Why Repeal of the NJ Estate Tax Means Married Couples Should Update Their Wills

Effective January 1, 2018, New Jersey repealed its estate tax.  The question then become how does this affect you and do you need to do anything about it?  For most people the change is a positive one because it means their heirs pay less taxes and they do not need to do anything to update their documents.

Generally, You are Unaffected by the Repeal of the NJ Estate Tax If...

1. You do not have children and plan on leaving money to siblings, nieces, nephews, friends or charity.
2. You are NOT married but have surviving descendants.
3. You are married couples with children and you plan to leave everything outright to your surviving spouse on the first to die.

In all three situations above, the repeal of the New Jersey estate tax should not affect you and you generally will not need to update your Will or Revocable Living Trust.*  In the first situation, if you are leaving money to siblings, nieces, nephews and friend, be aware that NJ did NOT repeal its inheritance tax, so you still are affected by that.

For married couples who have a Disclaimer Trust plan, your documents are also generally unaffected.

Repeal of the NJ Estate Tax Can Dramatically Affect Married Couples Who Set up a Trust for the Surviving Spouse

To understand why the repeal of the New Jersey Estate Tax can adversely affect married couples who set up a trust for the surviving spouse, I will take a step back to discuss why we often recommend a trust be created for a surviving spouse.

Reasons to Create a Trust for a Surviving Spouse

1. The first spouse to die wants to ensure that if the surviving spouse gets remarried, the children are protected from future spouse and still receive an inheritance.
2. You have children from a previous relationship and want to ensure that upon the death of your spouse, your children receive whatever is left over.
3. The surviving spouse isn't good with money and needs assistance managing the wealth.
4. Estate Tax Efficiency - Prior to 2017, New Jersey had a ‘use it or lose it’ state estate tax exemption of $675,000.  

Why Was It Tax Efficient to Create a Trust for a Surviving Spouse

Protecting money for the benefit of the your children or from a spendthrift spouse are still very valid reasons to set up a trust, so I will spend the rest of the article talking about how trusts for a surviving spouse in older Wills and Revocable Trusts are usually no longer tax efficient.  

Let's presume it's 2016 and we have a married couple with $1,350,000 of assets.  One spouse dies leaving everything to survivor outright.  The surviving spouse then dies shortly after leaving everything to the children.  In this scenario, we would lose the NJ estate tax exemption of the first spouse to die and the children would only benefit from the $675,000 NJ estate tax exemption of the Surviving Spouse.  Assuming no growth in assets, the children inherit the full $1.35M, but $675,000 would be subject to a tax of almost $55,000.

To minimize the NJ estate tax, attorneys would advise clients to set up a trust for the surviving spouse instead of having funds go outright.  So, in the example above, when one spouse dies, he could leave everything to a trust for the survivor.  The surviving spouse then dies shortly after leaving everything to the children.  In this scenario, by funding a trust for the surviving spouse, we are utilizing each spouse's NJ estate tax exemption.  Upon the death of the surviving spouse, children would receive $675,000 from the trust tax free and the other $675,000 from the surviving spouse tax free.  This type of planning could easily save $55,000 in NJ estate taxes.

Funding a Trust for the Surviving Spouse May Be Tax Inefficient after the Repeal of the NJ Estate Tax.

Now that you know why it was advisable to set up a trust for a spouse and why it was tax efficient, you need to know why most older trusts should be amended.  Basically, now we can make it even MORE tax efficient.  This time, however, we are not talking about estate tax efficiency - now we are trying to make the trusts more efficient for income tax and capital gains tax purposes.  Let me give you two examples again:

Let's presume it's 2010 and we have a married couple with $1,350,000 of assets.  Dad dies leaving everything to Mom.  Mom lives another 20 years before dying and leaving everything to the children.  Since Mom lived another 20 years, let's presume the assets grew by $1M and were now worth $2,350,000. We do not have to worry about the NJ estate tax anymore, so the assets would go to the children completely free tax.  Additionally, when the children receive their inheritance, it is eligible for a step-up in basis.  This means that the children can effectively sell their inheritance the day after Mom dies and pay no capital gains tax on the $1M+ of appreciation.  (Please read this post to better understanding basis.)  

Now, let's presume the same facts as above except that when Dad died, he left $675,000 to Mom in trust.  Let's also presume that the trust received the benefit of all the appreciation, so that when Mom died, she had $675,000 in her own name and $1,675,000 in trust.  The children would still receive a step-up in basis from the $675,000 in assets that came from Mom, but the basis in the trust fund assets would only be $675,000 (the value on Dad's date of death).  So when the children sold the assets that were in the trust, there would be a capital gains tax (up to 23%) on the $1M.  

Most older Wills and Revocable Trusts used this formula for a trust for a surviving spouse, so hopefully it is easy to see why it is no longer tax efficient to continue using it.

Do I Need to Update My Estate Planning Documents?

