Joint Trusts - A Great Planning Opportunity for Non-Traditional Couples and Blended Families

Creating an estate plan for clients who are in non-traditional relationships or are part of a blended family can be very tricky.
  

Why is Estate Planning for Non-Traditional Couples So Tricky?

Let's assume a hypothetical fact situation where you have a women (Jane) with $4M in assets.  She is a widow and has 2 children.  Now let's also assume that she is in a committed relationship with a person (Alex) who has $2M in assets, and Alex has three children.  Finally, let's assume that they agreed to set up a joint bank account and that they want to buy a house together worth about $1M, with Jane putting up three-quarters of the money for the house.  

Typically, the clients in this scenario will want to take care of each other, but they also want to ensure that a certain amount of their assets go to their respective children.  Let's assume the specific goal for Jane and Alex is that the surviving partner can have the joint bank account and use the house for the rest of their life, but everything else goes to their respective children.  To accomplish this, they buy the house as joint tenants with rights of survivorship and create Wills leaving everything else to their respective children.

In this hypothetical, if Jane dies first, the house and the joint bank account go to Alex because they are joint assets and supersede the Will.  When Alex dies, his $2M plus the house goes to his children.  This is not necessarily a far result for Jane's children.  Alternatively, if Alex dies first, the house and the bank account goes to Jane, and then upon her death, it all goes to her children, cutting out Alex's descendants with respect to the joint assets.  As you can see, the problem with this traditional plan is that one partner dies and the survivor takes the house and bank account and it cuts out the descendants of the first client to die with respect to the joint assets.

Why a Joint Trust Can Be an Important Estate Planning Tool for Non-Traditional Couples

One of the best ways to handle a situation like this is for Jane and Alex to set up a joint trust.  The trust could be funded with the house and cash (in whatever amount they like).  While Jane and Alex are alive, the trust could be revocable and they could have complete control over it to do whatever they like.  The trust becomes really powerful when the first partner dies (or becomes incapacitated), because we can then make the trust Irrevocable.  While we can customize these types of trusts in many ways, most people want to guarantee that the survivor can: live in the house for the rest of their lifetime, sell it and buy other real estate, or sell it and have an income stream to live off of.  

The main benefit to this type of trust planning is that we can provide a much safer way of ensuring that ALL of Jane and Alex's descendants receive whatever is left over when the survivor dies.  Moreover, we can make sure that their descendants receive money in a way that is more fair based upon need or based upon how Jane and Alex contributed funds towards the trust.  In this example, since Jane is putting up $750,000 towards the house, the trust can say that, following the deaths of both Jane and Alex, the remainder of the trust assets go 3/4 to Jane's children and 1/4 to Alex's children.  

Initially, Jane and Alex could be in control of the Trust (making them the Trustees).  We can also have a system in place so that one of Jane's children steps up as co-trustee if something happens to Jane and one of Alex's children steps up as co-trustee if something happens to Alex.  If Jane's children and Alex's children can't work together, we can also have a neutral trustee appointed. 

Can Anyone Create a Joint Trust?

Anyone can create a joint trust.  The type of trust I am describing in this post works for unmarried or married couples. 

Are There Any Downsides to Creating a Joint Trust?

When creating any estate plan, one of the downsides is the cost to create the plan.  Creating a custom plan like this will certainly cost more than simply titling assets in joint name.  However, the more money over which you are trying to control the disposition, the more it is worth setting up this type of trust.

Another potential downside to creating a joint trust is that, depending upon its structure, the trust may need a tax identification number and a tax return will need to be filed for the trust for any income earned.  

It should also be pointed out though that if the couple is unmarried and they live in a jurisdiction with an inheritance tax (like New Jersey or Pennsylvania), this structure would trigger the inheritance tax on both the first to die and likely the second to die.  However, for unmarried couples, this tax would be incurred on the first to die regardless of whether or not a joint trust was utilized.  In New Jersey, the inheritance tax could be avoided if the couple agrees to enter into a NJ Domestic Partnership agreement.

