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Tuesday, November 29, 2016

Caring for a Loved One - Guardianship, Powers of Attorney and Medical Directives

Holiday gatherings are often a time for us to gather with relatives and friends. The bustle of activity can highlight the impact that aging has had on our loved ones in the passing year. Observing decline in the people we care about can be unsettling and may generate many questions about how to best care for their needs. 

Creating a plan for dealing with problems before they develop, and putting a financial power of attorney and a healthcare power of attorney in place while your loved one is still competent can prevent a lot of misunderstanding, heartache and expense. If a loved one is already at a point where he or she is unable to care for and make good decisions for themselves, and if they are no longer competent to prepare financial and health care powers of attorney, Guardianship is the legal process that you must go through to be able to make decisions for them. 

Without guardianship or comprehensive powers of attorney, you will generally not be able to legally: 

  1.  Authorize their admission or discharge from a hospital or nursing home;
  2.  Hire and fire their doctors or authorize medical treatment; or 
  3.  Use their assets to pay for their expenses and care 

There are two different types of guardianship in New Jersey, the Guardianship of the Person and the Guardianship of the Estate, both of which require court appointment. The same person may serve as both types of guardian and are frequently referred to as Guardianship of the Person and Property. 

Guardianship of the Person allows you to make decisions about where an incapacitated person will live, which doctors will attend to their health, and how their medical conditions will be treated. Guardianship of the Estate allows you to manage the assets and financial affairs of the incapacitated person. In many cases, this means that the primary responsibility of the Guardian of the Estate is to figure out how to best use their loved one’s financial assets to provide care for them for as long as they are in need of it. 

To be appointed as a guardian, you must be able to prove to the court that a person is incapacitated, or unable to govern themselves or manage their affairs. In practice, this means that a person must be unable to make generally rational decisions about their medical care, personal care or finances. The incapacity may be caused by physical illness, mental disability, or chronic use of drugs or alcohol. For example, many of the individuals who seek guardianship are the parents of special needs children who have recently turned eighteen. 

If a person is able to perform some but not all of the tasks necessary to care for himself the guardianship may be limited to the areas where help is most clearly needed. As guardianship is such a powerful appointment, a court will not order it unless it is necessary. A critical part of the procedure to assess the need for a guardian is to require affidavits from two professionals (routinely physicians or psychiatrists) confirming the person’s mental and physical condition. 

You must also provide detailed information about your request to the incapacitated person and their next of kin (frequently their spouse and children, but this could also include their parents, grandparents, siblings, nieces, nephews or grandchildren depending on the situation). These individuals will then also have a chance to participate in the court process and present evidence that may either support or detract from your case. 

The allegedly incapacitated person will also have a person (usually an attorney) appointed on their behalf to help ensure that their voice is heard during the court proceedings and to assist them with resisting the guardianship if that is their desire. If guardianship is awarded, a person seeking guardianship must agree to be a fiduciary of the incapacitated person, which means that they must do what is in the best interests of their ward, even if it conflicts with their own personal interests. 

To help confirm that guardians are honoring that commitment, they must submit an annual report to the Court providing details about how the incapacitated person is doing and how their money has been spent.

Guardianship carries with it a lot of responsibility. Speaking with an estate planning attorney who routinely practices in this area of the law can help you determine if guardianship is worth pursuing and how to accomplish it in a way that will be minimally disruptive for you and your loved one.

Written by: Jessica J. Sauer, Esq. and Kevin A. Pollock, Esq., LL.M.

 “To care for those who once cared for us is one of the highest honors.”-Tia Walker

Wednesday, November 9, 2016

Estate Tax Thoughts on a Trump Presidency

It is no secret that most Republicans and Donald Trump wish to get rid of the federal estate tax (or as it is commonly referred to "The Death Tax").  With Republicans in charge of the House, Senate and Presidency, I think we are very likely to see a full repeal.

Many will counter that George H.W. Bush could not get a full repeal with Republicans in control of all 3 parts of the government.  I will suggest to you that those days are long gone.  There are no more moderate Republicans to push back against a full repeal, and President Trump has an incredibly personal vested interest in keeping his empire intact for his children.

There is a small chance of a filibuster against it, but I still see a strong likelihood that the federal estate tax will be gone by 2018.

Monday, October 24, 2016

NJ Estate Tax Repeal: How Does This Affect You?

It's official.  According to NJ.com, Governor Christopher Christie has signed a a bill to repeal the New Jersey Estate Tax.  The new law is part of a larger package deal that increases the gas tax, reduces the sales tax slightly, gives the working poor a larger tax credit, gives a tax cut on retirement income and gives a tax exemption for veterans who have been honorably discharged.

Under prior New Jersey law, a person may leave an unlimited amount to a spouse or charity. However, any money going to anyone else above $675,000 (the "exemption amount") is subject to an estate tax. This rule will remain in effect for the rest of 2016.  

For calendar year 2017, the estate tax exemption amount for NJ will increase to $2,000,000.  The tax rate will generally start at about 7.2% and go up to 16% on estates over $10,000,000.

There will be a full repeal of the NJ Estate Tax starting January 1, 2018.  

We have confirmed that New Jersey will NOT be repealing its inheritance tax. Accordingly, money that is left to a non-class A beneficiary will still be subject to a tax.  In other words, there will still be a tax if you leave money to anyone other than a spouse, your descendants, your ancestors or a charity upon your death.

So the big question for many might be how does this affect you.  I will break this down into 5 categories:

1) People who have prepared existing estate planning documents;
2) People with assets between $675,000 to $5,450,000 (for individuals) and married couples with assets less than $10,900,000;
3) Married couples with assets in excess of $10,900,000; 
4) Snowbirds; 
5) Widows and widowers who are the beneficiary of a credit shelter trust; and
6) People who wish to consider Medicaid planning.