If you have a Will or Trust created prior to 2017 leaving money in trust to a surviving spouse, the short answer is probably yes.  The one major exception to this is if you have a Disclaimer Trust plan.  If money goes outright to the surviving spouse, and the survivor has to make an affirmative election to fund a trust, then the plan most likely is fine the way it is written.

How You Can Fix Your Older Trusts

If you have an estate plan that automatically leaves money in trust for the surviving spouse, there are two easy ways you can fix it so that it is more tax efficient. 

1. Option one is to get rid of the trust for the surviving spouse and leave everything to the survivor outright.  This is an easy solution when the estate isn't very large or complex.  However if you are in a second marriage situation or if you are concerned about the surviving spouse getting remarried or spending away the children's inheritance, then you should consider the second option.
2. Option two is to revise the formulas in the Will or Trust so that it gets a step-up in basis when the surviving spouse dies.  (There are hundreds of ways to do this which are far beyond the scope of this post.)

To further complicate things, most tax attorneys like me will also build in a fail-safe so that if the NJ estate tax comes back, we can have the option of funding an old-style trust.

Conclusion 

If you have an older Will or trust that leaves money to a surviving spouse in trust - have it looked at.

* Regardless of whether you have a trust for a surviving spouse, always have your own estate planning documents reviewed by your attorney just to be sure it matches your wishes and still complies with state law.  The purpose of this blog post is to discuss who is most likely to be affected by the repeal of the New Jersey estate tax.

What is a Disclaimer Trust?

A Disclaimer Trust is a special type of trust often created under a Will (or as a sub-trust of a revocable living trust) that generally allows a person to refuse an asset and still benefit from it under a trust.  In order to understand Disclaimer Trusts, you first need to understand what a disclaimer is and what happens when you make a disclaimer so that you can understand the purpose and mechanics of Disclaimer Trusts.

What is a Disclaimer?

A disclaimer is literally when someone refuses to accept money or an inheritance.  A person can disclaim a gift, an inheritance, an interest in a trust, or certain powers.  (Let's call this the "Disclaimed Interest".) A person can also make a partial disclaimer, such as disclaiming half of their inheritance (although special rules apply to this).

What Happens When a Disclaimer Is Made?

When a Disclaimer is done correctly, it has the affect of treating the person who disclaims as if he or she died prior to the Disclaimed Interest being made.  So, if a Wife is disclaiming an inheritance from her Husband, it treats the Wife as if she had died before the Husband for whatever amount Wife disclaims.  Generally, in order for a disclaimer to be effective for tax purposes, it must be done within nine months from the date of death AND the beneficiary cannot have accepted the Disclaimed Interest.

Since the Disclaiming party is treated as if he or she died before the gift or bequest was made, the Disclaimed Interest will pass to the next person in line who is suppose to receive that.  For example, if a Will says, everything to my spouse, and upon the death of my spouse, it all goes to my children, then if the surviving spouse disclaims her inheritance, it would all go to the children.  However, that may not be the result the surviving spouse wants.  She might want to have access to that money during her lifetime and only have it go to the children upon her death.

What is the Purpose of a Disclaimer Trust?

The purpose of a Disclaimer Trust is that it allows a surviving spouse to inherit money, but to do so in a way that would be more tax efficient for the descendants of the person creating the Will.

This tax efficiency is probably best illustrated by two examples of how it affected NJ residents prior to 2017.  Back when NJ had a state estate tax, it often wasn't beneficial for the surviving spouse to inherit everything outright. New Jersey had a 'use it or lose it' state estate tax exemption of $675,000.  So, if a married couple owned $1,350,000 of assets, and when one spouse dies they wish everything to go for the benefit of the survivor and then down to the children:

1. Example 1 - Upon the first to die, everything goes to surviving spouse outright.  When the second spouse dies, she would only have one NJ estate tax exemption of $675,000.  So assuming no growth in assets, the remaining $675,000 would have been subject to the NJ estate tax, resulting in a tax of almost $55,000.
2. Example 2 - Upon the first to die, everything goes into trust for the surviving spouse.  This utilized the estate tax exemption of the first person to die.  The surviving spouse still had access to the funds in trust, but when she died and everything went to the children, there was no NJ estate tax because she also had an estate tax exemption.

Under What Circumstances Should a Surviving Spouse Disclaim Assets into a Disclaimer Trust?

A surviving spouse should disclaim an inheritance into a Disclaimer Trust when it would be tax efficient to do so.  If we go back to our example above, let's say the couple with $1,350,000 has their estate dwindle down to $500,000, or they move to another estate without a state estate tax, or the estate tax exemption has increased well beyond what they expect to have when the surviving spouse dies, there would be no point in the surviving spouse disclaiming. 

If it is highly like that the surviving spouse will live in a state that has a state estate tax, and it the surviving spouses assets (including the inheritance) would be above that state's estate tax thresh-hold, then it often beneficial for the surviving spouse to disclaim the assets into a Disclaimer Trust.