How Do I Create a Joint Trust?

If you would like to know more about estate planning for non-traditional couples or setting up a joint trust, we would happy to speak with you to so that it could be properly customized to meet your needs.  Kevin A. Pollock, Esq., LL.M. is an attorney licensed to practice in NJ, NY, PA and FL.  Kevin Pollock meets with clients in Lawrenceville, NJ and in Boca Raton, FL by appointment only.  Kevin may be reached at (609) 818-1555.  

You Can Create a Pet Trust - Just Like the One For Choupette

According to multiple news sources, when the creative director and fashion designer Karl Lagerfeld died on February 19, 2019, he left his famous cat, Choupette, a significant amount of money in trust.

Pet trusts are now quite common, and specifically authorized by statute in most jurisdictions.  Many people consider pets as a part of the family, and want them to be cared for as such.  A pet trust can provide money to pay for a caregiver, food, pet supplies, and a veterinarian.  It can also provide a place for your pet to live (or board), and in the case of Choupette, a personal chef.

Most estate planning attorneys who create pet trusts will provide a check and balance on the trustee, the caregiver, and the remainder beneficiary.  In other words, we do not recommend that the person in charge of caring for the pet be the one managing the money and the ultimate remainder beneficiary when the pet dies, as this would create a perverse incentive for the caregiver to do a bad job in caring for your beloved pet.

For people who do not want to create trust, they can always leave money to a caregiver (or charitable organization) with the hope that the caregiver will maintain the pet properly.  The benefit of a trust is that it makes the arrangement more legally enforceable and provides greater oversight.

New Jersey, Pennsylvania, and Florida have statutes based upon the Uniform Trust Code.  The NJ Pet Trust Statute can be found at:  3B:31-24 Trust for care of animal.  The Pennsylvania Pet Trust Statute can be found at: 20 Pa.C.S.A. § 7738.  Trust for Care of an animal.  The Florida Pet Trust Statute can be found at: Florida Statute 736.0408  Trust for care of an animal.  The State of New York also has a statute specifically authorizing the creation of a pet trust, which can be found at NY Est Pow & Trusts L § 7-8.1 Trusts for pets. 

It should be noted that the NJ statute, enacted in 2015, amended a previous version of the law that limited Pet trusts to 21 years.  It also clarified that a Pet trust could be created under a revocable trust document, not just as part of a trust created under a Will.

It should also be noted that living money to a pet (in trust or to a caregiver) will likely give rise to an inheritance tax in both Pennsylvania and New Jersey. 

Why Florida Probate Can Be Difficult

When deciding whether or not to do a Will package or a Revocable Trust package, many of my Boca Raton, Florida clients will ask why choose one over the other.  Among the many benefits that a Revocable Trust has over a Will is the ability to minimize or even avoid probate.  This leads to the obvious question of:

Why should I avoid probate in Florida?

The reason many people wish to avoid probate in Florida because it can bypass the restrictions on who can serve as the person in charge of your affairs, make things more simple for the person in charge of your affairs, keeps costs down, speeds up the process of getting money to your intended beneficiaries, and allows you to have greater privacy.

How does avoiding probate avoid the restrictions in Florida with respect to who can manage your affairs?

Avoiding probate makes it easier for the person you want to manage your affairs after death to qualify as the person in charge because not everyone can serve as an Executor of Administrator in Florida.  For example, a nonresident person may not serve as an executor unless they are related to you by blood, marriage, or adoption (See FL Statute Section 733.304)  So, if you want to name a family friend to be an executor, they are not permitted to serve as executor unless that friend lives in Florida.

Additionally, there is often a bonding requirement for anyone who wants to serve as an administrator of an estate when the decedent died without a Will.  If the proposed administrator does not have good credit, they likely will not qualify for a bond, and therefore would be ineligible to serve as administrator.

How does avoiding probate in Florida make things more simple?

