Why Florida Probate Can Be Difficult

When deciding whether or not to do a Will package or a Revocable Trust package, many of my Boca Raton, Florida clients will ask why choose one over the other.  Among the many benefits that a Revocable Trust has over a Will is the ability to minimize or even avoid probate.  This leads to the obvious question of:

Why should I avoid probate in Florida?

The reason many people wish to avoid probate in Florida because it can bypass the restrictions on who can serve as the person in charge of your affairs, make things more simple for the person in charge of your affairs, keeps costs down, speeds up the process of getting money to your intended beneficiaries, and allows you to have greater privacy.

How does avoiding probate avoid the restrictions in Florida with respect to who can manage your affairs?

Avoiding probate makes it easier for the person you want to manage your affairs after death to qualify as the person in charge because not everyone can serve as an Executor of Administrator in Florida.  For example, a nonresident person may not serve as an executor unless they are related to you by blood, marriage, or adoption (See FL Statute Section 733.304)  So, if you want to name a family friend to be an executor, they are not permitted to serve as executor unless that friend lives in Florida.

Additionally, there is often a bonding requirement for anyone who wants to serve as an administrator of an estate when the decedent died without a Will.  If the proposed administrator does not have good credit, they likely will not qualify for a bond, and therefore would be ineligible to serve as administrator.

How does avoiding probate in Florida make things more simple?

Avoiding probate in Florida makes things more simple because instead of the person in charge of your affairs having to go through a three step process to transfer your assets, he or she only has to do a two step process.  Specifically, if you die in a manner that requires probate, then your Executor or Administrator (if you die without a Will), needs to file a Petition with the Court to be officially named in charge of the estate.  (This is step one)

Once your executor or administrator qualifies, he or she must gather up the estate assets, set up an estate account, and pay the bills and taxes.  (This second step is often the longest step.)

The third step is to pay the beneficiaries and close down the estate.  When you use a revocable trust (which is fully and properly funded before death), the first step can be avoided.  Needless to say, when you don't have to go to Court and file a Petition, that speeds up the estate administration process and reduces the overall costs.

Other reasons to avoid probate.

I would also like to point out that another benefit to avoiding probate is that some counties have a routine practice of requiring executors and administrators to put all of the funds of an estate into a restricted depository account that can only be released by Court order.  This also has the negative effect of making the administration process take longer and more expensive (because you need another Court order).  However, I do understand that this practice is being challenged.  If you would like to learn more about that, Boca Raton, Florida Attorney Chuck Rubin has written a nice piece called: Mandatory Restricted Depository Arrangements in Probate Questioned.


Kevin A. Pollock, Esq., LL.M. is an attorney licensed to practice in NJ, NY, PA and FL.  Kevin meets with clients in Boca Raton, FL office located at 5499 N. Federal Highway, Suite K, Boca Raton, FL 33487 by appointment only.  Kevin may be reached at (561) 247-1557.

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.

NJ Estate Tax Repeal: How Does This Affect You?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Trouble with Banks Accepting a Power of Attorney - Florida

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

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

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

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.  

New Jersey Enacts Uniform Trust Code into Law

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

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

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

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

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

Non-residents Non-citizens of the US Should Be Careful of How they Invest in American Assets

Many individuals who live outside of America like to purchase real estate in America or invest in the U.S. Stock Market.  It can be much safer than in investing in other parts of the world and often times the individual has children who have moved to America to live or study.

Florida and New York are particularly attractive locations for foreigners to buy vacation homes or rental properties, so I will focus on those jurisdictions a bit.

From a tax perspective, Florida is relatively easy to deal with as there is no estate tax. The transfer taxes are small and the process is pretty quick if you need to transfer the property during your lifetime. New York recently changed its estate tax laws, so that individuals can soon transfer over $5,000,000 before there is a state estate tax.  Transfer taxes are a bit higher and the process is a bit slower, but it is not terrible.

On death, it is a different story, both Florida and New York can be a royal nightmare and you should avoid probate.  Probate is the process of transferring assets on death and is typically quite expensive. It is also very easy to avoid by setting up a simple trust that is invisible for taxing purposes. A trust can also be set up to avoid the US federal estate tax, and I strongly recommend this.

With respect to the US taxes, a foreign investor must worry about both income taxes AND estate taxes.  While owning stock or real estate outright may be easiest and perhaps even best to minimize income taxes, it can be the worst thing to do for estate taxes.