1) For people who have already prepared their estate plans, most likely this will not adversely affect your plans.  However, the modification of the tax law likely gives you the opportunity to simplify your documents.  In particular, it is common practice in New Jersey to create a trust for a surviving spouse (often referred to as a Family Trust, Bypass Trust, Credit Shelter Trust or A-B Trust) to double the $675,000 exemption among spouses.  

There still may be other reasons to have a trust for a surviving spouse (such as in second marriage situations), but starting 2018, doubling the NJ exemption amount will no longer be necessary.

2) For New Jersey domiciliaries who have assets above $675,000 (the NJ estate tax exemption limit in 2016) and below the federal estate tax exemption limit ($5,450,000 for individuals and $10,900,000 for married couples in 2016), it was a common part of estate planning for a person to make deathbed gifts to minimize the NJ estate tax liability.  Once the NJ estate tax gets repealed, it will generally be much more beneficial for a person to keep all of their assets until their death rather making substantial gifts during lifetime.

Until 2018, deathbed gifting can be very tax efficient because New Jersey has an estate tax but it does not have a gift tax.  Accordingly, there is the opportunity to substantially minimize the estate tax.  The problem however, is that many people make the mistake of gifting substantially appreciated assets such as stock or real estate. You often want to keep appreciated assets until death to obtain a step-up in basis.   

So before you make a gift, you would need to weigh the potential NJ estate tax consequence of keeping an asset versus the potential capital gains tax if an asset is sold after the gift is made.

Now with the repeal of the NJ estate tax, unless a person is likely to die prior to 2018, you don't need to worry about making the calculation as to whether the NJ estate tax or the capital gains tax will be higher.  It will almost always be better to keep the asset.

3) For married couples with assets in excess of the federal estate tax exemption amount, I have read a number of studies that indicate that a couple can usually transfer wealth in a more tax efficient manner by establishing a credit shelter trust for the surviving spouse rather than relying on portability.  

There are few reasons why wealthier clients may want to continue to use traditional credit shelter trust planning.  The first is that while the estate tax exemption is portable, the generation skipping transfer tax (GST Tax) is NOT portable to a surviving spouse.  Many wealthy clients often wish to make sure the money goes not just to their children, but also to more remote descendants.

Another benefit to traditional credit shelter trust planning is that it acts as freeze for the assets inside the trust.  Specifically, let's assume that we have a married couple with exactly $10,900,000.  If we put half of those assets in trust on the first to die, then regardless of how much that goes up or down, it passes tax free on the surviving spouse's death.  So if the value of the trust goes up at faster rate than the inflation adjustment on the exemption amount, the beneficiaries are basically saving about $0.23 on the dollar because the estate tax is a 40% tax and the capital gains on the appreciation is only taxed at 23%.

While none of this planning will be different after the NJ Estate gets repealed compared to now, it makes the planning much easier to justify because right now we have a dilemma as to "HOW MUCH" we fund the credit shelter trust with.  To avoid any tax on the first to die, a credit shelter trust can only be funded with $675,000.  For some, this hardly makes it worth setting up. However, as the estate tax in NJ goes away, we no longer have this concern.

4) For snowbirds and other people who wish to avoid a "death tax", very simply, starting 2018 the tax incentive to move will be dramatically reduced.  Back in 2009, I wrote a post discussing the tax benefit of relocating to Florida.  Once the NJ estate tax gets repealed, for many it will make little difference from a tax perspective where their domicile is.

That being said, there are still significant differences between being domiciled in New Jersey vs. Florida.  After all, if you own real estate in both places, you still will need to pay property tax in both locations.  The biggest differences that people should be aware of are:

  • Florida does not have a state income tax, whereas NJ does.  (Note NJ will start exempting a substantial portion of retirement income from the state income tax); 
  • Florida property has homestead protection only if you are a domiciliary of Florida.  This can provide asset protection and it usually stops the property tax from increasing; and
  • NJ is keeping its inheritance tax.  So if you plan to leave your assets to nieces, nephews, friends or other non-class A beneficiaries, there could be a substantial tax savings upon your death.

5) If you have a husband or wife who passed away leaving money to you in trust, come 2018 it may be beneficial to consider options for terminating the trust.  Imagine a scenario where husband dies in in 2004 leaving $675,000 in a credit shelter trust (often called a Family Trust or Bypass Trust) for his surviving spouse.  It is likely that these assets in trust have appreciated to over $1,000,000.  If these assets stay in trust until the surviving spouse's death, it will not receive another step-up in basis.  However, if the trust is terminated and assets are distributed to the surviving spouse after 2018, it could be very beneficial from a tax perspective.  

There are many caveats to this plan.  First, you would not want to terminate the trust if the first spouse to die wanted to protect the money in trust for his/her surviving children - so you would not want to terminate the trust in second marriage situations.  Second, you may not want to terminate the trust if the surviving spouse has substantial assets or debts.  It may also not be beneficial to terminate a trust if the value of the trust assets have gone down in value.  

Nevertheless, it would be advisable to consider terminating a trust to make life easier for the surviving spouse and avoid the hassle of having to file an extra income tax return for the trust. 

Please note that a trust can only be terminated if the trust allows it, so you should have the trust looked at to see if the document allows the trust to be terminated.  If the trust does not allow for termination, consider whether it should be modified under the New Jersey Uniform Trust Act.

6) While I don't do Medicaid planning, I do engage in tax planning, and tax planning just got much easier.  The problem with Medicaid planning is that there is so much bad information out in the public sphere.  

I frequently get clients with millions of dollars who want to do Medicaid planning.  They don't realize that to do this type of planning, they actually need to give away most of their assets.  This might work well with someone who has a few hundred thousand dollars.  However, the more money you have, the less sense it usually makes to do this type of planning.

