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Wednesday, December 26, 2012

IRS Not Issuing Tax IDs At End Of 2012

I went to the IRS website today and noticed that they are not issuing tax IDs for new businesses or trusts from December 27th, at 4pm until January 2 of 2013.This will make it particulary difficult to make a year end gift to a newly created trust or LLC as they will not be able to open up bank accounts without the EIN.  The IRS is officially saying that they are shutting down the website for maintenance, however, I personally wonder if it is to stop the flow of year end gifts in light of the apparent return to a $1,000,000 gift tax exemption.

Thursday, December 6, 2012

Right to Reclaim a Copyright

Very few people are aware that we are entering a unique period of time for muscians, artists, writers and their heirs.  In 1976, the U.S. Copyright Act was amended to allow the creator of a copyright to reclaim the rights to a work that was assigned.  Congress recognized that many new musicians, authors and artists were being taken advantage of by entertainment companies because they had so little leverage.  As a result, such individuals often assigned their rights for very little money.  The purpose of the Act was to allow individuals who had created the copyrightable material to terminate a bad assignment so that they could better profit from their work.

The Copyright Act allows the original copyright owner, the person who created the copyrighted work, to reclaim the work typically 35 years after the assignment.  However, notice of such termination can ONLY be done during a five year period which starts 30 years after the execution of a grant that does not include the right of publication.  For grants that do include the right of publication, notice of such termination must be made no earlier than 30 years after the execution of such grant or 25 years after publication under the grant, whichever comes first.

The timing of when one must reclaim can be quite confusing, but it is also critical.  Accordingly, it is best to consult an attorney immediately if you are the original owner of a copyright or an heir to the original owner of a copyright.

While the original copyright owner can terminate an assignment for any reason, it might be worthwhile to reclaim the copyright if the owner:
1)  had assigned the copyright for an unreasonably low amount;
2)  does not like the way the assignee has been utilizing the copyright; or
3)  has a bad relationship with the assignee.

Importantly, the right to reclaim the copyright doesn't just apply to the individual who created the copyright, but also to the heirs and the estate of such individual.   The corporations that own such assignments are not obligated to tell the creator of a copyright that he has the right to terminate the original assignment, so it is up to you to look out for your own interests.  However, if you are an executor of an estate, it is your duty to marshal all the assets of the estate, including any copyrights that might be outstanding.

The duty to marshal the assets of the estate basically means the executor must do a cost benefit analysis to determine whether to terminate any outstanding copyright assignments or let them be.  Additionally, on the planning side, if you are the original owner of a copyright, you may wish to create a position of a literary executor under your Will to manage all your copyrights.  Because managing a person's copyrights can be quite complex, the duties will require a knowledge and expertise that many traditional executors may not have.

If you are the heir to (or an executor of) an estate of someone who has produced any copyrighted works, please feel free to contact us so that we can help you determine what rights you may have.

Please note that the ability to reclaim a copyright does not apply to works for hire.

Friday, October 26, 2012

Making a Year End Gift Before Going Over the Fiscal Cliff

Just a reminder, for the rest of this year, every US citizen and permanent resident alien has a $5,120,000 gift tax exemption.  On January 1, 2013, regardless of who the president is, if Congress does nothing, then the gift tax exemption drops down to about $1,000,000.  (Technically I think it is $1,000,000 indexed for inflation back to 2001.) 

So, if you are in the fortunate position of having extra money that you do not need to live on and you wish to leave that extra money to your children while minimizing the tax on such transfer, you should seriously consider making a substantial gift before the end of the year.  Because it may not be to your advantage to give away certain property, especially highly appreciated property or business property that has been depreciated, I strongly suggest that you consult with a tax adviser before making any gift.

Tuesday, September 25, 2012

Same Sex Couple Entitled to Federal Estate Tax Marital Deduction?

There was a significant court decision back in June of this year regarding the rights of same sex married couples.  The New York Federal Court concluded that the surviving spouse of a same sex married couple is entitled to an unlimited marital deduction for purposes of federal estate taxes.  Windsor v. U.S., 109 AFTR 2d ¶ 2012-870 (DC N.Y. 6/6/2012)

Prior to this case being decided (and still the law for most of the rest of the country), when one same sex married partner dies leaving assets to the surviving spouse, only the estate tax exemption amount can pass free of estate taxes.  Anything over that would be subject to the federal estate tax.  For a heterosexual couple, when one partner dies, everything that passes to the surviving spouse can go tax free.  (Although there are some limitations if the surviving spouse is not a citizen.)

