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Tuesday, November 17, 2015

Trouble with Probate

Sometimes probate can be a simple process.  Sometimes it can be a royal nightmare... and sometimes it can be an expensive royal nightmare.

I'm not sure if it is a sign of the times or just a coincidence, but our office has had numerous estates where the probate has not been very easy.  To give an example of some of the problems we have run into recently:
1) An estate where even though there was a Will, the beneficiaries were not the next of kin.  While there was nothing untowards going on as the next of kin were very remote, we had to spend a lot of time and money tracking them down because state law required us to give notice to all next of kin, regardless of whether they are a beneficiary in the Will or not.
2) An estate where the decedent owned worthless land in another state.  This was an estate that was otherwise taxable, so we needed to get a valuation for this property and figure out how to dispose of it because no one wanted the headache.
3) Preparing a last minute amended estate tax return before the time to amend lapsed.  A bad return was prepared by an accountant and when the client came to us to review it, we had to stop all other work to prepare a revised return in order to save our client over $100,000.
4) An estate where the original Will could not be found, so we requested that the Court probate a copy of the Will.
5) An estate where the Will is unclear and requires judicial interpretation on who the beneficiaries are.
6) An estate where the client had many different types of assets and assets located in more than one country.
7) An estate where the executor is unable to travel, so our office is handling all the affairs of the estate and assisting in finding other professionals to value and sell local assets at a fair value.
8) An estate where the beneficiary has contacted us to obtain information from an executor who is refusing to disclose information.
9) An estate where the decedent, rather than formally update his Will, wrote a side letter saying where he wanted some of his assets to go - begging the question of how to handle that letter.

In most of these situations, considerable time and expense could have been saved if the decedent had consulted with an estate planning attorney on a regular basis.  While having a Will and trust can certainly make the estate administration process easier and less expensive, the benefit of hiring an experienced professional is not just that we can draft the routine paperwork.  An attorney that focuses on tax and estate planning can also make sure that you title assets in such a way as to make things smoother and more cost efficient.

Thursday, October 29, 2015

2016 Federal Estate Tax Exemption Amount

The IRS recently released Revenue Procedure 2015-53, announcing the inflation adjustments to many tax provisions.  Of note, the unified credit against the federal estate tax for Calendar Year 2016 is $5,450,000.  This is up from $5,430,000 in 2015.

The annual gift tax exclusion of $14,000 per person/per donee remains the same.  However, the annual gift exclusion to non citizen spouses has increased to $148,000 from $147,000.

Thursday, October 22, 2015

The Difficulty of Porting a Deceased Spouse's Unused Exemption Amount in Second Marriage Situations

Many estate planning commentators have joked that estate tax portability will lead to rich individuals marrying others simply to make use of their estate tax exemption.  I have found, in practice, that planning can be far more complicated.

Let me take you through a common situation that I am dealing with:
1) I represent a wealthy person (let's say $10M+) who is married to someone not as well off, but not poor (about $1M);
2) Each spouse has children from a previous marriage; and
3) The spouse who has less money has no real desire to give money to the surviving spouse and wants everything to go to his/her children.

I'll call the wealthy person Wendy and the less wealthy spouse Harry.  In a situation like this, if Harry dies first, and leaves his entire $1M to his children, then he will only have used up $1M of his $5.43M federal estate tax exemption.  Wendy is entitled to receive the Deceased Spouse's Unused Exemption Amount (DSUEA) of $4.43M.  This concept is known as portability and would increase what she can pass on to her children tax free from $5.43M to $9.86M - an estate tax savings of $1,772,000.

Now, if Harry is leaving everything to his children, it is likely that one of them is the Executor, and not Wendy.  This is important because the only way for Wendy to receive the DSUEA is for the Executor of Harry's estate to file a federal estate tax return.  Harry's executor might not want to incur the trouble or expense of filing a return that does not benefit them in any way.  After all, there is no need to file the federal estate tax return if the estate is less than $5.43M.

If Wendy gets along well with the Executor, she can agree to pay for the return, but that is no guarantee.  The safest approach to ensure that Wendy has access to Harry's DSUEA is to get Harry to redo his Will and make a specific bequest of his DSUEA to Wendy AND require the executor to file the federal estate tax return (or do whatever is necessary to ensure that the wealthier spouse actually gets to port his unused estate tax exemption amount).

