Benefit of a Life Insurance Trust after the Repeal of NJ Estate Tax

As we get closer to the repeal of the New Jersey Estate Tax on January 1, 2018, it is important to remember that New Jersey has NOT gotten rid of its inheritance tax.  Accordingly, if you wish to leave money to brothers, sisters, nieces, nephews, friends or a significant other (besides a spouse) and if you have life insurance, you should explore whether a trust is a good option.

Here's generally how the NJ Inheritance Tax works.  There is no inheritance tax on money going to charities or Class A Beneficiaries.  Class A Beneficiaries include: 

1. A spouse (or civil union partner or a registered domestic partner);
2. Lineal ascendants (parents, grandparents, etc.);
3. Lineal descendants (children, grandchildren, great-grandchildren, etc.) and
4. Step-children (but not step-grandchildren)

New Jersey excludes a number of items from the inheritance tax.  Specifically, the major items are excluded from the NJ Inheritance Tax are:

1. Real estate or real property owned outside of NJ (Note that if you own a co-op, you technically do not own real estate, you own stock, which is intangible asset that is subject to the NJ inheritance tax.); 
2. Money recovered under the NJ Death Act (as compensation for wrongful death); and
3. Life insurance that is payable to anyone except to a person's estate.

As you can see, when it comes to life insurance, if you ultimately want money going to brothers, sisters, nieces, nephews, friends or a significant other, you don't want to name your estate as the beneficiary (even if it filters through a Will) because it results in a NJ inheritance tax.

Now, the easy and obvious solution in most cases is that you can simply fill out a beneficiary designation form for the life insurance policy and name the people that you want, and then the death payout will be excluded from the NJ Inheritance Tax.  However, many people want to create more complex arrangements.  Here are some situations in which it is likely worth the time and expense to set up a trust:

1. If you want to set money aside for the benefit of an elderly parent or special needs relative, but upon their death, want the balance to go to other people.
2. If you want to have a complex formula for who gets your assets.  (For example: If Person A and B are alive, they get 30% each and person C gets 40%, but if A or B is not alive, then person C gets their share.)
3. If you don't want to let the beneficiary of your policy have immediate access to the money upon your death.  Let's say you want to leave money to a niece or nephew, but they are a minor, so you want them to have money for college, but not play money until later in life.  A trust is especially good here if you don't trust your sibling to manage the money.
4. If you have multiple policies and many beneficiaries, you may not want to update all the policies every time you change your mind regarding who the beneficiaries should be.  If you name the trust as beneficiary, you can just change the trust and you won't need to redo beneficiary designation forms at multiple institutions.
5. If you want to name certain people as beneficiaries, but you don't want them to know.  (Keep in mind that some insurance companies ask for Social Security Numbers of the beneficiaries and you may not want to ask people for that, or they may want to know why.  With a trust, you don't even need to have that conversation.)
6. In divorce settings.  Let's say you are obligated to pay life insurance to a ex-spouse, for a certain period of time, or based upon a formula.  You can name the trust as the beneficiary, and put the formula in the trust.  The alternative is revising your policy each year.

Remember, in many of the scenarios above, you can simply create a Will that sets up a trust, but if you name the estate as the beneficiary, it causes the inheritance tax.  If you set up the trust before you die, and name the trust, it won't cause an inheritance tax.  It is also very important to realize that if you are only worried about avoiding the NJ inheritance tax, it does NOT have to be a traditional irrevocable life insurance trust.  This means that if you even have a traditional revocable trust and name that as the beneficiary of your policy, it avoids the NJ inheritance tax.

Change to Estate Tax Exemption Limit for 2018

While the House and Senate are considering competing tax proposals, including a proposal to eliminate the federal estate tax, it is worth noting that the IRS has release Revenue Procedure 2017-58 which provides inflationary updates for a number of provisions in the Internal Revenue Code.

Assuming that the Republicans do not pass a bill that modifies the existing estate tax and gift tax structure, for 2018:

1. US Citizens and Permanent Residence Aliens can pass on $5,600,000 per person upon death or during their lifetime.  The federal estate tax exemption is also known by several other terms including the lifetime gift exemption, the basic exclusion amount, and the unified applicable exclusion amount.   The exemption is being increased by $110,000 from its 2017 limit of $5,490,000;
2. The annual gift tax exclusion will increase to $15,000 per person, per donee.  This is up from $14,000 in 2017; and
3. The annual exclusion for gifts made to a non U.S. Citizen spouse has been increased to $152,000.  This is up from $149,000 in 2017.