For example, if you have a $500,000 IRA, stock with a basis of $100,000 and worth $400,000, and a house with a basis of $50,000 and now worth $600,000, let's talk about the tax impact of most Medicaid planning.  In order to "give away" everything to qualify for Medicaid (a total of $1.5M here), the person would have to withdraw their entire IRA, causing a federal and state income tax of over $175,000.  Additionally, the transfer of the stock and real estate now would be subject to a built in capital gains of $850,000, resulting in about another $175,000 in capital gains taxes when sold.  

All told, this planning will likely cause about $350,000 in taxes.  This does not even factor in the planning fees and the loss of opportunity to grow the IRA in a tax deferred form.  At $10,000/month in a nursing home, that is about 3 years in a nursing home.  According to the non-profit Life Happens, the average stay in a nursing home is almost 2 and half years and about 70% of the population winds up spending some time in a nursing home.  A $350,000 tax could have paid for 3 years of nursing care home... and in a non-Medicaid facility.  

Prior to the change in the estate tax law, an argument could be made that the increase in income taxes was somewhat offset by a decrease in estate taxes. Until the end of 2016, with an estate of $1.5 million, there was the potential estate tax of over $60,000.  Repeal of the estate tax obviously changes the equation.  Under the new tax law, it is generally more prudent to keep assets in your name rather than giving them away ahead of time.  So while Medicaid planning can certainly be appropriate for some, the larger your estate, the less financial sense it makes to engage in this type of planning.  

Friday, October 7, 2016

The NJ Estate Tax is Repealed! Almost.

According to NJ.com, effective October 7, 2016, the New Jersey Legislature has approved a bill that will repeal the New Jersey estate tax.  We are only awaiting the signature of Governor Christopher Christie before the law is enacted, and rumor is that he has promised to sign the bill.

Under current New Jersey law, a person may leave an unlimited amount to a spouse or charity. However, any money going to anyone else above $675,000 is going to be subject to an estate tax. This rule will remain in effect for the rest of 2016.  This is known as the exemption amount.

For calendar year 2017, the exemption amount for NJ will increase to $2,000,000.  The tax rate will generally start at about 7.2% and go up to 16% on estates over $10,000,000.

There will be a full repeal of the estate tax starting January 1, 2018.  

The new law is part of a larger package deal that increases the gas tax, reduces the sales tax slightly, gives the working poor a larger tax credit, gives a tax cut on retirement income and gives a tax exemption for veterans who have been honorably discharged.

We have confirmed that New Jersey will NOT be repealing its inheritance tax. Accordingly, money that is left to a non-class A beneficiary will be subject to a tax still.  In other words, there will still be a tax if you leave money to anyone other than a spouse, your descendants, your ancestors or a charity.

Saturday, October 1, 2016

New Jersey Estate Tax Deal

According to various news reports, it appears that New Jersey will officially be eliminating the estate tax.  The deal to eliminate the estate tax is part of a larger deal that increases the gas tax, reduces the sales tax slightly, gives the working poor a larger tax credit, gives a tax cut on retirement income and gives a tax exemption for veterans who have been honorably discharged.

The exact details are still murky, and as far as I am aware the final deal hasn't been published.  It is my belief that the estate tax exemption will increase from $675,000 to $2,000,000 effective January 1, 2017 and be phased out completely over the next few years.

I have not yet heard any reports regarding whether or not the NJ inheritance tax will also be eliminated.  As I learn more, I will pass it on.

Informative news articles can be found here and here.

Sunday, September 11, 2016

Social Security After Death

One of the first questions we are asked is “do I have to do anything about Social Security”? Here are some important things to know if a decedent was receiving SSA benefits at the time of passing:


Normally the funeral director will contact Social Security to report a person’s death if you give them the decedent’s social security number, but family members and personal representatives can also report the information directly to the SSA by calling 1-800-772-1213. The most important thing is to make sure SSA records reflect the correct information. Check out SSA Death Master File and familysearch.org

FYI - Reporting cannot be done online.

Survivor Benefits
Surviving spouses (and in some cases ex-spouses) and children are entitled to different types of survivor benefits:
1) If you are already receiving social security benefits on behalf of decedent, you are eligible for:
     a) A one-time survivor benefit of $255 (surviving spouse or children), which can be automatically processed;
     b) Continuation of benefits – Payments should be automatically be changed to survivor benefits;
No new application is required for benefits and you do not need to go to a local Social Security office.

2) If you are not receiving social security benefits on behalf of decedent AND/OR you are receiving your own benefits, you are eligible for:
     a) A one-time survivor benefit of $255 (surviving spouse or children), which must be applied for within 2 years of death and is NOT retroactive to DOD(*);
     b) New survivor benefits – You need to submit an application to the local SSA office

You will need to go to the local SSA office and take with you a certified copy of the death certificate as well as proof of your relation to the decedent (e.g. your birth certificate, marriage certificate). You might be able to make the application over the phone but this can be a long, slow process; SSA calls are often answered by volunteers who pass along your contact information to a representative for call back later. Whether you apply in person or over the phone, be sure to have your banking information available if you want the benefits direct deposited.See "How to Find Your Local Office" service at www.ssa.gov, or call the SSA, toll-free, at 800-772-1213

FYI – Application for benefits cannot be done online.

IMPORTANT: Don’t wait to apply for benefits! With limited exception, the SSA won’t pay you for the period prior to the date you made the application. i.e. if you waited 6 months after the date of death to apply, you won’t likely be able to recoup the benefits that could have been paid during that 6 month period.

Decedent Benefits and Reclamation
It’s just one week after your mom’s passing - you’re looking at the bank statement for her checking account and notice that her direct deposit social security payment was auto-deducted after she died. Now what?