The Court in the Winsdor case ruled that the so called "Defense of Marriage Act" (or DOMA) effectively allows for a same sex married couple to be taxed when a traditional married couple would not.  They declared that there was no rational basis for this outcome and therefore the law violated the equal protection clause of the Constitution.  It should also be noted that the Obama administration flatly refused to support the DOMA.  The Attorney General's office usually makes an appearance to support all laws that are being challenged.

While the New York Federal Court made an important ruling, one ruling does NOT make it the law of the land.  You should note:
1)  The DOMA is still on the books and stands in the way of allowing the marital deduction for people not living in New York.
2)  The IRS will continue to challenge these rulings and it will likely go to the Supreme Court before it is finally resolved. In fact, there was an article online on CNN about this very topic today.
3)  Not all states allow same sex couples to be married, but if the couple marries in a state that allows it, the couple would then have an excellent argument to try and qualify for this important tax deduction.

While the ruling itself focused on the federal estate tax marital deduction, it can be taken much further.  Other potential benefits include the ability to roll over the surviving spouses IRA or 401(k), portability of the unified credit, the ability to file joint income tax returns and the ability to collect Social Security.

Because of the uncertainty surrounding these matters, it will always be best to pay your taxes and request a refund from the government to avoid any penalties.  When the IRS denies such payment, which they assuredly will, you will then need to make a decision as to whether you want to take further steps to get legally involved in this fight.  For those of you who don't have the inclination to spend a lot of time and money fighting, you should engage in proper estate planning for non-traditional couples.

Thursday, July 5, 2012

Inheritance of Farm Exempt from Pennsylvania Inheritance Tax

Under a new Pennsylvania law, there will no longer be an inheritance tax on farms owned by decedents who passed away after June 30, 2012.   The purpose of the law was to preserve farmland from being sold following the death of the owner.

As always, there are a few caveats to the law.  First, the farm must be a working farm, not just empty farmland.  (As a practical matter, this means the farm must produce at least $2,000 per year in gross income.)  The law also applies to the value of agricultural assets, such as livestock, crops and timber.

Second, the law only applies to transfers to lineal descendants (i.e. children and grandchildren), lineal ascendants (parents and grandparents), a spouse and siblings of the decedent.  Importantly, it does NOT apply to transfers to nieces and nephews, same sex partners or other third parties.

Third, if the land ceases to be used as farmland within seven (7) years of the decedent's death, the inheritance tax will come due.  (As a result, the owner of the real estate must complete an annual form that the land still qualifies as farmland.)

For a copy of the relavent amendments to statute, please refer to Neil Hendershot's blog, PA EE&F Law Blog.

Flush Tax

I got a little chuckle out of this article: http://www.delmarvanow.com/article/20120701/NEWS01/207010302/Maryland-law-changes-tax-hikes-take-effect

For all of New Jersey's tax problems, at least we don't charge people for flushing the toilet... yet!

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

Tuesday, May 22, 2012

NJ Estate Tax - Case Study $2M

In New Jersey, tax planning and estate planning can be very important.  I'd like to show you a good representation of what a plan can do for a married couple with $2,000,000 in assets.  Let's assume that the couple has $800,000 of life insurance, a house worth $400,000, retirement accounts of $200,000, brokerage assets of $350,000, and $50,000 of other miscellaneous assets.  Let's also assume that they are both citizens and they have two young children from their marriage.

Without a will, everything will go to the survivng spouse, free of tax. However, on the death of the surviving spouse, there will be NJ Estate Tax of about $100,000.  Moreover, the two children would each receive $950,000 outright at age 18 and there would be no clear guardian named.