This revenue procedure does not change any laws.  It is simply designed to inform taxpayers of any changes in tax provisions as a result of inflation. 

Proposed Tax Policy By Republicans Would Enable Wealthy to Pass On A Massive Income Tax Deduction to Their Heirs Upon Death

As most of you know, I generally try to avoid political discussions and I really try to avoid commenting on proposed tax policy before it becomes law for the simple reason that most proposed law changes never get enacted.  However, I feel compelled to talk about what I believe is a major flaw in the proposed “Tax Cuts and Jobs Act”.

Before I do, I think it is important to have a quick discussion on the background of estate and gift taxes, social policy and the purpose of an estate tax.  As many of you know, the United States has a 40% federal estate tax and gift tax that kicks in when someone transfers assets in excess of about $5.5 million (either upon death or through gifting).  Note, the amount that can be passed on tax free is doubled for married couples.  Additionally, there is no tax when one spouse dies and leaves assets to a surviving citizen spouse.  So to be clear, the estate tax currently affects very few people, about 5000 per year.

Proponents of an estate tax feel that it is a socially beneficial tax because it prevents wealth from being concentrated in the hands of a few.  Moreover, because wealth generally equals power, it also means that you are avoiding concentrating power in the hands of just a few individuals.  Opponents of an estate tax feel that if a person has already been taxed on their income, they should be able to do what they want with the money, including giving it away to their heirs without having to pay another tax.  They also object to the fact that frequently a decedent’s wealth is illiquid, because they own real estate or a business, and they are forced to sell assets off in order to pay the taxes.

However, I won’t go into the merits of either argument, as that is not the purpose of this article.

Specifically, my concern is that under the new tax act proposed by the Republican party leaders, they would like to repeal the federal estate tax while maintaining both the step-up in basis provisions under Section 1014 of the Internal Revenue Code and the ability of taxpayers to depreciate their rental property under Section 179. 

In order to understand the gobbledygook that I just said, you need to understand depreciation and you also need to understand basis. The simplest way to understand depreciation is that the government gives you the ability to deduct the cost of an asset over its useful life.  Different assets have different depreciation schedules.  For purposes of this article, you should know that rental property (but not the land) can depreciated over 27.5 years.  So, if you purchased land and a building for $4 Million, and the building was worth $2.75 million, you would be able to deduct $100,000 per year on your taxes for close to three decades.

The simplest way to understand basis is that the basis of an asset is generally the price you pay for something.  In other words, if you pay $20 for Apple stock, your basis is $20.  If you sell it for $100, you have an $80 gain.  With a 20% capital gains tax rate, the tax on that would be $16.

Basis in real estate is more complex because it is increased by capital improvements and decreased by depreciation.  So if you bought that building for $4 million, and spend $200,000 fixing up the bathrooms, the new basis will be $4,200,000.  (Let’s allocate $2.95M to the building and $1.25M the rest to the land.)  If you sell it for $5 million, there will be $800,000 of gain.  To take this example further, let’s say you have been renting this building out for 30 years and depreciated it that entire time, you would have received a tax deduction for about $110,000 each year.  However, because you had depreciated the property, the basis in the land would still be $1.25, but the basis in the building would be $0.  Therefore, upon a sale, there would be a total gain of $3.75M.  Equally as important, $2.95M of that gain would be treated as ordinary income and the balance would be treated as capital gain.  (Total taxes of about $1.4 million.)

Under the current tax laws, whenever a person dies, the beneficiary of that person’s estate receives a new basis in all assets owned by the decedent.  This concept is known as receiving a step-up in basis.  The original policy reasoning behind allowing for a step-up in basis is that it would be unfair for a person to pay both an estate tax and a capital gains tax when the asset was sold. 

So in the example above, if you had kept that building until your death, it would have received a new basis equal to $5 million, then if your kids sold it for $5 million, there would be no gain on the sale, therefore would have been NO TAX.  As mentioned, the proposed tax law does not change this.

