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)
Monday, March 24, 2008
Wednesday, March 5, 2008
Helpful Estate Planning Hints for Divorce Attorneys
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.
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: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:
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.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.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.
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.
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.
1. Typical terms include:
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.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?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.
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.
1. Demand that your client's ex agree to pay for the policy, but have your client actually buy it. This accomplishes multiple goals:
D. Do not forget about retirement assets, pension plans and life insurancea. 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;
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.
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.
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?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.
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 Assets2. 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.
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:
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 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.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.
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.
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