Avoiding probate in Florida makes things more simple because instead of the person in charge of your affairs having to go through a three step process to transfer your assets, he or she only has to do a two step process.  Specifically, if you die in a manner that requires probate, then your Executor or Administrator (if you die without a Will), needs to file a Petition with the Court to be officially named in charge of the estate.  (This is step one)

Once your executor or administrator qualifies, he or she must gather up the estate assets, set up an estate account, and pay the bills and taxes.  (This second step is often the longest step.)

The third step is to pay the beneficiaries and close down the estate.  When you use a revocable trust (which is fully and properly funded before death), the first step can be avoided.  Needless to say, when you don't have to go to Court and file a Petition, that speeds up the estate administration process and reduces the overall costs.

Other reasons to avoid probate.

I would also like to point out that another benefit to avoiding probate is that some counties have a routine practice of requiring executors and administrators to put all of the funds of an estate into a restricted depository account that can only be released by Court order.  This also has the negative effect of making the administration process take longer and more expensive (because you need another Court order).  However, I do understand that this practice is being challenged.  If you would like to learn more about that, Boca Raton, Florida Attorney Chuck Rubin has written a nice piece called: Mandatory Restricted Depository Arrangements in Probate Questioned.


Kevin A. Pollock, Esq., LL.M. is an attorney licensed to practice in NJ, NY, PA and FL.  Kevin meets with clients in Boca Raton, FL office located at 5499 N. Federal Highway, Suite K, Boca Raton, FL 33487 by appointment only.  Kevin may be reached at (561) 247-1557.

What to Think About Before Meeting With an Estate Planning Lawyer

I am happy to announce that we have finally finished creating a series of short videos regarding the estate planning and estate administration process.  Here is our third video in which Kevin A. Pollock, Esq., LLM is being interviewed by Pierson W. Backes, Esq., the head of our estate litigation department, regarding the things a person should think about before meeting with an estate planning attorney.


Some of the things people should think about include where you want your money to go, who you want to be in charge of your estate, who you would want to act as trustee of any trusts you create, and who should be guardians of any minor or disabled children. 

The role of the attorney should be help people put the legal structure in place, including setting up trusts, and to make the plan tax efficient.  A good estate planning attorney will also help you understand the options on how to get money to different people.  For example, if you want to leave $100,000 to a sibling, it might be more tax efficient to name them as beneficiary of a life insurance policy rather than naming them as a beneficiary under your Will,

To learn more about estate planning or hiring an elder law Attorney, please visit us at: https://pollockfirm.com/

Pass-Through Business Alternative Income Tax Act

New Jersey may be getting a lot tax friendlier for small business owners.  I hesitate to even write this blog post, as I generally prefer to wait until legislation is actually passed before I write on a topic (mainly because it is a waste of everyone's time to read about something that may never come into law).  However, the NJ State Senate has already passed the "Pass-Through Business Alternative Income Tax Act" by vote of 40-0, so there's a good chance that this may become law, and very soon.

Here's the gist of how the new law is supposed to work:
1)  NJ will start implementing a new business tax, effective January 1, 2018, on pass through business entities (such as limited liability companies, S-Corporations, and Partnerships).
2) This new business tax will be roughly equal to the tax the owners of the business are already paying on their NJ income tax returns.
3) The owners of the business will receive a dollar for dollar credit on their personal NJ income tax returns for any business taxes paid.  

The legislature was effectively trying to make this a wash from a NJ revenue standpoint, but let's be clear, this will raise significant revenue for New Jersey because the tax rates don't align perfectly with the income tax rates for either individuals or married couples.  

For example, under the new business tax law, there is a:
1) 5.525% tax on the distributive proceeds less than $250,000 (per owner);
2) 6.37% tax on distributive proceeds between $250,000 and $1M (per owner);
3) 8.97% tax on distributive proceeds between $1M and $3M (per owner); and
4) 10.75% tax on distributive proceeds over $3M.

