Social Security Statements

You may have noticed that you did not receive a Social Security statement recently.  A little more than a year ago, the SSA stopped mailing paper statements out in a cost savings move.  All is not lost however, as you can go online to get your earnings history and information on estimated benefits at:  https://www.socialsecurity.gov/mystatement/

Keeping up to date with what you are entitled to is an important part of your financial plan and your estate plan.  If you haven't done so yet, you should go ahead and create an online account with the Social Security Administration so that you will be able to access your earnings history.

Thank you to Ken Weingarten at Weingarten Associates, L.L.C. for bringing this important information to my attention.

Estate Planning with Illiquid Assets

One of the trickiest items that we must deal with as estate planners is to help clients transfer illiquid assets.  Illiquid assets can include: retirement plans, ownership in a family business, real estate, collectibles (such as artwork, baseball cards and comic books), expensive vehicles and even animals (such as thoroughbreds and show pets).

Illiquid assets are tricky to plan with because they almost always have huge built-in gains, sometimes multiple people want the same asset, the asset must often be sold to pay for taxes and they usually require special maintenance or care.  A client can face additional complications when most of a client's wealth is tied up in a single asset and the client wants to benefit multiple heirs. 

  

Each family requires a custom solution, but often the solution can be found in tried an true estate planning techniques, such as a life insurance trust (so that you can give the illiquid asset to one heirs and cash to another heir), a buy-sell agreement (for a family business), a pet trust (to deal with a beloved family pet), promissory notes and even charitable trusts.

While we can not help you decide which of your heirs should receive your assets, a good estate planning attorney can help you make sure that they pass in a practical and tax efficient manner.  

Gift Ideas - ROTH Style

One of the questions that frequently comes up when I speak with clients is that they want to be able to gift money to their heirs, but they do not want their offspring to waste the money. There are a number of ways to accomplish this. If you are considering gifting a significant amount of money, you may wish to set up a trust or a family limited liability company or a family limited liability partnership to manage those assets.

However, if you are like many middle class families, there is really no need to incur the expense of setting up such structures. Instead, one of the best and easiest things you can do is to contribute to your child or grandchild's ROTH IRA. For 2012, married couples can generally put in $5000 each if they have income of less than $173,000 and single individuals can put in $5000 if they have income of less than $110,000. The IRS website has a more detailed list of the ROTH IRA contribution limits.

Many people do not realize that they can contribute to a ROTH IRA even if they are contributing to their company's 401(k) or retirement plan. Many simple do not have the liquidity - which is one of the reasons this makes a wonderful gift idea. Because of the penalties for early withdrawal, it keeps most beneficiaries from withdrawing the money frivolously - but it can be used in the event of an emergency.

Another strategy is to buy relatively illiquid assets, like bonds that do not mature for a few decades - and just plop them in your safety deposit box.

Remember, in states like New York, Pennsylvania and New Jersey, you can save your heirs thousands of dollars in State Estate Taxes or State Inheritance Taxes by setting up a gifting program now. For more on gift planning, please contact our office.

Using Revocable Trusts to Prevent Elder Fraud

There are many schools of thoughts on the use of Revocable Trusts, also know as Living Trusts or Grantor Trusts. Some attorneys love them as a way to avoid probate; others, including myself, are more hesitant to recommend them. My hesitancy in using them stems from the fact that in New Jersey probate is usually not that difficult or expensive. (I always recommend them for my clients with property in Florida, New York or in multiple states.)

I also find that many attorneys create Revocable Trusts, but do not help their clients fund them. Unless these trusts are fully funded BEFORE you die, you have to go through probate anyway. This can double or triple the costs involved because you pay more on the front end AND when you die.

Despite my general reluctance in setting up Revocable Trusts, I can offer another good reason for setting one up - to prevent Elder Fraud. You probably see stories all the time about how a carekeeper, neighbor or other stranger is hired to look after an elderly person and then unwittingly gives away thousands of dollars for reasons that they can no longer recall.

In a worst case scenario, the elderly individuals become convinced that their children have abandoned them and change their estate planning documents to cut out their children. Occasionally, the bad caretaker, neighbor or stranger also becomes the new Power of Attorney and proceeds to spend all of the elderly person's assets.

A way to prevent these events from happening is to create a Revocable Trust naming a trusted relative as Trustee (or as co-Trustee with the elderly individual). With a trusted relative named as Trustee or co-Trustee, money cannot be spent or given away without the trusted relative knowing about it. Moreover, the trust cannot be modified without the trusted relative becoming aware of the situation.

Even without naming a trusted relative as Trustee or co-Trustee the trust can be structured to make it more difficult to modify to change than a Will or a Power of Attorney. For example, you can have a provision in the Revocable Trust that requires certain individuals to be notified before any modifications are made. That is not the case with a Will or Power of Attorney, which can be changed on a whim and without any notice requirements.