The biggest tax mistake most people make is that they leave everything outright to the surviving spouse.  The reason that this can be a tax mistake is because New Jersey allows each person to pass on $675,000 to their children (and grandchildren) before it taxes the estate.  If you do not use this $675,000 exemption, you lose it.  So the best way to preserve this tax exemption is to avoid giving the $675,000 outright to the surviving spouse and giving it to the surviving spouse and children in a trust.  Sometimes you will hear this referred to as a Bypass Trust, a Credit Shelter Trust or even a Family Trust.

Another big tax mistake most people make is to own life insurance on their own lives.  Most people think that life insurance passes to their heirs free of tax.  This is not true.  It is not subject to income tax or inheritance tax, but it IS subject to the Federal Estate Tax and to the NJ Estate Tax.  Usually the best way to avoid an estate tax on the payout from a life insurance policy is to have an Irrevocable Life Insurance Trust (also known as an ILIT) own the policy on the life of the insured.

So, knowing all this, let's come back to our couple.  The first thing that our couple should do is move the life insurance into a life insurance trust.  (It would be even better to have the trust buy a new life insurance policy because if you transfer a policy in to an ILIT, there will not be any tax benefits for 3 years.)

The second thing our couple should do is create Wills (or revocable living trusts).  In New Jersey, with most traditional couples, on the death of the first spouse, we will typically send the first $675,000 into a Bypass Trust for the benefit of the surviving spouse and the children.  (The $675,000 is really based upon a formula to allow the maximum amount possible to go into the this trust before there is a tax.  It various by state and also by the tax law at the time of the death of the first spouse.)  

If the first spouse to die owns more than $675,000, than that can either go outright to the surviving spouse or in a Marital Trust.  This is up to the couple to decide based upon how much they want to protect this money from creditors and future spouses.  Upon the death of the surviving spouse, everything that is in the name of the surviving spouse and everything that is in the trust for the surviving spouse gets combined and sent to the children.  If the children are young, we usually recommend that it goes to them in trust until they reach a more appropriate age.

Now that we have the plan in place, we must retitle the assets so that the plan will be effective. You see, a Will that states the first $675,000 goes to a surviving spouse in trust is useless unless the first spouse to die actually owns $675,000.  In our situation above, the house is most likely owned by husband and wife jointly, meaning it goes automatically to the surviving spouse outright regardless of what the Will says. Additionally, the life insurance and retirement accounts will most likely name the the surviving spouse as beneficiary.  For most couples, retitling the assets typically means moving the life insurance into the ILIT, preparing a new deed and otherwise moving assets around between the couple.   There is usually not much you can do with the retirement accounts.

The end result of this plan is that we will have moved $800,000 into a life insurance trust, reducing the taxable estate to $1,200,000.  The balance will be divided roughly equally between the husband and wife.  On the first to die, we send as much as we can into the Bypass Trust, utilizing their NJ Estate Tax exemption.  In this scenario, on the death of the second person, we will have reduced the NJ Estate Tax from $100,000 to $0. 

Another benefit to all this planning is that it can make the estate administration much easier and less costly.  In this econcomy, it is important to make things easier especially when you own real estate.  If you owe estate or inheritance taxes at the time of your death, a tax lien automatically attaches to the property and you will not be able to sell it with a clear title until the taxes are paid. 

Monday, May 7, 2012

Social Security Statements

You may have noticed that you did not receive a Social Security statement recently.  A little more than a year ago, the SSA stopped mailing paper statements out in a cost savings move.  All is not lost however, as you can go online to get your earnings history and information on estimated benefits at:  https://www.socialsecurity.gov/mystatement/

Keeping up to date with what you are entitled to is an important part of your financial plan and your estate plan.  If you haven't done so yet, you should go ahead and create an online account with the Social Security Administration so that you will be able to access your earnings history.

Thank you to Ken Weingarten at Weingarten Associates, L.L.C. for bringing this important information to my attention.

Tuesday, April 24, 2012

Estate Planning with Illiquid Assets

One of the trickiest items that we must deal with as estate planners is to help clients transfer illiquid assets.  Illiquid assets can include: retirement plans, ownership in a family business, real estate, collectibles (such as artwork, baseball cards and comic books), expensive vehicles and even animals (such as thoroughbreds and show pets).
Illiquid assets are tricky to plan with because they almost always have huge built-in gains, sometimes multiple people want the same asset, the asset must often be sold to pay for taxes and they usually require special maintenance or care.  A client can face additional complications when most of a client's wealth is tied up in a single asset and the client wants to benefit multiple heirs. 
Each family requires a custom solution, but often the solution can be found in tried an true estate planning techniques, such as a life insurance trust (so that you can give the illiquid asset to one heirs and cash to another heir), a buy-sell agreement (for a family business), a pet trust (to deal with a beloved family pet), promissory notes and even charitable trusts.