Harry can of course require that Wendy pay for all costs associated with such return, which I would imagine she would be happy to do.  After all, a federal estate tax return, even on the expensive side, is likely to save Wendy's heirs millions of dollars.

Monday, August 10, 2015

New York Reserves Right to Subject Real Estate Owned By Single Member LLC to Estate Tax

In a recent New York tax advisory opinion, TSB-A-15(1)M, the Commissioner of Tax and Finance stated that if a single member LLC owns an interest in New York real property, that property can be subject to the New York estate tax upon the death of the sole owner.

In this situation, the Petitioner had set up a single member Delaware LLC to own an interest in New York real estate. The Petitioner then wished to permanently leave New York to live in another jurisdiction.  New York has a state estate tax on real estate but it does not have an estate tax on intangible property.

Typically, an interest in corporation, partnership or trust is considered an interest in intangible property and therefore not subject to New York's estate tax laws.  This raised the question of how to treat the interest in an limited liability company.  An LLC can be taxed as a partnership, a corporation, an S-Corporation or as a disregarded entity.  Single member LLCs are taxed as a disregarded entity unless the taxpayer elects to have it taxed differently.

The rationale behind the opinion in this case is that if the federal government disregards the entity for tax purposes, so should the state of New York.  Accordingly, if you own real property in New York and are not a New York resident, you should speak with your tax advisers about the best way to minimize your estate tax burden.

The nice thing about an LLC is that you can always make an election to have it taxed in a different manner simply by filing a form with the federal government.  By electing to have it taxed as a Corporation or S-Corporation, or by adding your children on as owners of the LLC and having it taxed as a partnership, the LLC will no longer be treated as a disregarded entity.

Sunday, August 9, 2015

Moving Office Location and Adding Franklyn Z. Aronson as Of Counsel

We are pleased to announce that Franklyn Z. Aronson, Esq. has joined our firm as Of Counsel.  Mr. Aronson's practices in the area of Wills, Trusts and Estates and Small Business Law.

Additionally, we have moved our New Jersey offices from Pennington, NJ to:

100 Federal City Road
Building C, Suite 104
Lawrenceville, NJ 08648

Our other contact information has not changed.

Tuesday, May 26, 2015

Japan Institutes Exit Tax

Effective July 1, 2015, Japan will institute an "Exit Tax" on Japanese residents.  If a Japanese resident has lived in Japan for 5 of the last 10 years and then moves to another country (or gives up residence), the Exit Tax will create a deemed sale of all of such person's assets, triggering capital gains.

The purpose behind the new tax is of course to raise revenue for the Japanese government.  Under the old rules, a Japanese resident could move to another country for a year, sell his or her assets, and avoid the Japanese capital gains tax because the Japanese government only had the right to impose an income tax on residents.  (This is different from the US income tax which imposes an income tax on assets worldwide, subject to treaties and certain exceptions.)

There are numerous exceptions to the Japanese Exit Tax.  The most important exception is that it only applies to individuals who have assets in excess of 100 million yen (approximately $820,000). Another major exception is that it does not apply to foreign expatriate employees staying in Japan on a working Visa.

KPMG has a detailed explanation of who is affected by the Exit Tax.

Friday, February 13, 2015

Dynasty and Generation Skipping Trusts Can Trigger a Compromise Tax

A number of years ago I wrote about the dangers of accidentally triggering a Compromise Tax in New Jersey and in Pennsylvania.  It occurs to me that most dynasty trusts are set up to go to children, grandchildren and more remote descendants, but there is also boilerplate that says if the Grantor doesn't have any living descendants, it will go to other family members or friends.

This is where the tax gets tricky.  As a refresher, if money goes to a child, in New Jersey there is no inheritance tax and in Pennsylvania there is a 4.5% inheritance tax.  If money goes to other parties, like nieces and nephews, there can be an inheritance tax of 15-16%.   So, when money goes into trust for the life of a child, and then it goes to a niece or nephew after that, the tax must be computed based upon the value of the remainder interest.

Now let's take it a step further, what happens if the trust doesn't say upon the death of  the child that it goes to nieces and nephews, but rather there is a contingency.  The contingency being that it goes to the child's heirs, and if the child doesn't have any heirs, it goes to the nieces and nephews.

In this situation, technically you still have to calculate the actuarial interest of the child's interest, but now you also have to calculate the actuarial interest that the nieces and nephews will receive the remainder interest rather than any descendants of the child. 