(Incidentally, before the federal government had portability between spouses of the federal estate tax exemption, this was a part of practically every single Will for married couples.  Since portability and the increase the federal estate tax thresh-holds, fewer attorneys are including these clauses unless the state has an estate tax.)

When Should a Surviving Spouse Disclaim Assets into a Disclaimer Trust?

For a disclaimer to be effective for tax purposes, it must be done within nine months from the date of death.  The nice thing about Disclaimer Trust planning for couples is that it allows the surviving spouse to take a look at all the facts and circumstances when the first spouse dies.  

It is important to remember that the funding of a Disclaimer Trust is always optional.  A disclaimer Trust will NOT get funded unless the surviving spouse makes files a qualified disclaimer according to local state rules.  You can analyze your wealth situation, need for cash, look at the tax laws and figure out what is best for your situation.

What are the Tax Consequences of a Disclaimer?

If a Surviving Spouse disclaims within the nine period and does so according the rules set out by the IRS (basically not taking the property first, not directing where the disclaimed property goes, and complying with state rules on disclaimers), then the disclaimed amount will be includible in the decedent's taxable estate.  This is generally what you want as you are disclaiming to utilize the decedent's estate tax exemption amount.

The person disclaiming must be careful not to disclaim too much, otherwise that might trigger an estate tax on the first to die.

It should be noted that failing to disclaim in a timely fashion or in a way proscribed by the IRS will result in the disclaimer be treated as a taxable gift by the Disclaimant.  Basically, it's as if the surviving spouse accepted the property and then gifted it away.

Alternatives to a Disclaimer Trust Plan

The question I always ask my clients is whether or not they want to guarantee that money go into trust for the surviving spouse.  If they want to guarantee the use of an estate tax exemption or if they want to protect the money from a future spouse, we wouldn't do a Disclaimer Trust plan, we would just automatically fund a trust for the benefit of the surviving spouse upon the death of the first spouse instead of giving the surviving spouse the option to fund it upon the first to die.

However, many people aren't concerned about the surviving spouse remarrying, and they want to keep things simple.  Usually in those cases, we would allow the surviving spouse to disclaim their inheritance into a Disclaimer Trust upon the first to die if there is a tax reason to do so.

If the surviving spouse really doesn't need the money, he or she can also take the money and gift it to the children (or wherever you wish). Remember, this can result in a taxable gift.  However, with the high estate and gift tax exemption limits ($11.2M per person in 2018), most people will not actually incur a gift tax unless you make a very large gift.

Who Can Make a Disclaimer?

Throughout this post I have talked about the ability of a Surviving Spouse to make a disclaimer, and while anyone can disclaim an asset, only a Surviving Spouse can disclaim an asset in to a trust for the benefit of himself or herself.  The general rule for anyone other than a surviving spouse is that you cannot disclaim money and still benefit from it.  Accordingly, your child can never disclaim into a trust for his or her benefit.  

On the other hand, attorneys frequently create estate plans that give money to child, but if child dies, her share goes to grandchild in trust.  If the child is wealthy, she might not want or need the money and then Child can disclaim funds into grandchild's trust and act as trustee of that trust.

Problems With Disclaimer Trust Planning

The biggest problem with Disclaimer Trust planning is that the surviving spouse often fails to make an effective disclaimer.  If the surviving spouse doesn't seek counsel within nine months of the first spouse's date of death, or they transfer money into their own name, then an effective disclaimer cannot be made.

Balancing Estate Tax Planning and Capital Gains Tax Planning

One of the trickiest aspects of deciding whether or not to do a disclaimer is calculating whether a disclaimer will minimize overall taxes and expenses.  If the assets are in the surviving spouse's name, it can be subject to extra estate taxes.  If the assets are titled in the name of a Disclaimer Trust, it could produce additional capital gains taxes, accounting fees and other costs.  I would strongly urge you to consult with a tax attorney before exercising a disclaimer.

How Do I Know if My Estate Plan Includes a Disclaimer Trust?

The Will or Revocable Trust usually says something to the effect of "I leave everything to my spouse, but if my spouse disclaims all or a part of his or her inheritance, such disclaimed portion will be distributed pursuant to the Disclaimer Trust created hereunder."

A surviving spouse should be careful of disclaiming if no Disclaimer Trust is established under the Will or Revocable Living Trust as a disclaimer could have the effect of sending everything to the children.

If a Disclaimer Trust is Primarily for Married Couples Living in a State That Has a State Estate Tax, Why Do My Documents Have a Disclaimer Trust?

Disclaimer Trust planning is most useful in states still have a state estate tax.  However, many attorneys will automatically put it in the estate planning documents for a married couple even if they live in a state that doesn't have a state estate tax just in case the client moves to a jurisdiction that does have the tax.  Moreover, it was common practice to do Disclaimer Trust planning prior to 2001 when the federal government allowed spouses to port their unused federal estate tax exemption to the surviving spouse.  Accordingly, there is a historical component to this in all states.

