMT, but it is unclear at what level.
Estate Taxes
--> Senator Clinton is in favor of keeping the federal estate tax at the same levels that will be in place starting in 2009, $3,500,000 per person.
Other Tax and Probate Related Issues
--> Senator Clinton proposes increasing or removing the $95,000 cap from the payroll tax. Currently, only the first $95,000 of income is subject to payroll tax. Payroll taxes are for such things as Social Security, Medicaid and Medicare.

The Republican Candidates

Mike Huckabee
Governor Huckabee wants to eliminate ALL income, payaroll, gift, estate, capital gains, alternative minimum, Social Security, Medicare and self employment taxes. He wants to replace these with a consumption tax (i.e. a tax on what we buy - similar to a sales tax). The consumption tax rate would be about 23% inclusive (or about 30-34% exclusive). For a view of the plan known as FairTax given by supporters, click here. For an opposing view, click here. The consumption tax would theoretically be on EVERYTHING, including new home purchases, rent, doctor's bills, and worst of all - LEGAL FEES. It would however exclude used items. (Hmm... I wonder if you can have used legal services...)
Income Taxes
--> See above
Estate Taxes
--> See above
Other Tax and Probate Related Issues
--> See above
W. Mitt Romney
Income Taxes
--> Governor Romney generally wants to lower tax rates for everyone.
Estate Taxes
--> Governor Romney is in favor of permanently repealing the estate tax. It is unclear if he wishes to repeal the gift tax.
Other Tax and Probate Related Issues
--> Governor Romney wants to get rid of taxes on interest, dividends and capital gains for those with an adjusted gross income under $200,000.
Fred Thompson
Income Taxes
--> Former Senator Thompson plans to index the AMT for now and repeal it eventually. He believes in instituting a flat tax which would give much larger personal exemptions, but get rid of all deductions.
Estate Taxes
--> Former Senator Thompson wants to elimate the estate tax. It is unclear if he wishes to repeal the gift tax.
Other Tax and Probate Related Issues
--> He has an interesting proposal to let tax payers choose the current tax forms or a flat rate form with only 2 exemptions.
John McCain
Income Taxes
--> Senator McCain is in favor of permanently repealing the AMT. He would make the currently scheduled tax levels permanent.
Estate Taxes
--> It appears Senator McCain wants to elimate the estate tax. It is unclear if he wishes to repeal the gift tax.
Other Tax and Probate Related Issues
--> Would ban taxes on cell phone messages. (I don't think that there is one...)
Ron Paul
Congressman Paul wants to get rid of the income tax completely (which would require severe spending cuts).
Income Taxes
--> See above
Estate Taxes
--> It appears that Congressman Paul wants to eliminate the gift, estate and GST tax.
Other Tax and Probate Related Issues
--> It appears he wants to fund the goverment with fees such as: tariffs, excise taxes, user fees and highway fees.
Rudy Giuliani
Income Taxes
--> Former Mayor Giuliani intends to permanently lower the marginal rates to what they will be under the Bush tax act, or lower. He intends to tie the AMT to inflation. He also proposes an income exclusion up to $15,000 for families without employer based health care.
Estate Taxes
--> Former Mayor Giuliani wants to eliminate the estate tax. It is unclear if he wishes to repeal the gift tax.
Other Tax and Probate Related Issues
--> He wants to drop the corporate tax rate from 35% to 25%.

Sources include: www.ontheissues.org, the candidate's websites, and various news articles.

Follow up to Pet Trusts

2007-09-10T11:20:00.000-04:00

Following Leona Helmsley's bequest of $12,000,000 to her dog, the USAToday published a nice article about the importance of setting up a pet trust for your beloved animals. I note that the article contains a nice chart detailing which states allow for the creation of a pet trusts.

Business Succession Planning

2007-08-03T15:15:00.001-04:00

Some of you may have seen these scary statistics:

According to the U.S. Small Business Administration, 90 percent of the 21 million small businesses in the U.S. are family-owned, but less than one-third of family-run companies succeed into the second generation, while only half of that make it to the third. Most often, the lack of a proper succession planning is to blame.