Social Security payments are:
· Retroactive i.e. a payment made in August represents the benefit due for July
· Paid on specific days of the month according to a person’s birthdate and/or the types of benefits received. Click here to see the Schedule for Social Security Benefit payments
· Not pro-rated. In other words, a person is only entitled the monthly benefit only if she was alive for the full month.
· Subject to automatic reclaim. Monthly benefits that are direct-deposited to a decedent’s bank account will be automatically reclaimed if the Treasury Department determines the decedent was ineligible for the benefit. (Direct deposit is required for all SSA applicants after March 1, 2013, and for anyone receiving benefits as of that date. Direct Express card is another payment option)

Example #1:
Mom died July 15, 2016. Social security payment was deposited August 2, 2016. Mom did not live for the full month of July, so the payment will be auto-reclaimed. (If by chance you’ve acted quickly enough to close the account and withdraw the funds prior to the Treasury reclaiming the benefit, you cannot keep the money; Mom was not entitled to the benefit and the government will absolutely want it back. You will need to reimburse the government via check sent to your local Social Security office. ) 

Example #2:
Mom died August 10, 2016. Social security payment was deposited August 2, 2016. Mom lived for the full month of July so payment can be kept. If a deposit is made in September (representing the August benefit), the September payment will be reclaimed because Mom did not live for the full month of August.

Example #3:
Same scenario as Example #2, Mom died August 10, 2016 and Social security payment was deposited August 2, 2016. However, even though your mom was eligible for the benefit, it is later auto-deducted on August 15, 2016 which you believe to be in error. A family member or personal representative of Mom’s estate can apply for payment using Form SSA-1724

Example #4:
Mom died August 10, 2016 and her checking account was closed on August 20, 2016. Mom lived for the full month of July and is entitled to the July benefit, but the Social security payment which should have been deposited Wednesday, August 23, 2016 (DOB April 27) was not received. A family member or personal representative of Mom’s estate can apply for payment using Form SSA-1724.

Example #5:
Mom died July 15, 2016, a deposit was made August 10, 2016 and it is now December and no reclamation has occurred.

120-day Rule: It’s possible that the bank itself properly contested the reclaim. SSA has 120 days to submit a request for reclaim from the date it receives notification of date of death and sends a “death notification entry”. While this is the rule, it’s best to double-check with the bank directly to confirm that is the case – it could be that the bank simply hasn’t responded to the request and is sitting on money that should be returned.

Written by Elizabeth C. Ketterson, Esq. Elizabeth is a Senior Associate at the Law Office of Kevin A. Pollock LLC and helps to run the Estate and Probate Administration Department at the firm.

Monday, August 29, 2016

Income Taxation of Trusts - Determining Which State Can Tax the Trust

Determining the situs of a trust (i.e. the residence of a trust) is not always an easy matter.  Each state has its own rules regarding whether a trust is a "Resident Trust", and often these rules are different from the tax rules, and in some states these rules have been challenged in Court as unconstitutional, where the taxpayer has prevailed, but yet the "unconstitutional rule" is still on the books.

This brings us to the wonderful worlds of New Jersey and Pennsylvania.  (Although I am sure a challenge is coming to New York soon.)

Let's take four different situations:
1) A NJ Resident Trust;
2) A Non-Resident NJ Trust;
3) A PA Resident Trust; and
4) A Non-Resident PA Trust.

In situation 1, a Trust is considered a NJ Resident Trust for state income tax purposes, and must file Form NJ-1041, if:
a) The Trust consists of property transferred by a NJ decedent via his/her Will;
b) If a NJ person gifts property to an irrevocable trust; or
c) If a NJ person owns assets in a revocable trust dies and now the trust is irrevocable.

It is important to note that an irrevocable trust is NOT considered a NJ Resident Trust if it was created in another jurisdiction even if all the trustees and beneficiaries are now NJ residents unless the trust situs is changed to New Jersey.

Moreover, even if the trust is considered a NJ Resident Trust, it is NOT subject to New Jersey income tax if:
a) It does not have any tangible assets in NJ;
b) It does not have any income from NJ sources; AND
c) It does not have any trustees who are NJ residents.

It is probably worth creating a separate post on what it means for a person to be domiciled in a particular state, but for now, let's say that it is clear that a person has fixed, permanent home in New Jersey.

All of the above can be gathered simply by looking at the instructions for NJ Form-1041.  However, what happens if the Trustees and beneficiaries move out of state?  Can NJ still tax the entire trust if only a portion of the income is attributable to NJ?  In 2013, the Tax Court of New Jersey decided in Residuary Trust A under the Will of Fred E. Kassner, Michele Kassner, Trustee v. Director, Division of Taxation, that New Jersey could not impose a tax on undistributed income generated by the trust simply because the Trust owned an S-Corporation created in New Jersey when the Decedent was a New Jersey domiciliary, but the Trustee was located outside of NJ and all of the other assets of the trust were located outside of NJ.

Specifically, the Court stated that the due process clause bars NJ from taxing undistributed income of a trust to the extent the trustee, assets and beneficiaries are outside of New Jersey, citing Pennoyer v. Taxation Division and Potter v. Taxation Division.

So, even if a trust is considered a NJ Resident Trust, it does NOT mean it will actually be subject to NJ income tax.

In situation 2, a Non-Resident NJ Trust, which can best be described as any trust that is not a NJ resident Trust, is only subject to NJ income tax to the extent the trust has income from NJ sources, such as a NJ business, real estate or gambling winnings.  (Although hopefully your trustee is not actually gambling!)