Is there Any Harm to Having a Disclaimer Trust in my Will or Revocable Trust Even Though I Know I Will Never Use It?

Attorneys never like to use the word "never".  So, I will say that it would be very surprising if there is any harm in having a Disclaimer Trust in your Will or other estate planning documents.  It is a great failsafe.

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. 

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.

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.

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.

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.  

Trouble with Probate

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

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

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

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

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

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

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

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

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

Dynasty Trusts Explained

I am frequently asked about the best way to transfer wealth to younger generations.  Sometimes people feel that absent having a minor child, a problem child or a special needs child, there is no reason to set up a trust.  Often times they are correct and there is no reason create a trust because the client has very responsible children.

Sometimes though, even if the children are quite responsible, if the client has a lot of money, it may be worthwhile to set up a dynasty trust.  Most trusts are designed so that the trust assets will be distributed to the beneficiaries at staggered ages (e.g., one-half at age 25 and the balance at age 30). On the other hand, a dynasty trust is a trust designed to hold assets for many generations usually without any requirement that the principal ever be distributed. 

Keeping assets in trust has many benefits.  If money is in trust it can be protected from creditors, including an ex-wife or an ex-husband.  Additionally, keeping assets in trust will protect it from estate taxes.  (If you give money to a child upon death, it is taxed, when they die, it is taxed again, and so forth...)  

The grantors of the trust can also control the flow of money out of the trust.  For example, they can allow for an income stream, they can allow for small percentage distributions when their heirs reach certain ages or graduate from college, they can allow invasion for certain expenses or they can simply let the trustee decide when and how to give their heirs money based upon whatever criteria they think is important.  The most common standard is for the health, education, maintenance and support of their heirs.

Another beneficial feature of a dynasty trust is that it can be located anywhere.  Typically, wealthy parents have provided for their children and already have good careers and plenty of their own assets.  If parents simply give more money to their children outright, it will be taxed in the jurisdiction where the children live.  If that state has a high income tax, it could be a drain on the funds.  If trust were created in a place that doesn't have a state income tax, that can save significant assets for future generations.

Almost anyone can be trustee of the dynasty trust other than the Grantor.  The Trustee is the party that manages the money and makes distribution from the trust.  Common choices of trustee include the heirs of the Grantor, a friend or an attorney or a corporate trustee.  If the Trustee is also a beneficiary of the trust, there will have to be restrictions on what the Trustee gives himself (otherwise you lose the tax and asset protection benefits).  Often times a trust is created with substantial flexibility so that an heir can act as trustee with limited invasion, but that heir also can be given the power to hire and fire additional trustees who have much broader discretion to distribute funds.  

A dynasty trust can go on for as long as the Grantor has heirs.  In case something happens to the entire family, most people usually name a charitable remainder beneficiary.  Other features that most good dynasty trusts include are the ability to relocate the trust to another jurisdiction (usually to obtain a more favorable tax rate), the ability to have a separate investment advisor, and the creation of a trust protector to modify terms of the trust in the events facts or circumstances change. 

A dynasty trust can be created during the lifetime of the Grantor (an intervivos trust) or upon his death (as a testamentary trust).  Usually it is better to create the trust during the lifetime of the Grantor because it will offer more flexibility in terms of jurisdiction (where the trust is located).  Jurisdiction is important because some states do not allow a perpetual trust, there is a state income tax in some states, and some states offer better creditor protection than others.  Another benefit to creating a dynasty trust during the lifetime of the Grantor is because the trust can be set up as an Intentionally Defective Grantor Trust (IDGT).

An IDGT is an irrevocable trust created during the Grantor's life that is not includible in the gross estate of the Grantor at the time of his death, but while the Grantor is alive, the income is taxable to the Grantor.  The benefit to this is that the Grantor can pay the taxes on the trust with his own money, allowing the trust to grow at a faster rate.  Essentially, it is like making a tax free gift to the trust in the amount of the tax.

Even if a trust is created during a Grantor's lifetime, it does not have to be funded until the Grantor passes away.  Sometimes a Grantor will want to or need to maintain control over certain assets.  Often, it is best to partially fund the dynasty trust with assets that the Grantor thinks will appreciate substantially in the future and transfer low basis assets that have already highly appreciated to the dynasty trust on death.

Because of the potential that these trusts can go on forever, it should not be set up unless the individuals involved have a fair amount of assets.  Normally I would not recommend it unless the Grantor is planning to fund it with several million dollars.  However, each client's situation is unique. Please contact our attorneys if you think a dynasty trust might be right for you.

Update to Executor's Commissions in NJ

Back in March of 2014, I wrote a lengthy post about how to Calculate an Executor's Commissions in New Jersey.  Frankly, most of the executors I work with don't want a commission.  However, I recently came across an interesting situation where an executor wanted a commission and the decedent had substantial joint survivorship accounts with the executor.