The United States is not very friendly when it comes to foreign individuals who wish to transfer property in America. While a US citizen or resident alien may transfer $5,340,000 before there is a gift or estate tax, the threshold for non-resident is $14,000 for gifts (per person per year) and only $60,000 (total) on death.  A person may gift $145,000 (annually indexed for inflation) to a non-citizen spouse before there is a US gift tax.

For transfers in excess of the limits above, there is an 18%-40% tax depending upon the amount of the transfer.  You can defer the tax on a transfers to a spouse by setting up a Qualified Domestic Trust (QDOT).

Additionally, the rules are very complicated because some assets are taxed on death or gift and some assets are not.  The general rule is that if something can be considered a U.S. Situs asset, it is subject to the US Federal Estate Tax when the owner dies.  Examples of U.S. Situs assets include: real estate located in the U.S., cash or jewelry in the U.S., ownership in a US based REIT, and ownership of a US based Annuity.  Examples of Non-U.S. Situs assets include: real estate in foreign countries and stock in foreign corporations.  Less obviously, this also includes life insurance and debt obligations (such as bonds).

This is further confused by the fact that some assets considered non-U.S. situs for gift tax purposes differ from the assets that are non-U.S. situs for estate tax purposes.  Specifically, intangible property such as stock in a U.S. corporation or an interest in a US partnership or limited liability company are considered U.S. Situs assets for the estate tax, but not the gift tax. Additionally, cash on deposit in a checking or savings account at a U.S. Banking institution is a U.S. situs asset for gift tax purposes, but not for estate tax purposes.

To restate this another way, a gift in excess of $14,000 of cash on deposit in a U.S. bank is subject to a gift tax.   However, regardless how much cash is there when you pass away, it is not subject to the U.S. Estate tax.  Conversely, a gift of U.S. stock (regardless of how much), is not subject to the U.S. Gift Tax, but if you die owning the stock, anything in excess of $60,000 is subject to the estate tax.

(NOTE: a person must be really careful of that cash in a money market account is treated as an intangible asset so it is considered a U.S. Situs asset for estate tax purposes, but not gift tax purposes.) Please see this link to the IRS website which details assets that are subject to the US estate tax and those which are exempt.

If you are a non-resident, non US citizen who owns stock and real estate in the United States, your options include:
1) Paying the estate tax on your death;
2) Setting up a foreign corporation to own a local business entity (this will cause more income taxes now though, but save money on estate/gift taxes);
3) Sell the stock and property before you die and put the money into non-US situs assets until afterwards (this can be tough to time though).
4) Transfer the house to an LLC and then transfer the stock and the LLC to your children or to a trust for your children. As long as you survive for 3 years after the transfer, this should not be an issue for estate tax purposes.
5) Sell the assets and invest the money inside of a life insurance policy. That will be free of income tax and estate tax. The question is whether you can find someone to write the policy on a non-resident.

I generally recommend that if a person can afford it, you establish a US based trust in a state that doesn't have an income tax (like Florida) to own assets. Ideally you should transfer money into the trust from a non-US bank account. If you do not need the income from the trust, you can make the trust strictly for the benefit of your heirs. This will avoid an estate tax on the assets owned by the trust REGARDLESS OF WHAT ASSETS ARE NOW IN THE TRUST. This is how you can invest in the market or in real estate without worrying about an estate tax. As mentioned above trust will also help with administration and managing the funds by avoiding probate.

Remember a gift or transfer of assets may require the need to file an informational return with the IRS.  Also, the United States has tax treaties with several countries which may affect your need to do planning, so please confer with a competent international estate planning attorney before buying any assets in America.

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.

Florida Office

I'm pleased to announce that effective January 1 that I will have a new office in Boca Raton, Florida.  The new office address is:

5499 N. Federal Highway
Suite K
Boca Raton, FL 33487

My phone number in Florida will remain unchanged: 561-247-1557.

Please contact me for any of your Wills, Trusts or Estate Administration needs.

New Florida Power of Attorney Law

Effective October 1, 2011, a new law went into effect dramatically changing the Florida Power of Attorney Statute. A Power of Attorney is a writing in which one party grants authority to an agent to act in place of the principal; each act performed by the agent pursuant to the power of attorney has the same effect and benefit to the principal and the principal's successors in interest as if th principal had performed the act.