More importantly, since the heirs would receive the property with a stepped up basis of $5 million dollars, they could decide to depreciate it AGAIN and receive a tax write-off of close to $150,000 per year for another 27.5 years. 

The policy of having a step-up in basis makes sense so as to avoid a double tax, but it also makes sense because so many people have trouble tracking what they originally paid for things.  Accordingly, the government thought that a step-up would make it easier to track basis.  Back when the estate tax threshold was $1,000,000, everyone benefited from this step-up rule, and it was not a significant tax policy concern because wealthier individuals would be paying the estate tax instead of a capital gains or income tax.  Basically, back before 2001, only people with less than $1 million dollars could take advantage of this loophole.

Under the current law, people with assets under $5.5 million ($11M for married couples) can take advantage of this loophole, but the estate tax still prevents the ultra-wealthy from doing so. 

Under the tax law proposed by the Republicans, not only would the ultra-wealthy become eligible for this loophole, they could do it over and over again at every generation, meaning that you are effectively giving birth to a class of individuals who will be born with a tax deduction.  Literally passing on a rental property to an heir means you would be passing on the ability to deduct have a reduced income for income tax purposes.  Taken to an extreme, this would consolidate wealth and power in the hands of a few individuals.  This will stifle social mobility as land will become the most valuable commodity and create a feudalistic system similar to what existed in Europe for ages.

As far as I am aware, all other countries that have an estate tax also have a step-up in basis rule to avoid a double tax.  Countries that do not have an estate, inheritance tax or some other sort of death tax, do not allow the basis of a decedent’s assets to be adjusted on death because that would mean a person’s assets could never be taxed.

The solution to this problem is quite simple though.  Keep the estate tax.  Alternatively, don’t allow a step up in basis upon death.  I am not currently suggesting that we remove the depreciation deduction provision as I believe that we should encourage people to buy property.  As long as they pay tax on it sometime, society will be fine.

In summary, the proposed tax law allows for the creation of a new and more powerful class of land owners by combining 3 tax breaks that were not meant to be combined:

1. Repealing the estate tax (meaning that wealthy land owners pay no tax upon their death);
2. Maintaining the Section 1014 step up in basis for all assets  - This means that if a real estate mogul purchased land and buildings for $20,000,000 and it was worth $200,000,000 at the time of the mogul’s death the heirs would inherit it at a new basis of $200 million.
3. Allowing for depreciation of rental Property. During the mogul’s lifetime, he could depreciate the property get a tax deduction of over $700,000 per year and upon the mogul’s death, his heirs could do it again at a much higher level.

By combining these three provisions, the heirs described above would receive a property worth $200 million tax free. They could then either (i) sell the land and buildings for $200 million dollars and never pay any estate tax, income tax or capital gains taxes; or (ii) keep the real estate and depreciate it from its new stepped up basis of $200 million, not just the original $20 million purchase price.  The heirs of mogul, after paying no taxes ever on this property, would be able to receive approximately a $6 million annual tax break for doing nothing other than inheriting property!

What makes this amazing is that this can happen at EVERY GENERATION! Each time a parent passes away, the heirs would inherit tax free and then they would get to depreciate the property with a new increased basis. People would literally be born into a situation where they are inheriting millions of dollars worth of tax deductions.

Can the Trustee of a New Jersey Special Needs Trust Buy Clothing?

Although the federal government clearly changed the rules in 2005 to allow a Trustee of a First Party Special Needs Trust to buy an unlimited amount of clothing for person receiving Medicaid and SSI, there is still a lot of confusion regarding this issue in New Jersey.

New Jersey Administrative Code Section 10:71-4.11, which was enacted in 2001, states that if a Trustee of a Special Needs Trust purchases clothing for someone who has qualified for Medicaid or SSI, it will be considered income to the beneficiary and could reduce the beneficiary's government benefits.  Moreover, if the trust allowed distribution for purchase of clothing, it had the possibility of having the entire trust counted as an asset that may disqualify the beneficiary from benefits.  THIS IS OLD LAW.