Normally, a survivorship account is not subject to an executor's commission on the theory that the executor doesn't have to do any work with respect to those accounts.  In this situation though, the survivorship accounts were actually convenience accounts.  A convenience account is a type of account that goes to the surviving account holder, primarily to pay bills, but based upon the intent of those involved, the balance of the funds will be disposed of with the rest of the Decedent's estate.  In other words, the money does not legally belong to the surviving joint account holder, it belongs to the estate of the Decedent.

In my situation, even though the money passed to the executor, in his individual capacity, on the death of the decedent, the money will ultimately be processed through the estate's accounts and go to the beneficiaries under the Decedent's Will. Accordingly, the executor CAN take a commission on these joint accounts.  More importantly, this commission is tax deductible for purposes of calculating the New Jersey estate tax.

I had trouble finding legal authority for this position, so I called up the New Jersey Division of Tax, Estate and Inheritance Department, and they confirmed this result.

Change in New York Estate Tax Law

Effective April 1, 2014, the State of New York made numerous changes to its tax law.  Most dramatically, New York is increasing its estate tax exemption amount from $1,000,000 to match the federal estate tax exemption amount.

New York's New Estate Tax Exemption Amount
Until March 31, 2015, the new estate tax amount will be $2,062,500.
From April 1, 2015-March 31, 2016, the exemption amount will be $3,125,000.
From April 1, 2016-March 31, 2017, the exemption amount will be $4,187,500.
From April 1, 2017-December 31, 2018, the exemption amount will be $5,250,000.
From January 1, 2019 on, the exemption amount will be indexed to the federal estate tax exemption amount.

However, New York has created a devastating Estate Tax "Cliff" by phasing out the benefit of the New York Exclusion Amount for estates that exceed 100% - 105% of the exclusion amount.

The practical implication of the "Cliff" is that for estates under the NY estate tax exemption amount, there will be no tax.  For estates just above the threshhold, there will be an effect tax rate of as high as 252% (Source www.jdsupra.com).  For estates above 105%, there is a flat 16% tax on all assets owned by the decedent, not just the amount above the exemption limit.

Addition of a Three Year Look Back Provision
New York has also added a three year look back provision for gifts made within three years of death.  This provision only applies for gifts made between April 1, 2014 and January 1, 2019.  The lookback will not apply if the gifts were made when the decedent wasn't a New York resident or if the gift is otherwise includible in the decedent's taxable estate.

Other Important Changes to NY Estate Tax
Other major changes made by the new law are to:
1)  repeal New York's generations skipping transfer tax; and
2)  allow a marital deduction for non-citizen spouses.

New Law Regarding Income Taxation of NY Resident Trusts
Finally, the new law aggressively pursues an income tax on trusts for the benefit of New York residents.  The bill is going after two types of trusts.  The first one being one that a wealthy New York resident sets up for his own benefit, retaining a discretionary interest in the trust.  The second one being any trust for the benefit of a New York resident.

With respect to the first type of trust, for years, wealthy individuals have set up "incomplete gift non-grantor trusts" to avoid the New York income tax.  The idea was that if you created a trust in another jurisdiction (with the assets and trustees outside of NY) then New York would not have the right to tax the income earned in that trust to the extent income was retained in the trust.

With respect to all other trusts, New York will now tax the distributions of accumulated income to New York residents.  However, the State will offer a credit to the extent a tax is paid to another jurisdiction.

Important Items That Were Considered But Not Changed
1)  New York has not adopted the concept of portability of the estate tax exemption; and
2)  New York had considered a maximum 10% tax rate, but decided to keep it at 16%.

Excellent Guide on International Estate and Inheritance Taxes

While I have not had a chance to review it thoroughly to confirm its accuracy, I note that the accounting firm, Ernst & Young, has posted a detailed analysis of the estate and inheritance tax laws of almost every country in this brochure.

For those of you who have assets in multiple jurisdictions or are citizens living abroad, you should familiarize yourselves with these laws and hire competent counsel to asset you in minimizing your taxes.

Gifting to Parents to Save on Capital Gains Taxes

As I gaze outside at yet another major snowstorm here in Mercer County, NJ and contemplate how nice it would be if I were visiting my folks near my Boca Raton, Florida office, I am reminded of a tax savings idea that I heard was gaining traction amongst wealthy children whose parents are still living.

With the federal estate tax exemption up to $5,340,000 after its most recent adjustment for inflation, children that own highly appreciated assets (such as stock or real estate) can simply gift these assets to their parents now. When the parent passes away, the children can receive these assets back with a stepped up basis, potentially saving hundred of thousands of dollars in capital gains taxes when the assets are finally sold.