Proper business succession planning is particularly vital in the Northeast where taxes are so high.

Let's assume that an unmarried NJ decedent (Jane) has a company worth $5,000,000 at the time of her death. Without looking at Jane's other assets, I can tell you that her heirs have a potential federal estate tax liability of close to $1,350,000 plus a NJ Estate Tax liability of almost $400,000 for a total tax liability of close to $1,750,000. If she had no issue or parents living, this would also be subject to a $750,000 New Jersey inheritance tax. These taxes could decimate a small company at a time when the key person involved is not around.

The benefits of proper planning are countless.

At a minimum, proper strategy will help you minimize taxes, maximize control and provide a clear path for continuity of the business. Planning an exit strategy is important as soon as you go into a business. This includes planning for death, divorce or a sale upon retirement.

Some popular planning techniques include:

Setting up an entity structure (LLC, C Corporation, S Corporation, Partnerships, etc.);
Purchasing Life Insurance (combined with Buy-Sell Agreements);
Creating agreements limiting control of potential takers to the business;
The use of promissory notes;
Selling or gifting ownership in the business to family members; and
Selling or gifting ownership in the business to other entities or trusts that will benefit family members.

Valuation Discounts

One of the most important aspects of proper planning is gaining the ability to maximize the amount that you can pass down to your heirs through the use of Valuation Discounts.

When a person has a small business, it is often difficult to sell. The IRS recognizes this lack of marketability. Additionally, as many small business owners get on in years, they are not as involved in running the business. The IRS also recognizes this lack of control.

It is not uncommon to have restrictive agreements in place that will allow an owner to pass on his or her interest with a one-third discount for lack of marketability PLUS another one-third discount for lack of control. Discounts are very specific to each business and a proper appraisal is a MUST.

So how does it work?

Let's go back to our example above. Let's assume that Jane has one child, Dave, who is 35 years old and has shown some interest in the business. Ten years ago, Jane sets up an entity, let's say an LLC, with a restrictive operating agreement. As a result, the appraisal comes back and states that there is a 1/3 discount for lack of marketability. Jane can transfer Dave $1,012,000 of this company without any out of pocket gift tax consequences. Without the appraisal, this would result in a transfer of 20% of the company. With the appraisal, Jane could transfer as much as $1,518,000 of the LLC (a little over 30%) without gift taxes. Additionally, Dave could buy another 20% of the company with a promissory note at the lowest rate available for tax purposes. Let's say a ten year note of $666,666 at 6% interest. Finally, Jane is in good health, so for the next 10 years she uses her annual exclusion amount to gift Dave another $12,000 worth of the company annually. (Since annual appraisals would be expensive, let's assume we don't discount this.)

The result is that upon Jane's death 10 years later, her 100% interest in the company, which started at $5,000,000 company, has been reduced as follows:
1) Through the lifetime gift to Dave, her interest is reduced to a 70% interest, worth $3,500,000;
2) Through the promissory note, her interest is reduced just under 50%, with a value of just under $2,500,000.
3) Through the annual gifting, her interest in the business is reduced to $2,380,000.

Upon Jane's death her $2,380,000 interest will receive a 1/3 discount for lack of marketability and another 1/3 discount for lack of control. This will result in a tax valuation of approximately $1,060,000. After we add back in the $666,666 that she received for the 20 interest plus another $220,000 for interest payments, she will pass with a taxable estate of about $1,950,000.

Accordingly, upon Jane's death, her estate will not be subject to any federal estate tax liability. Additionally, the NJ Estate tax liability will be reduced to $96,000. This is a tax savings of over $1,600,000 - which far outweighs the costs involved in such preparation.

Obviously, there are many different ways to structure this type of transaction, but they are usually based upon the same methodology. The numbers and techniques involved will depend upon the individual needs of the client. For example, if Dave were not responsible or had no interest in running the business, Jane could give him his shares in trust. If Jane had a business partner, this structure could be done for each partner and combined with a buy-sell agreement funded by life insurance.