If the chance that the nieces and nephews will receive the remainder interest is too remote that there will not be a tax, the question then becomes what is too remote?  In a call to the New Jersey Division of Inheritance Tax, they advised me that there is no bright-line rule.  Each situation is a facts and circumstances test.  

For example, in the situation described above, they might look at the age of the child when the trust is created, whether there are actually any grandchildren alive at that point, the terms of the trust, and many other factors.  So in a situation where the children are older, unmarried and without children of their own, there is a much higher chance that nieces and nephews will wind up with the remainder interest.

So how can you complete the inheritance tax return when there are so many possible contingencies?  The safe route, and the one recommended by the New Jersey Division of Inheritance Tax, is to make a note of the potential tax and explain why you think there should only be a minimal or no tax.  Usually this is the better way to go in New Jersey because if someone is setting up a dynasty trust, they typically are doing it with a fair amount of assets and are going to be paying the New Jersey estate tax anyway.  In Pennsylvania, because there is no estate tax, this may be a tougher negotiation.  

Because of the complexity of these situations, I strongly recommend hiring a competent estate administration attorney to assist.  Failure to deal with this at the time the inheritance tax return is due could lead to substantial interest and penalty costs.


Monday, January 5, 2015

Change in Pennsylvania Power of Attorney Law

Happy New Year!  Effective January 1, 2015, under Act 95, Pennsylvania modified Chapter 56 of Title 20 of the Pennsylvania Consolidated Statutes, which deals with Powers of Attorney.  The amendment was made to try to better protect the Grantor of the powers.

Under the new statute, a Pennsylvania Power of Attorney must be witnessed by two witnesses and a notary to be valid.  Also, the warning statement that the Grantor must sign at the beginning of the Power of Attorney was also modified slightly so that the Grantor better acknowledges the power he or she is potentially giving to the Agent.

The new law also creates some mandatory duties on the Agent that the principal cannot waive or modify. These three requirements are that the agent must: (1) act in accordance with the principal’s reasonable expectations to the extent actually known by the agent, and otherwise in the principal’s best interests; (2) act in good faith; and (3) act only within the scope of authority granted in the power of attorney.

Furthermore, under the new law, unless the document says otherwise, an Agent must also:
(1)  Keep his funds separate from the principal’s funds unless: 
    (i)  the funds were not kept separate as of the date of the execution of the power of attorney; or 
    (ii) the principal commingles the funds after the date of the execution of the power of attorney and the agent is the principal’s spouse.
(2)  Act so as not to create a conflict of interest that impairs the agent’s ability to act impartially in the principal’s best interest.
(3)  Act with the care, competence and diligence ordinarily exercised by agents in similar circumstances.
(4)  Keep a record of all receipts, disbursements and transactions made on behalf of the principal.
(5)  Cooperate with a person who has authority to make health care decisions for the principal to carry out the principal’s reasonable expectations to the extent actually known by the agent and, otherwise, act in the principal’s best interest.
(6)  Attempt to preserve the principal’s estate plan, to the extent actually known by the agent, if preserving the plan is consistent with the principal’s best interest based on all relevant factors, including:
    (i)    The value and nature of the principal’s property.
    (ii)   The principal’s foreseeable obligations and need for maintenance.
    (iii)  Minimization of taxes, including income, estate, inheritance, generation-skipping transfer and gift taxes.

Finally, Section 5601.4(a) limits the power of an agent to take certain actions unless the authority is expressly granted in the POA and is not prohibited by another instrument. The major powers and actions that must be specifically authorized are:  
(1)  Create, amend, revoke or terminate an inter vivos trust other than as permitted under section 5602(a)(2), (3) and (7) (relating to form of power of attorney).
(2)  Make a gift.
(3)  Create or change rights of survivorship.
(4)  Create or change a beneficiary designation.
(5)  Delegate authority granted under the power of attorney.
(6)  Waive the principal’s right to be a beneficiary of a joint and survivor annuity, including a survivor benefit under a retirement plan.
(7)  Exercise fiduciary powers that the principal has authority to delegate.
(8)  Disclaim property, including a power of appointment.
Section 5601.4(b) further limits the exercise of hot power authority by agents who are not in certain family relationship with the principal. However, a Power of Attorney can be written to specifically opt out of these limitations.