While at first blush this seems like an incredibly easy strategy to save money on taxes, there are actually many pitfalls. In particular, the strategy will not work well if:
1) the parent is receiving Medicaid or government benefits;
2) the parent lives in a state or jurisdiction that has a state estate tax or inheritance tax;
3) the parent has remarried; 
4) the parent has significant wealth and has their own estate tax problems; or
5) MOST IMPORTANTLY, the gift must be made to the parents at least one year prior to the parent's death to avoid triggering Section 1014(e) of the Internal Revenue Code.*

Additionally, there could be problems if you have siblings or step siblings as the child who originally owned the assets would obviously want to ensure their return. Here is the final catch, the IRS will not like it if you prearrange this plan. In other words, the parent can't immediately promise/guarantee that they will redirect the asset to the child.

Finally, gifts of certain assets will require an appraisal for the federal gift tax return that would be required (Form 709), potentially making this a costly transaction.

Please contact our attorneys if you would like to learn more about this type of gift planning or any other estate planning.

*Updated on 5/22/14 to reflect the need to make the gift at least one year prior to parent's death.

Choosing an Executor, Trustee and Guardian

Clients frequently ask me for advice on who they should name as Executor, Trustee or Guardian when creating their Last Will and Testament.  First, let me explain the difference between the three roles.

The Executor is the person who probates your Will, goes into your house and looks through all your things, safeguards your assets, gathers up your money, pays your bills, files any income tax, estate tax or inheritance tax returns that need to be filed, and then distributes the balance of your money according to the instructions in your Will.  One or more individuals or corporate fiduciaries can serve as Executor.

The Trustee is the person who takes the assets that the Executor (or Grantor) gives him, invests the money in a prudent fashion, and distributes the money to the beneficiary of the trust in accordance with its terms.  One or more individuals or corporate fiduciaries can serve as Trustee. 

The Guardian is the person who will raise your minor children until they are 18 (or longer for an incapicitated individual). 

The three main qualities that you want to look for in an Executor and Trustee are:

1. Someone that is trustworthy and won't steal the money;
2. Someone that will not be overwhelmed by the role, there is a lot of work involved; and
3. Someone that does not have a bad relationship with the beneficiaries and will be able to communicate with them.

You will notice that I did not say that the exeuctor or trustee must be good at investing money.  That is because I believe the other characteristics are much more important.  An honest person who is diligent can always hire an investment manager. They just need to keep an eye on the investment manager.

The three main qualities that you want to look for in a Guardian are:

1. Someone that will love and care for your children;
2. Someone that will raise your children in a manner that you wish (including religion, education, diet, etc.); and
3. Someone that will have a stable family household.

Frequently, clients will name one party as executor or trustee and another person as guardian.  Sometimes this can be a good idea as the two parties can then monitor each other.  Additionally, this is a way to get two parts of the family to interact.  However, if there is someone that you truly trust to serve in all three roles, it is usually best to name them and not divide the roles just for the sake of dividing the roles.

For all of these positions, age may be a factor as well as you may not want to name someone too young or too old.  It is a heavy burden to put on people.  I never, ever recommend naming people just so they won't feel excluded. 

Finally, an attorney can serve as an Executor or Trustee, but you can name whomever you wish.

United States - Japan Estate, Inheritance & Gift Tax Treaty

My links to this have expired and it always takes me forever to find the treaty, so I'm going to reprint the whole thing here.  Hopefully it is accurate:

JAPAN ESTATE AND GIFT TAX TREATY

UNITED STATES- JAPAN ESTATE, INHERITANCE, AND GIFT TAX TREATY

[Signed 4/16/54]


ARTICLE I

(1) The taxes referred to in the present convention are:

  (a) In the case of the United States of America: The Federal estate and gift taxes.

  (b) In the case of Japan: The inheritance tax (including the gift tax).

(2) The present convention shall also apply to any other tax on estates, inheritances or gifts which has a character substantially similar to those referred to in paragraph (1) of this Article and which may be imposed by either contacting State after the date of signature of the present convention.


ARTICLE II

(1) As used in the present convention:

  (a) The term "United States" means the United States of America, and when used in a geographical sense means the States, the Territories of Alaska and Hawaii, and the District of Columbia.

  (b) The term " Japan", when used in a geographical sense, means all the territory in which the laws relating to the tax referred to in paragraph (1)(b) of Article I are enforced.

  (c) The term "tax" means those taxes referred to in paragraph (1)(a) or (b) of Article I, as the context requires.

  (d) The term "competent authorities" means, in the case of the United States, the Commissioner of Internal Revenue as authorized by the Secretary of the Treasury; and, in the case of Japan, the Minister of Finance or his authorized representative.

(2) In the application of the provisions of the present convention by either contracting State any term not otherwise defined shall, unless the context otherwise requires, have the meaning which such term has under the laws of such State relating to the tax.

(3) For the purpose of the present convention, each contracting State may determine in accordance with its laws whether a decedent at the time of his death or a beneficiary of a decedent's estate at the
time of such decedent's death, or a donor at the time of the gift or a beneficiary of a gift at the time of the gift, was domiciled therein or a national thereof.