Important changes in the new Florida law include:

1. An individual can no longer make a springing power of attorney - a springing POA is a power of attorney that becomes effective in the event of disability or some future contingent event (there is an exception of military powers);


2. All Florida Powers of Attorney must be durable powers of attorney (i.e. they must be effective when signed);


3. A Grantor must specifically initial any provision that allows for:
   - gifting, changing beneficiary of a retirement account,
   - changing any benefiary of an annuity,
   - changing the ownership or beneficiary of a life insurance policy,
   - amending, modifying, creating, revoking or terminating a trust,
   - waiving the principal's right to be a beneficiary of a joint and survivor annuity, including surivor benefits under a retirement plan, or
   - disclaiming property and powers of appointment;


4. If multiple agents are named, absent explicit direction otherwise, each agent may act unilaterally. This changes the presumption, it used to be that if multiple agents were named, they had to act together; and


5. Third parties are required to accept a copy of the power of attorney (and not demand an original).

The new Power of Attorney Act also modifies and clarifies the duties of an agent. Specifically, the agent may not delegate authority to act as agent (except for investment functions), the agent must keep record of all receipts, disbursments and transactions made on behalf of the principal, and the agent may not act contrary to the principal's reasonable expectactions, including preserving the principal's estate plan.

The changes are not retro-active, so powers of attorney drafted before October 1, 2011 are still valid (including gifting provisions that are not initialed). However, to avoid confusion, it may be best to redo any older power of attorney forms you have.

A Comparison of the Pennsylvania and New Jersey Inheritance Tax Laws

Some states, including New Jersey and Pennsylvania, have an inheritance tax. Other states, like Florida and New York, do not have an inheritance tax. An inheritance tax is a tax on the person who receives money from a decedent.

The inheritance tax rate itself depends upon the relationship between the person receiving the money and decedent. For example:

1. In both New Jersey and Pennsylvania, if the person receiving the money is a spouse (or a charity), there is no tax.
2. If the person receiving money is a sibling, there is a flat 12% tax in PA. In NJ it is a bit more complicated - the first $25,000 is exempt; beyond that there is a tax of 11-16% depending upon on the amount of the bequest.
3. Generally, if the person receiving money is anyone else (besides a child, parent or same sex partner), then there is a 15% flat Pennsylvania inheritance tax and a 15 or 16% New Jersey inheritance tax depending upon the amount of the bequest.
4. The first BIG DIFFERENCE is that Pennsylvania taxes bequests to all lineal descendants and certain lineal ascendants at 4.5%. New Jersey does not charge an inheritance tax to any lineal descendants or ascendants. (Note: Pennsylvania does not charge a tax on the bequest to a parent if the decedent was under 22 years of age.)
5. The second BIG DIFFERENCE is that Pennsylvania has a 15% inheritance tax on bequests to a same sex partner. In New Jersey, as long as the partners are in a civil union or domestic partnership, there is zero inheritance tax. If the partners are not in a civil union or domestic partnership, then there is a 15 or 16% tax, depending upon the amount of the bequest. For more information, see my blog on Estate Planning for Same Sex Couples.
6. In NJ, a bequest to a son-in-law or a daughter-in-law is taxed at the same rate as a bequest to a sibling. N.J.S.A. Section 54:34-2c. In PA, such transfers are taxed at the same rate as a bequest to a child. 72 PS 9116 (Note: If the son-in-law or daughter-in-law later remarries, this does not apply.)
7. In both NJ and PA, step children and adopted children are taxed in the same manner as natural children. New Jersey also allows inheritance tax free transfers to mutually acknowledged children in certain circumstances. N.J.S.A. Section 54:34-2a.
8. The only other significant difference in the rates is that New Jersey exempts transfers that are less than $500. Pennsylvania exempts certain transfers of up to $3,000.