To quote from the new law, POMS S.I. 01130.430: "A change in the regulations, effective March 9, 2005, establishes that the resource exclusion for household goods and personal effects no longer has a dollar limit. As a result, beginning with resource determinations for April 2005, SSA no longer counts household goods and personal effects as resources to decide a person’s eligibility to receive Supplemental Security Income (SSI) benefits."  The 2005 law goes on to define "personal effects" to include clothing.

There are several reasons why things are still so confusing:

1. New Jersey has not updated the Administrative Code to reflect the change of law on the federal level by POMS S.I. 01130.430.  The Social Security Regulations clearly override any state rules with respect to eligibility for Medicaid and SSI benefits.  So when Social Security updated its rules in 2005, the NJ rules were automatically updated as well.
2. When looking up the NJ rule online, there is a lot of bad, old information on many websites.
3. When looking up the NJ Administrative Code, which is free on Lexis-Nexis (thank you by the way), unfortunately it has the most recent year next to the Code.  That has the unfortunate side effect of making it look like a new and current law, even if it is not.

So, to be clear - a Trustee of a Special Needs Trust (regardless if it is a first party trust or a third party trust) can buy clothes for the beneficiary and not be concerned that such expenditures will be counted as income or that the beneficiary will lose his or her government benefits.  That being said, if you are spending an excessive amount on clothes, you should probably expect extra scrutiny from the government and potential problems because they could make the argument that the person is just taking the clothes back in exchange for cash, and the fight wouldn't be worth it.

Keep an Eye on Your Credit - Equifax Breached

In perhaps one of the largest security breaches ever, the credit reporting agency Equifax has admitted that criminal hackers have had access to over 143 Million consumers' files, including names, Social Security Numbers, birth dates, addresses and driver's licenses.  Make sure you monitor your credit very carefully with a reputable agency.  For more information, see this USA Today news article.

Terry Pratchett's Executor Destroys Unpublished Work of Author

As a fan of the works of Author Terry Pratchett, in particular Going Postal and Making Money, I got a chuckle out of this story in the New York Times.  As some of you are aware, Terry Pratchett died in 2015.  One of his last wishes was that all of his unpublished works be destroyed by a steamroller.  A few days ago, Rob Wilkins, his estate manager posted a picture of a steamroller running over a hard drive.

Compare what Terry Pratchett did with what the Administrator of Prince's estate is doing.  Comerica Bank and Trust, as Trustee of Prince's estate, is slowly analyzing all of Prince's unpublished works and the plan is to release an album shortly to maximize the value of the estate.  Whether or not Prince would have wanted the works to be released is debatable, but because he did not leave clear instructions, an Administrator is obligating to exploit the assets as best it can so that his heirs receive the most money possible.

Remember, if you have written any books or have any other intellectual property where you wish to control of their disposition after you pass away, you must leave specific instructions for what you want done in your last Will and Testament (or other estate planning documents).  You may also name a separate executor or agent to manage your intellectual property (who may be distinct from the person managing the rest of your financial affairs).

Will the New Jersey Estate Tax Repeal Become Permanent?

As most of my estate planning clients are aware, I have been very cautious regarding whether or not New Jersey will keep a $2,000,000 estate tax exemption beyond 2017 or allow for a full repeal. However, it is worth noting that the front-runner for Governor, Phil Murphy, released part of his tax and spending plan today.  See this article on NJ.com: http://www.nj.com/politics/index.ssf/2017/08/murphy_tax_plan_would_raise_13_billion_heres_whod.html

As part of the plan, he stated that he has NO intentions of re-introducing the estate tax.  Accordingly, there is probably a good chance that the repeal of the NJ Estate Tax does become permanent.  Only time will tell though.

NJ Has Finally Released 2017 Estate Tax Return and Calculator

As I know many of you have been waiting anxiously, I wanted to make sure that you are aware that the New Jersey Division of Taxation has finally released the 2017 Estate Tax Return form.  They have also released an estate tax calculator so that we can accurately prepare the return.  The NJ 2017 Estate Tax Calculator can be downloaded from the NJ Department of Treasury website.