Article III

(1) If a decedent at the time of his death or a donor at the time of the gift was a national of or domiciled in the United States, or if a beneficiary of a decedent's estate at the time of such decedent's death or a beneficiary of a gift at the time of the gift was domiciled in Japan, the situs at the time of the transfer of any of the following property or property rights shall, for the purpose of the imposition of the tax and for the purpose of the credit authorized by Article V, be determined exclusively in accordance with the following rules:

  (a) Immovable property or rights therein (not including any property for which specific provision is otherwise made in this Article) shall be deemed to be situated at the place where the land involved is
located.

  (b) Tangible movable property (including currency and any other form of money recognized as legal tender in the place of issue and excepting such property for which specific provision is otherwise made in this Article) shall be deemed to be situated at the place where such property is physically located, or, if in [transit], at the place of destination.

  (c) Debts (including bonds, promissory notes, bills of exchange, bank deposits and insurance, except bonds or other negotiable instruments in bearer form and such debts for which specific provision
is otherwise made in this Article) shall be deemed to be situated at the place where the debtor resides.

  (d) Shares or stock in a corporation shall be deemed to be situated at the place under the laws of which such corporation was created or organized.

  (e) Ships and aircraft shall be deemed to be situated at the place where they are registered.

  (f) Goodwill as a trade, business or professional asset shall be deemed to be situated at the place where the trade, business or profession to which it pertains is carried on.

  (g) Patents, trade-marks, utility models and designs shall be deemed to be situated at the place where the trade, business or profession to which it pertains is carried on.

  (h) Copyrights, franchises, rights to artistic and scientific works and rights or licenses to use any copyrighted material, artistic and scientific works, patents, trade-marks, utility models or designs shall be deemed to be situated at the place where they are exercisable.

  (i) Mining or quarrying rights or mining leases shall be deemed to be situated at the place of such mining or quarrying.

  (j) Fishing rights shall be deemed to be situated in the country in whose government's jurisdiction such rights are exercisable.

  (k) Any property for which provision is not hereinbefore made shall be deemed to be situated in accordance with the laws of the contracting State imposing the tax solely by reason of the situs of property within such State, but if neither of the contracting States imposes the tax solely by reason of the situs of property therein, then any such property shall be deemed to be situated in accordance with the laws of each contracting State.


(2) The application of the provisions of paragraph (1) of this Article shall be limited to the particular property, and any portion thereof, which without such provisions would be subjected to the taxes
of both contracting States or would be so subjected except for a specific exemption.


ARTICLE IV

Where one of the contracting States imposes the tax solely by reason of the situs of property within such State, in the case of a decedent who at the time of his death, or of a donor who at the time of
the gift, was a national of or domiciled in the United States, or in the case of a beneficiary of a decedent's estate who at the time of such decedent's death, or a beneficiary of a gift who at the time of the gift, was domiciled in Japan, the contracting State so imposing the tax:

  (a) shall allow a specific exemption which would be applicable under its laws if the decedent donor, or beneficiary, as the case may be, had been a national of or domiciled in such State, in an amount not
less than the proportion thereof which (A) the value of the property, situated according to Article III in such State and subjected to the taxes of both contracting States or which would be so subjected except for a specific exemption, bears to (B) the value of the total property which would be subjected to the tax of such State if such decedent, donor, or beneficiary had been a national of or domiciled in such State;  and

  (b) shall (except for the purpose of subparagraph (a) of this paragraph and for the purpose of any other proportional allowance otherwise provided) take no account of property situated according to
Article III outside such State in determining the amount of the tax.


ARTICLE V

(1) Where either contracting State imposes the tax by reason of the nationality thereof or the domicile therein of a decedent or a donor or a beneficiary of a decedent's estate or of a gift, such State shall
allow against its tax (computed without application of this Article) a credit for the tax imposed by the other contracting State with respect to property situated at the time of the transfer in such other State and included for the taxes of both States (but the amount of the credit shall not exceed that portion of the tax imposed by the crediting State which is attributable to such property). The provisions of this
paragraph shall not apply with respect to any property referred to in paragraph (2) of this Article.

(2) Where each contracting State imposes the tax by reasons of the nationality thereof or the domicile therein of a decedent or a donor or a beneficiary, with respect to any property situated at the time of the transfer outside both contracting States (or deemed by each contracting State to be situated in its territory, or deemed by one contracting State to be situated in either contracting State and deemed by the other contracting State to be situated outside both contracting States or deemed by each contracting State to be situated in the other contracting State), each contracting State shall allow against its tax (computed without application of this Article) a credit for a part of the tax
imposed by the other contracting State attributable to such property.
  The total of the credits authorized by this paragraph shall be equal to the amount of the tax imposed with respect to such property by the contracting State imposing the smaller amount of the tax with respect to such property, and shall be divided between both contracting States in
proportion to the amount of the tax imposed by each contracting State with respect to such property.