New Jersey and Pennsylvania also have similarities and differences between the types of assets that they will tax. This is not a complete list, but as an example:

1. Neither state taxes life insurance, real property located outside of the state or business interests located outside of the state;
2. Both states will fully tax cash and brokerage assets of individuals who died while domiciled in their state.
3. Both states will fully tax real estate and business interests located inside the state of resident and non-resident domiciliaries.
4. Joint property held with rights of survivorship are fully taxed in New Jersey unless the recipient can prove he or she contributed to the joint property. In Pennsylvania, only the portion of the property owned by the decedent is taxed.
5. IRAs, Annuities, 401(k)s, 403(b)s and other retirement assets are taxed in New Jersey, but not in Pennsylvania, provided the account owner passes away before having the right to withdraw the money free of penalty (generally before retirement age of 59.5) AND provided that a person was named as beneficiary of the retirement plan. In PA, if the owner of the 401(k) has the right to close down the account it will also be subject to a tax, this is generally age 62 or 65.
6. Retirement plans, annuities and other benefits payable by the federal government to a beneficiary are not subject to an inheritance tax in NJ or PA.
7. In Pennsylvania, transfers made within one year of death are taxable, but each such transfer is subject to a credit of up to $3,000 per recipient. In New Jersey, transfers "made in contemplation of death" are taxable for inheritance tax purposes. There is a presumption that transfers made within three years of death are made "in contemplation of death".

Note: An inheritance tax is not to be confused with an estate tax. A state can have either an inheritance or an estate tax, both, or neither. Additionally, many of the assets that are exempt from inheritance tax (such as life insurance) are subject to an estate tax.

The NJ inheritance tax is due within 8 months from the date of death. In PA, the inheritance tax is due within 9 months of the date of death, but there is a 5% discount if the tax is paid within 3 months from the date of death.

The NJ Inheritance tax statute can be found at N.J.S.A Section 54:34-1, et. seq. The PA Inheritance tax statute can be found at 72 PS 9101, et. seq.

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Edited on January 20, 2011 thanks to input from Patricia Picardi.

'Tis the Season to be a Snowbird

Ah, the weather outside is frightful.
And Florida is so delightful.
You've packed up your things to go...
Let it snow, let it snow, let it snow.

Seriously, weather aside, have you ever wondered why so many older wealthy people retire to Florida. Well, maybe this answer will help - a relatively affluent person can buy a second house in Florida with the tax savings ALONE!

Let me give you an example: Let's assume that you have a couple in their 70's with about $4 Million in Assets. They have an IRA of $1 million, brokerage assets of $1,000,000, Life Insurance of $1,000,000, a house worth $600,000 and miscellaneous other assets of $400,000. They are leaving everything to their children.

If this couple died as residents of New Jersey, EVEN WITH adequate estate planning other than a life insurance trust, there would still be a NJ estate tax of about $210,000 on the second to die of the husband and wife.

If this couple died as residents of Pennsylvania, EVEN WITH adequate estate planning other than a life insurance trust, there would still be a PA inheritance tax of about $135,000 on the second to die of the husband and wife. (Note, with a $4 million dollar estate, a small state inheritance tax may be due on the first to die in order to avoid a much larger federal estate tax on the second to die.)

If this couple died as residents of New York, EVEN WITH adequate estate planning other than a life insurance trust, there would still be a NY inheritance tax of about $190,000 on the second to die of the husband and wife.

If this couple died as residents of Florida, then there is ZERO Florida estate or inheritance tax.

Now, factor in the additional benefits. In addition to lower property taxes in Florida, Florida is also the only one of these three states not to have an income tax. (It should be noted though that Pennsylvania does exempt IRA distributions from the state income tax.) So, let's make an additional assumption that this couple lives another 20 years and that they take out about $1 million dollars from the IRA during that time. (I'm not going to get into the time value of money.) This would produce an aggregate state income tax of approximately $70,000 for NY and $65,000 for NJ.

In total, moving to Florida would help save:

• $275,000 for a NJ resident;
• $260,000 for a NY resident; and
• $135,000 for a PA resident.

Now, these savings may not purchase a mansion, but you can certainly find a nice house (especially in this real estate market) with the tax savings from moving. Obviously, the wealthier you are, and the more you have in your IRA, the better the result.

An attorney licensed to practice in Florida plus your home state can help you move down to Florida in a way that will be most cost efficient. This includes preparing the appropriate estate planning documents in Florida, mitigating the necessity for ancillary probate in the your original home state, and properly setting up your other legal documentation to prove that you are a Florida domiciliary.

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DISCLAIMER: All the usual disclaimers found elsewhere on this Blog plus a disclaimer that all tax calculations are approximate and made for tax year 2009.