With respect to Situation 3, the rules for determining whether a Trust is a PA Resident Trust are almost identical to New Jersey.  However, where NJ had some clear exclusions whereby a trust was not subject to the NJ income tax, PA tries to tax all income if there was a resident trust.  This can be a big problem if you have a PA grantor of a Trust or a PA decedent where following the creation of the trust, the Trustees and the beneficiaries are all out of state.

Now, all is not lost as there was very recently an important case, McNeil vs. Commonwealth of Pennsylvania, in which the Court decided that Pennsylvania did NOT have the right to tax the income of a trust, which was created by a PA Grantor, when the trust was created in another jurisdiction, the Grantor had died, the Trustees where located outside of PA, and the only connection to PA where some discretionary beneficiaries that had not in fact received any income.

Pennsylvania seems to have acquiesced considerably in this decision.  While they still say "Resident Trusts" are subject to PA income tax and must file the PA Form 41, the instructions on that form, Pennsylvania allows a Resident Trust to be converted to a Non-Resident Trust by change the trust situs if it lacks sufficient nexus to PA.  It appears that the Trustees must follow certain steps to do this, but once done, the trust will no longer be subject to PA income tax.  (See page 3 of the form and 20 PA Code Section 7708.)

With respect to Situation 4, if there is a PA Non-Resident Trust (basically a trust that was not created by a PA resident), PA generally takes the position that the Trustee must only file a tax return in PA if the trust has PA source income or if there is a resident beneficiary.  The requirement to file the return when there is a resident beneficiary is new and particularly problematic because the requirement to file is true EVEN IF THE TRUST MAKES NO DISTRIBUTION TO THAT BENEFICIARY.

Importantly, the failure to file the PA-41 (Income tax return for a PA Trust) can trigger interest and penalties as high as 50%.

Sunday, June 12, 2016

Is NJ finally going to repeal the Estate Tax and the Inheritance Tax?

I tend not to get too excited about any legislation until it is actually signed, but there is a fair amount of rumbling from both Republicans and Democrats about repealing the NJ Estate Tax.  The NJ Transportation Trust fund is running out of money, and Governor Christie has refused to sign any deal to increase the tax on gasoline without a corresponding tax cut somewhere else.

According to various sources, including this article on www.nj.com, lawmakers are close to finalizing a deal to raise the gas tax by $0.23/gallon in exchange for a 4-5 year phaseout both NJ's estate tax and inheritance tax.

Part of the proposed deal would also include a reduction on income tax on retirement money for people earning less than $100,000, an increase in the tax credit for the working poor and an increase in the deduction for charitable gifting.

It is important to note that they are trying to get a deal together by the end of the month to fund the Transportation Trust Fund.   Despite support from both Republican and Democratic senate members, a Chris Christie veto is expected (presumably because he does not think it cuts enough taxes)... that's why I'll believe a deal when I see it.

Monday, May 23, 2016

Trouble with Banks Accepting a Power of Attorney - Florida

As I've written in my last two posts, more and more Banks have been routinely rejecting Power of Attorney forms drafted by attorneys in New Jersey.  Obviously this irks me enough to write about it in three consecutive posts.

Apparently, this practice is not as common in Florida, and banks do so at their own peril after a Florida Court of Appeals awarded attorney fees against an insurance company for refusing to accept a person's power of attorney in Albelo v. Southern Oak Insurance Co.  This is because under Florida Statute 709.2120, no third party can unreasonably reject a valid power of attorney.

For a nice summary of the topic, please see David M. Goldman, Esq.'s post in his Florida Estate Planning Lawyer Blog.

Thursday, May 19, 2016

Banks Required to Accept a Power of Attorney Under NJ Statutory Law

Yesterday I wrote a post about how banks are routinely refusing to accept powers of attorney.  I thought this statute may be helpful to people who may need to argue with the banks (at least in NJ anyway):

N.J.S.A 46:2B-13.    Banking institutions to accept power of attorney      4.   With respect to banking transactions, banking institutions shall accept and rely on a power of attorney which conforms to this act and shall permit the agent to act and exercise the authority set forth in this act, provided that: 

   a.   The banking institution shall refuse to rely on or act pursuant to a power of attorney if (1) the signature of the principal is not genuine, or (2) the employee of the banking institution who receives, or is required to act on, the power of attorney has received actual notice of the death of the principal, of the revocation of the power of attorney or of the disability of the principal at the time of the execution of the power of attorney; 

   b.   The banking institution is not obligated to rely on or act pursuant to the power of attorney if it believes in good faith that the power of attorney does not appear to be genuine, that the principal is dead, that the power of attorney has been revoked or that the principal was under a disability at the time of the execution of the power of attorney.  The banking institution shall have a reasonable time under the circumstances within which to decide whether it will rely on or act pursuant to a power of attorney presented to it, but it may refuse to act or rely upon a power of attorney first presented to it more than 10 years after its date or on which it has not acted for a 10-year period unless the agent is either the spouse, parent or a descendant of a parent of the principal; 

   c.   If the power of attorney provides that it "shall become effective upon the disability of the principal" or similar words, the banking institution is not obligated to rely on or act pursuant to the power of attorney unless the banking institution is provided by the agent with proof to its satisfaction that the principal is then under a disability as provided in the power of attorney; 

   d.   If the agent seeks to withdraw or pay funds from an account of the principal, the agent shall provide evidence satisfactory to the banking institution of his identity and shall execute a signature card in a form as required by the banking institution; 

   e.   If the banking institution refuses to rely on or act pursuant to a power of attorney and the agent or principal has, in writing, provided the banking institution with an address of the agent, the institution shall notify the agent by a writing addressed to the address provided to it that the power of attorney has been rejected and the reason for the rejection; 

   f.   The banking institution has viewed a form of power of attorney which contains an actual original signature of the principal. Alternatively, if the banking institution receives an affidavit of the agent that such an original is not available to be presented, the banking institution may accept a photocopy of the power of attorney certified to be a true copy of the original by either (1) another banking institution or (2) the county recording office of the county in which the original was recorded. 