Kevin A. Pollock BLAWG

Setting up Trusts for High Maintenance Children

Updates for 2012

Checking in with Your Relatives

New Florida Power of Attorney Law

Life Insurance for College Students

Deficit Reduction Package - Change in Estate Tax Exemption?

Dangers of Specific Bequests and General Bequests

Estate Administration and Bad Credit

Step-Up in Basis Rule - Common Mistakes

The Biggest Danger of a Roth IRA Conversion

The Future of Estate Tax: Will “13” Prove To Be A Lucky Number?

Federal Estate and Gift Taxation of Deathbed Gifts

Deathbed Transfers in New Jersey

Verifying an Employee's Social Security Number

Understanding What "Per Stirpes" Means

Japanese Inheritance Tax vs. US Estate Tax (2011 Update)

The Mystery of Calculating Executor's Fees in Pennsylvania

Estate Planning for Non-Traditional Couples

New York Statutory Power of Attorney

Inflation Updates for 2011

Federal Estate Tax Reform 2011

Summary of the New Tax Law

So How Does the New Tax Law Affect You?

Revised Estate Tax Appears to Be a Done Deal

The New Jersey QDOT Trap - Revised

Betting on the Estate Tax

Titling of Assets

Seminar Announcement - Which Side of the Delaware River Should I Live on?

Which Side of the Delaware River Should We Live On?

New Jersey vs. Pennsylvania

Kevin A. Pollock, J.D., LL.M.

Attorney at Law, licensed in NJ, NY, PA & FLLaw Office of Kevin A. Pollock LLC

Kate P. Sweeney, CFP, CIMA

Comparison of PA and NJ Inheritance Tax Laws - Chart

Pennsylvania Inheritance Tax Trap

A Comparison of the Pennsylvania and New Jersey Inheritance Tax Laws

New Jersey Estate Tax

Lawyer's CARE Legal Clinic

Estate and Trust Litigation

Termination Clause in Special Needs Trust

Are Contributions Made to a Non-Profit Organization Tax-Deductible if 501(c)(3) Status Has Not Yet Been Received?

Self Settled Special Needs Trusts

Organ Donation

The "Gift" of Health Insurance

Choosing an Attorney to Help Probate an Estate

Giving to Charity Using Life Insurance

Business Organization and Succession Planning

New Jersey Estate Tax for Non-Residents Coming?

Follow up to Articles on Expatriation

Pennsylvania (and Philadelphia)Tax Amnesty Programs

How to Avoid Estate Litigation - Communication

Who exactly is a Covered Expatriate?

Income Tax Consequences of Expatration

There is a Federal Inheritance Tax?

IRA Planning in Light of Robertson v. Deeb

Mercer County

The Importance of Planned Gifting

Timing of a Gift

Time to Start Expecting Congress Will Do Nothing on the Estate Tax

Free Seminar

2010 SSI Monthly Payment Amounts

So, Will there be a Federal Estate Tax in 2010?

Understanding Basis

A Good Time to Buy that First House – But How?

Special Needs Planning in NJ - Part 4 of 4

Special Needs Planning in NJ - Part 3 of 4

Special Needs Planning in NJ - Part 2 of 4

Special Needs Planning in NJ - Part 1 of 4

What Happens When a Pennsylvania Resident Dies Without a Will?

Links to Important US-Japanese Tax Treaties

Estate tax liability for Non-Citizen Non-Residents of America

Weird Wills

What Happens When a Bond Holder Dies?

United Kingdom Inheritance Tax Update

New Jersey Tax Amnesty 2009

It's Looking More and More Like We Will Keep the $3.5 Million Estate Tax Exemption

Who has an Estate and Gift Tax Treaty with the US?

Change to New York Power of Attorney Form

Perfect Time to do Estate Planning for that Vacation Home

Attorney at Law, licensed in NJ, NY, PA & FL
Law Office of Kevin A. Pollock LLC