The New Jersey Estate Tax Calculator is important because the new estate tax law was crafted with a slight flaw in it because it has a circular calculation.  (This means the tax can't be calculated without reference to the tax, which in effect, changes the tax, over and over again.) For example, if you were to look at the statute, you may think that if you had an estate of $2,001,000, the estate would be taxed at 7.2% on the $1,000 that you were over the $2M threshhold.  This is not true.  According to the calculator, the tax is $66.82, not $72.  As the numbers get higher, this obviously becomes more important.

Anyway, the good news is that if you are an executor, administrator or involved in an estate of someone who passed away in 2017, you can now start the process of filing a New Jersey estate tax return.

Where Is The Best Place To Die From An Estate And Inheritance Tax Perspective?

Several years ago, I wrote a few articles comparing the tax consequences of dying in New Jersey, New York, Pennsylvania and Florida.  Now that New Jersey has amended its estate tax laws, I thought I should write another post for 2017.

I will write this blawg post with the following assumptions in mind:
1) Nothing is going to a surviving spouse (since no state taxes transfers to a surviving citizen spouse, this is generally not a factor).  Note, NJ still has an estate tax on transfers to a surviving NON-CITIZEN spouse if the transfer is for more than the state estate tax exemption amount, currently $2,000,000.
2) Nothing is going to anyone other than lineal descendants (children, grandchildren, etc.)  Transfers to nieces, nephews, friends, etc. can lead to a significant inheritance tax in New Jersey and Pennsylvania, so that is really a different comparison.
3) Since different states have different rules regarding what types of assets are taxable and where they are located, I will presume that all assets described herein are taxable by your state of domicile at the time of death.
4) The tax rates computed here are approximations only.  This is particularly true because New Jersey has a well known problem with its current estate tax that needs to be addressed.  (Basically, NJ's estate tax law contains a "circular" math calculation to figure out the tax.  We are still awaiting guidance from NJ on how to best do this or if they will issue a correction making the math easier and more straightforward.)

FLORIDA
Let's start off with the easiest of the four states, Florida.  Florida does not have an estate tax. Simply put, you do not have to worry about a tax upon death.

PENNSYLVANIA
Pennsylvania has a FLAT 4.5% inheritance tax on all transfers to children and grandchildren.  There are some notable exemptions though.  In particular, Pennsylvania does NOT have an inheritance tax on:
1) life insurance;
2) real estate or business interests owned outside of Pennsylvania;
3) a "qualified family owned business interest" - defined as having fewer than 50 full-time equivalent employees, a net book value of assets less than $5 million dollars, and being in existence for at least five years at the decedent's date of death. In addition, the principal purpose of the business must not be the management of investments or income-producing assets of the entity.  Here is a short post I wrote about the inheritance taxation of small businesses in PA;
4) Most family farms; and
5) certain IRAs, 401(k) plans and 403(b) plans.  Generally, if the decedent is under 59.5 years of age and not disabled, it won't be subject to a PA inheritance tax.  The decedent must have the right to terminate or withdraw the money without penalty to avoid the PA inheritance tax.

Additionally, Pennsylvania only taxes a portion of money held in joint account with another if it has been titled in joint name for more than 1 year.

NEW YORK
New York has slowly been raising its estate tax exemption up towards the federal estate tax exemption limit.  However, NY never makes anything too easy.  For individuals dying between 4/1/16 and 3/31/17, the exemption amount is $4,187,500 and for individuals dying between 4/1/17 and 12/31/18, the exemption amount is $5,250,000.  Additionally, while NY exempts real estate located outside the state of New York from its estate tax, it also forbids deductions related to such property, which occasionally has the effect of taxing a portion of the property!

The worst part of New York's estate tax regime is that it has a substantial cliff.  Basically, if your assets are 5% higher than the exemption amount, YOU DO NOT QUALIFY FOR THE EXEMPTION!  So, currently if your estate is above $5,512,500, your pay a full tax on everything, and if you are between $5,250,000 and $5,512,500, you only receive a partial estate tax exemption.

The tax rates in New York range from 3.06% to 16% once you have over $10,100,000 of assets.

NEW JERSEY
As stated above, because of the technical problem with NJ's statute, I my calculations are based upon the assumption that New Jersey will offer a true dollar for dollar credit for its $2,000,000 exemption in 2017 (on the first $2M of assets in the name of the decedent, not the last $2M).