(3) The credit authorized by this Article, if applicable, shall be in lieu of any credit for the same tax authorized by the laws of the crediting State, the credit applicable for the particular tax being
either credit authorized by this Article or credit authorized by such laws, whichever is the greater. For the purposes of this Article, the amount of the tax of each contracting State attributable to any
designated property shall be ascertained after taking into account any applicable diminution or credit against its tax with respect to such property (other than any credit under paragraph (1) or (2) of this
Article), provided, however, in case another credit for the tax of any other foreign State is allowable with respect to the same property pursuant to any other convention between the crediting State under the present convention and such other foreign State, or pursuant to the laws of the crediting State, the total of such credits shall not exceed the amount of tax of the crediting State attributable to such property computed before allowance of such credits.

(4) Credit against the tax of one of the contracting States for the tax of the other contracting State shall be allowed under this Article only where both such taxes have been simultaneously imposed at the time of a decedent's death or at the time of a gift.

(5) No credit resulting from the application of this Article shall be allowed after more than five years from the due date of the tax against which credit would otherwise be allowed, unless claim therefor
was filed within such five-year period. Any refund resulting from the application of this Article shall be made without payment of interest on the amount so refunded, unless otherwise specifically authorized by the crediting State.

(6) Credit against the tax of one of the contracting States shall not be finally allowed for the tax of the other contracting State until the latter tax (reduced by credit authorized under this Article, if any)
has been paid.


ARTICLE VI

(1) The competent authorities of both contracting States shall exchange such information available under the respective tax laws of both contracting States as is necessary for carrying out the provisions
of the present convention or for the prevention of fraud or for the administration of statutory provisions against tax avoidance in relation to the tax. Any information so exchanged shall be treated as secret and shall not be disclosed to any person other than those, including a court, concerned with the assessment and collection of the tax or the determination of appeals in relation thereto. No information shall be exchanged which would disclose any trade, business, industrial or professional secret or any trade process.

(2) Each of the contracting States may collect the tax imposed by the other contracting State (as though such tax were the tax of the former State) as will ensure that the credit or any other benefit
granted under the present convention by such other State shall not be enjoyed by persons not entitled to such benefits.


ARTICLE VII

Where representative of the estate of a decedent or a beneficiary of such estate or a donor or a beneficiary of a gift shows proof that the action of the tax authorities of either contracting State has
resulted, or will result, in double taxation contrary to the provisions of the present convention, such representative, donor or beneficiary shall be entitled to present the facts to the competent authorities of the contracting State of which the decedent was a national at the time of his death or of which the donor or beneficiary is a national, or if the decedent was not a national of either of the contracting States at the time of his death or if the donor or the beneficiary is not a national of either of the contracting States, to the competent authorities of the contracting State in which the decedent was domiciled or resident at the time of his death or in which the donor or beneficiary is domiciled or resident. Should the claim be deemed worthy of consideration, the competent authorities of such State to which the facts are so presented shall undertake to come to an agreement with the
competent authorities of the other contracting State with a view to equitable avoidance of the double taxation in question.


ARTICLE VIII

(1) The provisions of the present convention shall not be construed to deny or affect in any manner the right of diplomatic and consular officers to other or additional exemptions now enjoyed or which may hereafter be granted to such officers.

(2) The provisions of the present convention shall not be construed so as to increase the tax imposed be either contracting State.

(3) Should any difficulty or doubt arise as to the interpretation or application of the present convention, or its relationship to conventions between one of the contracting States and any other State, the competent authorities of the contracting States may settle the question by mutual agreement; it being understood, however, that this provision shall not be construed to preclude the contracting States from settling by negotiation any dispute arising under the present convention.

(4) The competent authorities of both contracting States may prescribe regulations necessary to interpret and carry out the provisions of the present convention and may communicate with each other directly for the purpose of giving effect to the provisions of the present convention.


ARTICLE IX

(1) The present convention shall be ratified and the instruments of ratification shall be exchanged at Tokyo as soon as possible.

(2) The present convention shall enter into force on the date of exchange of instruments of ratification and shall be applicable to estates or inheritances in the case of persons who die on or after the
date of such exchange and to gifts made on or after that date.

(3) Either of the contracting States may terminate the present convention at any time after a period of five years shall have expired from the date on which the convention enters into force, by giving to
the other contracting State notice of termination, provided that such notice is given on or before the 30th day of June and, in such event the present convention shall cease to be effective for the taxable years beginning on or after the first day of January of the calendar year next following that in which such notice is given.


IN WITNESS WHEREOF, the undersigned Plenipotentiaries have signed the present convention.

DONE at Washington, in duplicate, in the English and Japanese languages, each text having equal authenticity, this sixteenth day of April, 1954.

FOR THE UNITED STATES OF AMERICA:

WALTER BEDELL SMITH


FOR JAPAN:

S. IGUCHI