   L.1991,c.95,s.4; amended 1994,c.142,s.2.  
46:2B-14.    Banking institutions not liable for action in reliance on power of attorney       No banking institution acting in reliance on a power of attorney as set forth in this act, nor any person acting on behalf of such an institution, shall be held liable for injury for any act or omission if it is performed in good faith and within the scope of the institution's or person's duties, unless the act or omission constitutes a crime, actual fraud, actual malice or willful misconduct.  

Wednesday, May 18, 2016

Growing Problem of Banks refusing to Honor a Financial Power of Attorney

Please be advised that more and more banks are refusing to accept any financial power of attorney other than their own form.  This may not be a huge problem if you are still competent, but if you become incapacitated later and have not sign the "Bank approved form", it could make life very difficult for your agent to act on your behalf.

I recently ran in to this problem with a client and it took a long time to straighten out.  Also, I just came across this excellent article in the New York Times written by Paula Span on the topic. I strongly suggest reading it as it details how widespread the problem is and offers some helpful solutions.

I do note that, to date, the banks have tended to back down if you approach the managers and legal department.   Unfortunately, hiring an attorney to fight that fight may cost the client a fair amount in legal fees.  Another approach, if you are politically connected, is to get your ombudsman involved.

As a result of these news, I tend to be advocating Revocable Living Trusts even more.  Unfortunately, that won't help if the client has an IRA or other retirement account.  I'm interested in hearing how others are dealing with this problem.

Wednesday, May 11, 2016

Estate Planning and Divorce in New Jersey

Men and women who are contemplating a separation or divorce have unique needs. Some divorces are very friendly and you can still count on your soon-to-be ex, but in most other situations, you may find that you rethink many aspects of your life, including where you wish your assets to go should something happen and who you can trust. 

Accordingly, it is essential to update your estate planning documents.  This should be done:
  1. To ensure that someone trust-worthy will be able to make medical and financial decisions for you in the event that you are incapacitated; 
  2. To prevent your soon-to-be-former spouse from receiving all of your assets; and 
  3. To give you as much control as legally possible over how your children or any embryos created during infertility treatments will be taken care of and provided for in the event that you pass away.
The less trust-worthy your spouse is, the more important it will be that you take action to protect yourself (and your children). To help you get safely through this time of transition, you should consider creating:   
  1. A Will. If you are married and die without a Will, your spouse would generally be entitled to 100% of your estate. However, if even if you are still married you are generally permitted to leave your assets to whomever you wish if you write a Will.  Most people think that your spouse may still be entitled to a third of your estate (the “elective share” under N.J.S.A. 3B:8-1), but the statute contains many exceptions which typically allow you to completely cut out your soon to be ex. This is because the elective share statute requires that at the time of death the decedent and the surviving spouse must not have been living separate and apart in different habitations, they must still been cohabiting as spouses and not under circumstances which would have given rise to a cause of action for divorce or nullity of marriage to a decedent prior to the decedent's death.
  2. An Advance Directive for Health Care/Health Care Power of Attorney. This will allow you to control who will make medical decisions for you if you are unable to make them for yourself, helping to ensure that your wishes will be achieved. For example: would you want the person you are divorcing to be able to make decisions about your medical care and whether or not to remove life support, or would you want this decision to be made by a relative or close friend?
  3. A Financial Power of Attorney. This will allow your agent to use your money to pay for your medical bills, attorney fees connected to your divorce, and potentially take action to do anything else needed for your benefit. Depending on how this document is structured, it can take effect as soon as you sign it, so that a trusted friend, relative, or financial services professional can help you through this stressful period. The divorce process is a stressful one and often brings with it a slew of new responsibilities and challenges. This document can allow you to outsource emotionally-difficult tasks such as selling your marital home and managing the transition of your assets from joint to separate accounts while you focus on making the big decisions, attending court, and adjust to life as a single parent. This document can also prove invaluable if symptoms of anxiety and depression (which can often be triggered by major life events) set in and you become unable to manage your affairs. Being proactive and creating a plan for dealing with your responsibilities can help make your daily life easier and more manageable during this difficult time. 

Speaking with an estate planning attorney can help you better understand your options and create the best possible plan when preparing for challenging circumstances.  

Written by: Jessica J. Sauer, Esq. & Kevin A. Pollock, Esq., LL.M. 

Tuesday, May 3, 2016

Reasons to Value a Trust

Recently I gave a lecture on the valuation of trusts.  While I am not an accountant nor am I a valuation expert, I live and breathe trusts... and frequently the question comes up, what is value of a particular beneficiary's interest in a trust.

Keep in mind, just because a trust is worth $1M, it does not mean that the beneficiary's interest is worth $1M if they have limited rights to invade the trust or control it.  Here's are a few reasons to value a trust:

  1. When a person dies, that person may have a beneficial interest in a trust.  Depending upon the type of interest a person has, it may or may not be includible in his/her taxable estate.  If the interest is includible in the deceased beneficiary's taxable estate, then the executor of the deceased beneficiary must report it on federal and state estate tax returns. 
  2. Similar to the above, but slightly different, when a person dies, he or she may leave a beneficial interest in a trust to another person.  Particularly in New Jersey and Pennsylvania, you see this come up a lot when a person leaves money to a class A beneficiary in trust (such as a spouse), and then the remainder interest to an non class A beneficiary (such as a nephew or niece).  This triggers something known as the Compromise tax.
  3. Financial Aid - Some colleges and schools will look at the trust terms, others won't.  Each school is different regarding the questions they ask on their forms.
  4. Divorce.  Depending upon the state, a person's interest may be subject to equitable distribution, alimony and especially child support.  
  • New Jersey tends to be fairly friendly to a trust beneficiary.  See Tannen vs. Tannen, where the Appellate Court ruled that a beneficiary's income interest should not be imputed for purposes of alimony.  The general rule was already that such an interest was not subject to equitable distribution.  (NOTE:  This case law is likely to be challenged in light of the fact that NJ recently enacted the Uniform Trust Act
  • Pennsylvania is far less friendly to trust beneficiaries.  The general rule in Pennsylvania is that marital property does not include trust property acquired by gift, bequest, devise or descent prior to or during the marriage, but it does include the increase in value of such property. See 23 Pa. Cons. Stat. 3501(a.1)   
  • As far as I am aware, both Florida and New York follow the NJ rule and generally considers trust property as separate property, not subject to equitable distribution.  
  • Massachusetts recently came down with a terrible case:  See Pfannenstiehl.   (Note: I'm not licensed in MA)
Regardless of the reason why you need to value a trust, the first step in determining the value is to figure out what type of interest that person has.  Usually a beneficiary's interest includes one or more of the following:

  • An income stream
  • The right to receive income or principal for health, education, maintenance and support
  • An annuity stream (such as $2000/month)
  • Principal distributions once the beneficiary reaches a certain age
  • The right to take out $5000 or 5% per year
  • A discretionary interest
Once you have figured out a person's interest in a trust, the next step usually involves hiring a certified appraiser to figure out the value of a person's interest. A trust attorney can assist the appraiser by advising them on the nuances of the trust and not-so-obvious options that a person may have in invading a trust.  

If you are the beneficiary of a large trust, I would recommend that you have the trust reviewed to see if you should disclaim and renounce certain powers to minimize taxes upon your death.  

Friday, April 29, 2016

News and Updates

It's been a busy few weeks, and as I sit here in my desk at 7 o'clock on a Friday, I just wanted to take a moment to make a few announcements.

First, effective today, Franklyn Z. Aronson, Esq., who has been Of Counsel to our firm, is retiring. Frank, thank you for all your advice these last few years and I wish you all the best in retirement... although I know we will see you around the office quite a bit!

Second, I wish to welcome Jessica J. Sauer, Esq. as an associate to our firm.  She will be joining us in the estate planning department and also assisting on guardianship matters.

Third, Pierson W. Backes, Esq. will be officially joining our firm as Of Counsel in the estate litigation department.  As many of you know, Pierce and I have worked closely together for years, mostly with me working as Of Counsel to his firm with respect to estate planning matters.  Lately, we have had more and more contested probate matters and trust litigation cases, and I am confident he will be able to assist our clients in these matters.

Fourth, I wish to thank my wife, Asako, for all of her hard work over the past few months in getting our new website, www.Wills-Trusts.net, up and running.  Please let me know what you think and if there are any suggestions you might have.

Monday, April 4, 2016

New Jersey Enacts Uniform Trust Code into Law

While this may not sound like big news, it is actually very exciting that New Jersey has finally enacted the Uniform Trust Code (UTC) into law.  The new law will go into effect on July 17, 2016.  When it does, New Jersey will join Pennsylvania, Florida and a majority of other states in adopting most of the provisions of the UTC.

What does this mean for you though?  For the most part, if you have have a trust and have ever said to yourself, "The trustees and beneficiaries all agree this is outdated and certain provisions should be modified", this law is for you!

The best part about the UTC is that it makes it easier to modify a trust without going to court to have it amended.  There are obviously certain limitations, but simple things are much easier including:
1)  like moving the trust from one jurisdiction to another;
2)  interpreting confusing terms of a trust;
3)  approving the resignation of a trustee;
4)  appointing a new trustee
5)  granting or removing a trustee power; 
6)  determining trustee compensation; 
7)  approving an accounting; 
8)  terminating a trust (if not inconsistent with terms of trust); 
9)  reforming mistakes; and
10)  allowing a parent to bind minor children and unborn children if there is no conflict of interest.

Some other interesting provisions in the new law include:
1)  Even if a trust says that a beneficiary is not to be told about a trust, the Trustee must respond to the requests of certain beneficiaries and give them a copy of the trust document and other information related to the administration of the trust.
2)  It clarifies some of the terms of trusts for animals/pets.
3)  It clarifies the time-frame for a person to contest the validity of a trust.
4)  It clarifies to what extent and how a trustee can rely on financial advisers.

The new law, while effective starting on July 17, 2016, will apply to all trusts, whenever created.  This does not necessarily mean if you have a trust that you need to amend it.  However, some people may want to amend the trusts as soon as possible if:
1)  You really want to restrict your heirs from having the ability to modify the trust; or
2)  You have a split interest charitable trust based in New Jersey (although it is unclear if the charity or the Attorney General of NJ will consent to this); or
3)  You know that the trust document has a mistake and you'd rather try to convince the people alive now to fix it than wait for the next generation.

Tuesday, March 29, 2016

Requirement of Executors to Report Basis of Assets When Administering an Estate - FollowUp

The IRS has released new regulations that have extended the due date for filing Form 8971 to March 31, 2016.  Executors and administrators of estates that are required to file a federal Form 706 Estate Tax Return are now also required to file Form 8971 and report the basis of the assets included in the estate to the beneficiaries of the estate.

As discussed in my post on February 7, 2016, the IRS is trying to consistently tax assets for estate tax and capital gains tax purposes.  Requiring executors to supply this information to beneficiaries and the government is their attempt to better track this information.  

Additionally, there was an open question as to whether all estates had to file the Form 8971 or just those that were over the federal estate tax exemption threshold.  According to this publication from Bessemer Trust, the IRS has issued regulations that state that if you are filing a form 706 merely to elect portability, you do not also need to file form 8971. 

