What to Think About Before Meeting With an Estate Planning Lawyer

I am happy to announce that we have finally finished creating a series of short videos regarding the estate planning and estate administration process.  Here is our third video in which Kevin A. Pollock, Esq., LLM is being interviewed by Pierson W. Backes, Esq., the head of our estate litigation department, regarding the things a person should think about before meeting with an estate planning attorney.


Some of the things people should think about include where you want your money to go, who you want to be in charge of your estate, who you would want to act as trustee of any trusts you create, and who should be guardians of any minor or disabled children. 

The role of the attorney should be help people put the legal structure in place, including setting up trusts, and to make the plan tax efficient.  A good estate planning attorney will also help you understand the options on how to get money to different people.  For example, if you want to leave $100,000 to a sibling, it might be more tax efficient to name them as beneficiary of a life insurance policy rather than naming them as a beneficiary under your Will,

To learn more about estate planning or hiring an elder law Attorney, please visit us at: https://pollockfirm.com/

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

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

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

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

There are several reasons why things are still so confusing:

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

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

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.

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.

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.

Estate Administration and Bad Credit

Everybody knows that good credit is important for receiving favorable financing terms when buying a car or a house. Let me give you another reason to keep your credit up: the ability to act as administrator of the estate of parent or loved one.

When a person passes away without a Will, the closest next of kin can petition the Court to act as Administrator for the decedent's estate. The Court will usually agree to let the next of kin act as Administrator provided that they agree to pay for a Probate Bond. A Probate Bond is basically an insurance policy that insures provides the intestate beneficiaries and creditors of the estate with a way to receive some money in the event the Adminstrator absconds with the funds.

The Court will require a probate bond in almost all situations in which the decedent dies without a Will. A person can only qualify for a Probate Bond if he or she has good credit or significant assets to their name.

Obviously, the way to avoid this situation is to make sure your parents and loved ones prepare a Will which states that no bond is required. However, you find that you are involved in an estate administration in which the decedent did not prepare a Will, before you spend a lot of money trying to qualify as an Administrator, Executor or Trustee, make sure you have good credit.