While we can not help you decide which of your heirs should receive your assets, a good estate planning attorney can help you make sure that they pass in a practical and tax efficient manner.  

Monday, April 9, 2012

Gift Ideas - ROTH Style

One of the questions that frequently comes up when I speak with clients is that they want to be able to gift money to their heirs, but they do not want their offspring to waste the money. There are a number of ways to accomplish this. If you are considering gifting a significant amount of money, you may wish to set up a trust or a family limited liability company or a family limited liability partnership to manage those assets.

However, if you are like many middle class families, there is really no need to incur the expense of setting up such structures. Instead, one of the best and easiest things you can do is to contribute to your child or grandchild's ROTH IRA. For 2012, married couples can generally put in $5000 each if they have income of less than $173,000 and single individuals can put in $5000 if they have income of less than $110,000. The IRS website has a more detailed list of the ROTH IRA contribution limits.

Many people do not realize that they can contribute to a ROTH IRA even if they are contributing to their company's 401(k) or retirement plan. Many simple do not have the liquidity - which is one of the reasons this makes a wonderful gift idea. Because of the penalties for early withdrawal, it keeps most beneficiaries from withdrawing the money frivolously - but it can be used in the event of an emergency.

Another strategy is to buy relatively illiquid assets, like bonds that do not mature for a few decades - and just plop them in your safety deposit box.

Remember, in states like New York, Pennsylvania and New Jersey, you can save your heirs thousands of dollars in State Estate Taxes or State Inheritance Taxes by setting up a gifting program now. For more on gift planning, please contact our office.

Monday, March 19, 2012

Using Revocable Trusts to Prevent Elder Fraud

There are many schools of thoughts on the use of Revocable Trusts, also know as Living Trusts or Grantor Trusts. Some attorneys love them as a way to avoid probate; others, including myself, are more hesitant to recommend them. My hesitancy in using them stems from the fact that in New Jersey probate is usually not that difficult or expensive. (I always recommend them for my clients with property in Florida, New York or in multiple states.)

I also find that many attorneys create Revocable Trusts, but do not help their clients fund them. Unless these trusts are fully funded BEFORE you die, you have to go through probate anyway. This can double or triple the costs involved because you pay more on the front end AND when you die.

Despite my general reluctance in setting up Revocable Trusts, I can offer another good reason for setting one up - to prevent Elder Fraud. You probably see stories all the time about how a carekeeper, neighbor or other stranger is hired to look after an elderly person and then unwittingly gives away thousands of dollars for reasons that they can no longer recall.

In a worst case scenario, the elderly individuals become convinced that their children have abandoned them and change their estate planning documents to cut out their children. Occasionally, the bad caretaker, neighbor or stranger also becomes the new Power of Attorney and proceeds to spend all of the elderly person's assets.

A way to prevent these events from happening is to create a Revocable Trust naming a trusted relative as Trustee (or as co-Trustee with the elderly individual). With a trusted relative named as Trustee or co-Trustee, money cannot be spent or given away without the trusted relative knowing about it. Moreover, the trust cannot be modified without the trusted relative becoming aware of the situation.

Even without naming a trusted relative as Trustee or co-Trustee the trust can be structured to make it more difficult to modify to change than a Will or a Power of Attorney. For example, you can have a provision in the Revocable Trust that requires certain individuals to be notified before any modifications are made. That is not the case with a Will or Power of Attorney, which can be changed on a whim and without any notice requirements.

Another way a Revocable Trust can prevent Elder Fraud is because it is just more cumbersome to deal with. So, while many attorneys, and non-attorneys, feel that they can write a Will or Power of Attorney, far fewer people want to mess with a Revocable Trust. Sometimes, there is no better way to stop a thief than to make them have to jump through some legal hoops.