Thanks again to Abby Moller for bringing this to my attention 

Sunday, February 7, 2016

IRS Releases Form 8971 - Executors Now Required to Report Basis of Assets When Administering Estate

For many years the IRS and beneficiaries of estates had a problem figuring out how much gain should be imposed on an inherited asset because the beneficiaries did not know the basis.  The IRS did not like the fact that frequently the value reported by an Executor was not the value reported by a beneficiary when an inherited asset was sold.   
Accordingly, the government enacted Internal Revenue Code Section 1014(f) and is requiring that any estate which is required to file an estate tax return (Form 706) also file Form 8971 (including all attached Schedule(s) A), retro-active to decedents who died after July 2015. The executor must also provide Schedule A to each beneficiary receiving assets from the estate. Both requirements must be met within 30 days after the date on which Form 706 is required to be filed with the IRS, or the date that is 30 days after the date Form 706 is filed with the IRS, whichever is earlier. 
Notice 2015-57 has made February 29, 2016 the due date for all Forms 8971 (including all attached Schedule(s) A) required to be filed with the IRS after July 31, 2015, and before February 29, 2016. Penalties may be imposed for failure to comply with this new filing requirement.
If an estate is not required to file a Form 706, then there is no corresponding requirement to file a Form 8971.  However, it is probably good practice for the executor to advise the beneficiaries of the value of assets as determined on a decedent's date of death so that everyone knows what the new basis is in the inherited assets. 

Instructions for Form 8971 can be found here: https://www.irs.gov/instructions/i8971/ch01.html

I note that there are a number of important items that are not clear:
1)  Does Form 8971 need to be filed when an estate files Form 706 for purposes of porting the DSUE of a deceased spouse. Accordingly, until we receive clarification, it would probably be best practice to do so.

2) Which beneficiaries should actually receive a copy of the Form?  For example, it would make sense to give the form to the beneficiaries of a trust.  It would make more sense to give it to the trustee of a trust.

3) Form 8971 asks "Did this asset increase the estate tax liability?"  I am a little unclear on what this actually means.  I would think that you should pretty much always answer yes to this question.  However, I have heard one commentator state that this really muddies the waters because theoretically assets that qualify for the Marital Deduction, Charitable Deduction, or other similar deductions do not increase the estate tax liability.  Nevertheless, I do not believe the IRS now saying we don't get a step up in basis for those assets.  I believe this is primarily to identify non-qualified preferred stock options and potentially negative value assets.  After all, it would be shocking for the IRS to say that assets passing to a spouse do not receive a step up under the normal 1014 basis rules.  If I here otherwise, I will be sure to let you know... and join in the revolt against the politicians!

4) What about situations where a beneficiary is actually allowed to have a basis higher than a decedent's date of death value?  Examples of this potentially include:  situations where a beneficiary gifted away an asset within one (1) year of death, where a decedent dies owning an interest in a partnership or limited liability company subject to a debt, or real estate subject to a non-recourse debt. 

The American Bar Association Taxation Section has submitted a letter to the IRS requesting clarification of many of these items.  I hope we will all hear a response soon.

Updated 3/23/16 - Thanks to Abby Moller for finding a few typos in this article. Additionally, she has advised me that apparently you do not need to file Form 8971 just for purposes of portability.  I will try to find additional support for this.

Friday, January 8, 2016

Do I Need An Attorney To Prepare A Simple Will?

I occasionally get asked if it is really necessary to hire an attorney to prepare simple estate planning documents.  Usually, the answer is NO, however, I find that once I start asking a few questions, most people really don't need a simple Will and they would be much better served with professional guidance.

Let me take you through some of the questions that I ask to determine whether it is worthwhile to engage legal counsel:

1) Do you have children from a previous marriage?  If so, I strongly recommend that you hire an attorney.
2) Do you minor children?  Most likely you would benefit from professional advice.
3) Are you wealthy?  If you have less than $300,000, I would say you probably would not need an attorney. Between $300,000 - $500,000 is maybe.  Between $500,000 to $2,000,000 is probably.If you have over $2,000,000, I strongly recommend that you hire an estate planning attorney with a masters in taxation.
4) Do you wish to leave money to a person with special needs child, drug/alcohol problems, going through divorce, bad with money or might otherwise require special instructions?  If so, I strongly recommend that you hire an attorney.
5)  Are you leaving money UNEQUALLY to your children or are you cutting out one of your next of kin?  If so, I strongly recommend that you  hire an attorney.
6)  Do you have concerns that your next of kin might fight over your inheritance?   If so, I strongly recommend that you hire an attorney.
7)  Do you plan to leave more than a token amount to charity?  If so, I strongly recommend that you hire an attorney with a masters in taxation.
8)  Do you plan to leave different types of assets to different people?  (For example, a business to one child, one piece of real estate to another child, and an IRA to a third child)  If so, I strongly recommend that you hire an attorney.
9)  Do you intend to leave money to a pet?  Yes - serious question for some and if you do, I recommend using an attorney.
10) Do you own any unusual items that have value (such as artwork, intellectual property, family heirlooms)?  If so, you probably wish to hire an attorney.
11) Do you own assets in more than one jurisdiction?  If so, I recommend using an attorney.
12) Are you elderly and worried that you may need to spend significant time (over 2 years) in a nursing home?  Then you should probably meet with a Medicaid attorney.
13) Where do you live?  In some states, probate is an absolute nightmare, so even with a small amount, you might wish to hire an attorney to help you avoid probate.

So what do I consider a simple situation?  Generally it is a person who has less than $300,000 of traditional assets, has responsible adult children who all get along, and the testator wishes to leave everything outright to those children in a probate friendly state.  Most others could basically save time or money with professional advice.