For a single person, the NJ income tax rates are as follows:

NJ Tax Bracket - Single Person	NJ Tax Rate
$0.00 - $19,999	1.4%
$20,000.00 - $34,999	1.75%
$35,000.00 - $39,999	3.5%
$40,000.00 - $74,999	5.53%
$75,000.00 - $499,999	6.37%
$500,000.00 - $4,999,999	8.97%
$5,000,000 +	10.75%

For a married couple, the NJ income tax rates are as follows:

NJ Tax Bracket - Married Couple	NJ Tax Rate
$0 - $19,999	1.4%
$20,000 - $49,999	1.75%
$50,000 - $69,999	2.45%
$70,000 - $79,999	3.5%
$80,000 - $149,999	5.53%
$150,000 - $499,999	6.37%
$500,000 - $4,999,999	8.97%
$5,000,000.00 +	10.75%

However, if this new law goes into effect, it will be a significant net savings for NJ business owners because they will not be as badly impacted by the new federal law.   Remember, the Tax Cuts and Jobs Act signed by President Trump stated that State income taxes and local property taxes are capped at $10,000 per year.  The reason that NJ business owners will not be adversely affected by this new (and usually higher) business tax is that NJ is converting a non-deductible state income tax (from your personal return) into a deductible business expense.

Let's run through an example.  Let's say that Joanne owns a nearby estate planning law firm structured as a limited liability company.  Joanne's net income after all expenses (except state income taxes) is $150,000.  (For purposes of this example, let's assume that she is single and has no other income and is not entitled to any other deductions other than a $10,000 property tax deduction for her primary residence.)  

If the New Jersey Pass-Through Business Alternative Income Tax Act does not come into law, then she would have a state income tax liability of approximately $7,365 and a federal income tax liability of $19,533 (after factoring in the 199A deduction of 20% and the $10,000 property tax deduction).  Total tax liability of approximately $26,898.  Joanne does not get to deduct the $7,365 from her federal income taxes.

If the New Jersey Pass-Through Business Alternative Income Tax Act does come into law, then there would be a NJ business tax of $7,875, no NJ personal income tax, and a federal income tax liability of approximately $18,118 after reducing the $150,000 of income by $7,875 and then factoring in the 20% 199A deduction.  Total tax liability of $25,993.  

As you can see, the big difference is that the $7,875 should be considered a deductible business expense for purposes of the federal tax law.  So even though there is an additional $510 of NJ state taxes, there is $1415 less of federal income taxes, for a total savings of $905.  

If and when the NJ law actually passes, I will provide another update.

* Note - all calculations for taxes done using free software with minimal assumptions, so please do not rely on them.  I am just trying to illustrate how the new tax law should work in theory.

Elizabeth Ketterson named as Partner to The Pollock Firm LLC

We are Pleased to announce

Elizabeth C. Ketterson, Esq.

has been named Partner to our firm and

Director of the estate administration department.

&

Our firm name has changed from:

Law Office of Kevin A. Pollock LLC 

to:

The Pollock Firm LLC

Excellent Social Security Strategy Link

As part of the estate planning process, we frequently need to analyze how much a person is likely to have upon death.  As part of an overall wealth analysis, this invariably leads to questions such as:

1. How much are you earning now?
2. When are you expecting to retire?
3. How much should you gift to your children to minimize taxes while still having enough to live on?
4. What do you expect to earn/spend in retirement?
5. How much are you likely to receive from Social Security?

Many clients are concerned with running out of money and have a lot of difficulty calculating the best strategies for how and when to start claiming their Social Security.  After all, the strategy of wait until as late as possible simply doesn't work for everyone.  From a pure return on investment strategy, it might be worthwhile for a low income earner in a marriage to take the benefits early. This is particularly true when there is a big age disparity between spouses.

In looking around online, I found a wonderful website to help you analyze the best strategies.  The site Open Social Security has a great calculator for spouses that let's you know, based upon your ages and the amount Social Security expects you to receive at full retirement, when is the best time for each of you claim your social security. 

We still recommend speaking with your attorney and other advisors to fully flush out all the issues, such as factoring in the health of your and your spouse, discussing when other income should come in, and what type of guaranteed money is otherwise likely to be available.  Nevertheless, this is definitely one of the better calculators I've seen.

Happy holidays!