Moreover, it should be noted that NJ has the fewest items that it excludes from its estate tax.  It doesn't include out of state real property or business interests fully, but it does do so on a proportionate level, effectively taxing some of it once you are above the exemption amount.

New Jersey DOES have an estate tax on life insurance if you owned the policy on your own life, unless paid to a citizen spouse or charity.

New Jersey's tax rates will be 7.2% to 16% depending upon how far above the $2,000,000 exemption amount you are.

SO JUST GIVE ME THE ANSWER, WHERE IS THE LEAST EXPENSIVE PLACE TO DIE?
It's still never that easy, except for Florida.  There is never a death tax in Florida, but let's compare:

NY estate tax vs. NJ estate tax vs. FL
Starting April 1, 2017, between New Jersey, New York and Florida,  if you have assets of less than $2,000,000 and are leaving everything to your children, it does not matter.  There is no state estate tax.

If you have assets between $2,000,000 and $5,250,000, it is cheaper to die in New York and Florida as neither of those two has an estate tax.  At about $5,000,000, New Jersey will have an estate tax of close to $292,000.

As your estate approaches, $5,500,000, New York quickly becomes the most expensive place to die because of the tax cliff.

NY estate tax vs. PA inheritance tax 
Starting April 1, 2017, between Pennsylvania and New York,  if you have assets of less than $5,250,000 and are leaving everything to your children, New York is the clear winner as it does not have a death tax and Pennsylvania has a flat 4.5% tax from the first dollar.

As your estate approaches, $5,500,000, New York quickly becomes a much more expensive place to die because of the tax cliff and because the rate is so much higher.

NJ estate tax vs. PA inheritance tax 
Starting January 1, 2017, between Pennsylvania and New Jersey,  if you have assets of less than $2,000,000 and are leaving everything to your children, New Jersey is the clear winner as it does not have a death tax and Pennsylvania has a flat 4.5% tax from the first dollar.

As your estate approaches, $4,000,000, New Jersey quickly becomes a much more expensive place to die because it has a higher tax rate.

Interestingly, the last time I made these calculations, for individuals dying before 2017, the cross-over point was $1,500,000.

RECOMMENDATIONS
As always, each client has a unique situation.  Many people who have assets in excess of $4,000,000 tend to own real estate in more than one jurisdiction, further complicating the tax picture.  Also just because you have a taxable estate now, it does not mean that you should move to avoid taxes upon your death.  It is usually possible to engage in tax planning to minimize any estate and inheritance taxes.  For instance, we can assist you with gift planning to minimize taxes upon your death.  Please contact us if you would like to learn more about how the changing laws affects you.

New Jersey Has Yet To Create An Estate Tax Return Form For People Dying In 2017

As many of you know, New Jersey recently revised its estate tax law.  Effective January 1, 2017, people who die in the year 2017 will have a New Jersey estate tax exemption of $2,000,000.  Since the law was enacted towards the end of 2016, the division of tax needs some time to prepare a new estate tax return form.

Unfortunately, if you are the executor or an administrator of an estate, and the estate is in excess of $2,000,000, you will not be able to file an estate tax return until the State of New Jersey provides guidance on the type of information they will need in order to issue Tax Waivers.  Inevitably, this will lead to a delay in getting access to funds.

If you are an executor trying to access funds from a financial institution, remember, the financial institution is required to release one-half of the funds.  We have heard a few horror stories recently about banks not doing this.  If this happens to you, please refer them to this notice from New Jersey. You will see in the section titled "Blanket waiver" that the bank may release 50% of the funds without a tax waiver.

Note, New Jersey has released Form L-8 and Form L-9 so that decedents who are leaving everything to Class A beneficiaries and charities and who have a taxable estate under $2,000,000 can access their accounts completely and apply for a tax waiver for any real estate owned.  (Thanks to the head of my estate administration department, Elizabeth Ketterson, for the reminder.)

This can be tricky when a decedent wants to give a token gift to a niece, nephew, godchild, step-grandchildren or friend.  Any bequest of more than $500 means that the Executor of the estate cannot use Form L-9 or L-8 to have more than 50% of the funds released as an inheritance tax will result and New Jersey will have an automatic lien on all New Jersey accounts and property.

