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.

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.

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.

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

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Updated on 12/31/12.