Monday, March 12, 2012

Estate Planning for Same Sex Couples

In many jurisdictions, estate planning for same sex couples can be quite complex. In some states, the laws are favorable to non-traditional couples and in others, they are not (like Pennsylvania). There are also states like New Jersey, where the laws themselves can be favorable to same sex couples if you enter into a Civil Union, but there is still Tax Planning that must be done.

In states where the laws are unfavorable to same sex couples, without structuring your affairs properly, one partner may not inherit from the other. Moreover, without a
Power of Attorney or Guardianship in place, one partner may even not be allowed to visit the other in a hospital or make financial or health care decisions for the other.

To structure your affairs properly, you should prepare a
Will, Financial Power of Attorney, Health Care Power of Attorney and properly title your assets. The proper titling of your assets, including naming beneficiaries of your retirement accounts, life insurance policies, brokerage assets and bank accounts must not be overlooked. Without doing this, your plan will fail.

If you are ready to make a commitment to each other, you should take advantage of whatever laws the state you live in offers, whether it is a marriage, a Civil Union or a Domestic Partnership. To give you an idea of some of the benefits this can offer:

  1. In NJ, a civil union partner and a domestic partner are entitled to receive the death certificate of the deceased partner.

  2. A surviving civil union partner is automatically allowed to inherit as if he or she was a surviving spouse; and

  3. A surviving civil union partner is deemed to be first in line to act as an administrator (if the decedent has failed to prepare a Will) or guardian (if the partner has failed to prepare a Power of Attorney).
You should also be aware that New Jersey has not updated all of its statutes to comply with their own Civil Union Law. For example, 37:1-31 states that NJ Civil Union Couples shall have all the rights of married couples. However, the inheritance tax law does not use the phrase Civil Union Couples - only domestic partners, as it was last updated prior to the enactment of the Civil Union law. Even though the inheritance tax statute has not been updated, NJ Division of Taxation has updated its forms and I have not heard of any instances in which NJ has tried to tax the surviving partners of a civil union.

Among the things that I find get overlooked when same sex couples plan for themselves is that they do not consider what will happen to their assets if both of them should pass simultaneously nor do they consider the most tax efficient way to structure their assets. So while much of the material here you may have read elsewhere, you should realize that a good estate planning attorney can help you customize a comprehensive, tax efficient plan for you.

Monday, March 5, 2012

Is there an Inheritance Tax on Life Insurance Proceeds?

One of the biggest misconceptions people have about life insurance is how it should be taxed. Most people think that they can receive the proceeds completely tax free. Upon the death of the insured, the beneficiary of a policy can almost always receive the proceeds without paying an income tax. However, estate taxes and inheritance taxes are a different matter.

If the insured owns a life insurance policy on his or her own name, it is subject to the federal estate tax. It is also subject to the state estate taxes of many states, including the
New Jersey Estate Tax and the New York Estate Tax. This is one of the reasons many people have a life insurance trust own the life insurance on their lives. It is also one of the reasons that many people name their children as the owners of their life insurance policies.

The inheritance tax has its own set of rules for how a life insurance policy should be taxed. In Pennsylvania, the death benefit from a life insurance policy is always free of inheritance tax.  

However, in New Jersey, it depends upon whether the policy is payable to an individual beneficiary or the estate of the insured.  If the policy is payable to an individual in New Jersey, then there is no inheritance tax.  If the policy is payable to the estate of the insured, then there may be an inheritance tax depending upon who the beneficiary of the estate is.

Under the New Jersey Inheritance Tax scheme, if the proceeds pass to a spouse, civil union partner, child, grandchild, parent, grandparent or a charity, then there is no inheritance tax. However, if the money passes to a sibling, then there could be anywhere from an 11-15% inheritance tax. Generally, if the money passes to anyone else, then there is a 15-16% tax depending upon how much is transferred.

As a result of these rules, it is usually best to consider who will be a beneficiary of your estate before deciding which assets you wish to go to whom. For example, if you know you want to benefit a niece or a nephew, using life insurance is one of the most tax efficient ways to do it.

contact us if you wish to discuss planning with life insurance in more depth.

Updated on 12/31/12. 

Tuesday, January 24, 2012

Setting up Trusts for High Maintenance Children

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.