Notification of the Death of a Loved One

New Jersey recently passed a new law that requires senior citizen housing developments to notify the next of kin in the event that a resident passes away in the development.  See http://www.nj.com/politics/index.ssf/2017/02/christie_signs_next-of-kin_notification_law_to_pre.html#incart_river_home

You would think that most organizations would have procedures in place for sort of thing, but it is actually a fairly common occurrence that families are not notified immediately when a loved one dies, goes to the hospital or is injured.  Accordingly, it is best for each family to make sure that if you are moving a loved one into a facility of any kind that you determine what policies and procedures the facility has in place to notify emergency contacts.

The facility should be able to recognize that when health emergencies take place, it is often important to notify a different one set of people and that if there is a death or other type of emergency, a different set of people should be notified.  Ideally, whatever facility or organization you work with can build a custom plan and contact tree that meets your needs.  

Why Titling Of Assets Is So Important In Second Marriages

I was talking to another estate planning recently and discussing how much of our work involves assisting clients who have blended families.  Blended families generally refers to clients who are married but at least one of the spouses has a child from a previous relationship.

In comparing stories and ways that we can assist clients, we discovered that the biggest hurdle that we face is with respect to titling of assets.  To understand the problem, you must realize that the following are examples of things generally trump whatever you put in your Will or Trust:

1. Life insurance beneficiary designations;
2. IRA/401k/403b and other retirement beneficiary designations;
3. Annuity beneficiary designations;
4. Owning real estate as husband and wife;
5. Owning real estate with a survivorship clause;
6. Owning real estate with a life estate;
7. Having someone on your bank account as a Pay on Death (POD) or Transfer on Death (TOD) beneficiary;
8. Owning a bank account or brokerage account jointly with someone;
9. Contractual agreements (such as a buy-sell agreement or divorce decree);
10. Joint ownership of cars and other vehicles; and
11. Joint ownership of bonds.

So, to put this another way, if you have two children from a previous relationship and are married to a new spouse, you may want 1/3 to go to each of your two children, and 1/3 to your spouse.  Well, even if you have a Will which says 1/3 goes to each person, this will not happen if some of your assets name a beneficiary or are in a joint account with someone.

Let's say in the example above Husband is the parent to 2 children and he owns the following:  A $400,000 house in New Jersey with Wife (who has no children), a $1,500,000 apartment in New York in just his name, a business worth $10,000,000 owned 70/30 with a partner, a 401k worth $3,000,000 naming his wife the beneficiary, a life insurance policy worth $1,000,000 naming his wife as a beneficiary, a brokerage account in his name worth $2,000,000 and a checking account with Wife worth $100,000.   Accordingly, the Husband has a net worth of $15,000,000.  (I'm only including $7M of the $10M business.)  It is Husband's desire to give $5M to each.

Without any additional planning and assuming that Husband and business partner have no agreement in place, a Will that leaves everything 1/3 to each child and Wife has the following consequences:

1)  The Wife would get the NJ house, the 401k, the life insurance, plus the joint checking account for a subtotal of $4,500,000.  Additionally, she would receive 1/3 of everything else (another $3,500,000) for a total of $8M.
2)  Each of the kids would receive $3,500,000 of assets - far less than what H intended.
3)  The business would be owned 23.33% by each of the children, 23.33% by the Wife and 30% by the business partner.

Unfortunately, however, life is usually even more complicated than this!  Frequently, there is a divorce agreement that might require that the life insurance be payable to the children.  Sometimes either the surviving spouse or the child is named as executor - and then the surviving spouse does not get along with the children.

Because these situations are so complex, they are very likely to result in estate litigation.  To minimize the costs of an expensive an hostile administration, it is very important to understand that title of assets frequently overrides what a Will or Trust might state and plan accordingly.

Opening of New York Law Firm Office

I am pleased to announce that we have officially opened an office in Manhattan.

While our main office is still located near Princeton, New Jersey, we will be happy to meet with clients by appointment at our New York location:

122 East 42nd Street

Suite 620
New York, NY 10168
Phone: 646-727-0399

The Law Office of Kevin A. Pollock LLC in midtown Manhattan, New York is located in walking distance from Grand Central Station in the historic Chanin Building at the corner Lexington Avenue.