Another way a Revocable Trust can prevent Elder Fraud is because it is just more cumbersome to deal with. So, while many attorneys, and non-attorneys, feel that they can write a Will or Power of Attorney, far fewer people want to mess with a Revocable Trust. Sometimes, there is no better way to stop a thief than to make them have to jump through some legal hoops.

Estate Planning for Same Sex Couples

In many jurisdictions, estate planning for same sex couples can be quite complex. In some states, the laws are favorable to non-traditional couples and in others, they are not (like Pennsylvania). There are also states like New Jersey, where the laws themselves can be favorable to same sex couples if you enter into a Civil Union, but there is still Tax Planning that must be done.

In states where the laws are unfavorable to same sex couples, without structuring your affairs properly, one partner may not inherit from the other. Moreover, without a Power of Attorney or Guardianship in place, one partner may even not be allowed to visit the other in a hospital or make financial or health care decisions for the other.

To structure your affairs properly, you should prepare a Will, Financial Power of Attorney, Health Care Power of Attorney and properly title your assets. The proper titling of your assets, including naming beneficiaries of your retirement accounts, life insurance policies, brokerage assets and bank accounts must not be overlooked. Without doing this, your plan will fail.

If you are ready to make a commitment to each other, you should take advantage of whatever laws the state you live in offers, whether it is a marriage, a Civil Union or a Domestic Partnership. To give you an idea of some of the benefits this can offer:

1. In NJ, a civil union partner and a domestic partner are entitled to receive the death certificate of the deceased partner.


2. A surviving civil union partner is automatically allowed to inherit as if he or she was a surviving spouse; and


3. A surviving civil union partner is deemed to be first in line to act as an administrator (if the decedent has failed to prepare a Will) or guardian (if the partner has failed to prepare a Power of Attorney).

You should also be aware that New Jersey has not updated all of its statutes to comply with their own Civil Union Law. For example, 37:1-31 states that NJ Civil Union Couples shall have all the rights of married couples. However, the inheritance tax law does not use the phrase Civil Union Couples - only domestic partners, as it was last updated prior to the enactment of the Civil Union law. Even though the inheritance tax statute has not been updated, NJ Division of Taxation has updated its forms and I have not heard of any instances in which NJ has tried to tax the surviving partners of a civil union.

Among the things that I find get overlooked when same sex couples plan for themselves is that they do not consider what will happen to their assets if both of them should pass simultaneously nor do they consider the most tax efficient way to structure their assets. So while much of the material here you may have read elsewhere, you should realize that a good estate planning attorney can help you customize a comprehensive, tax efficient plan for you.

Is there an Inheritance Tax on Life Insurance Proceeds?

One of the biggest misconceptions people have about life insurance is how it should be taxed. Most people think that they can receive the proceeds completely tax free. Upon the death of the insured, the beneficiary of a policy can almost always receive the proceeds without paying an income tax. However, estate taxes and inheritance taxes are a different matter.

If the insured owns a life insurance policy on his or her own name, it is subject to the federal estate tax. It is also subject to the state estate taxes of many states, including the New Jersey Estate Tax and the New York Estate Tax. This is one of the reasons many people have a life insurance trust own the life insurance on their lives. It is also one of the reasons that many people name their children as the owners of their life insurance policies.

The inheritance tax has its own set of rules for how a life insurance policy should be taxed. In Pennsylvania, the death benefit from a life insurance policy is always free of inheritance tax.  

However, in New Jersey, it depends upon whether the policy is payable to an individual beneficiary or the estate of the insured.  If the policy is payable to an individual in New Jersey, then there is no inheritance tax.  If the policy is payable to the estate of the insured, then there may be an inheritance tax depending upon who the beneficiary of the estate is.

Under the New Jersey Inheritance Tax scheme, if the proceeds pass to a spouse, civil union partner, child, grandchild, parent, grandparent or a charity, then there is no inheritance tax. However, if the money passes to a sibling, then there could be anywhere from an 11-15% inheritance tax. Generally, if the money passes to anyone else, then there is a 15-16% tax depending upon how much is transferred.

As a result of these rules, it is usually best to consider who will be a beneficiary of your estate before deciding which assets you wish to go to whom. For example, if you know you want to benefit a niece or a nephew, using life insurance is one of the most tax efficient ways to do it.

Please contact us if you wish to discuss planning with life insurance in more depth.

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Updated on 12/31/12. 

Setting up Trusts for High Maintenance Children

I was talking with a colleague the other day regarding a trust that he manages for a rather difficult benefiary. The trust is rather small in terms of overall dollars, but he advised me that it consumes a great deal of his time because the beneficiary calls hundreds of times a year - begging for money.

As trustee of this trust, he cannot give out much money because the goal of the person who funded the trust was to have the money last for a long time and only be used in the event of an emergency. The trouble is - EVERYTHING is an emergency to high maintenance beneficiary. These individuals live on the edge of financial ruin: they have trouble choosing friends, they are unable to understand the long term ramifications of their decisions, and they are terrible at budgeting.

It is a great imposition on the trustee to manage these trusts, and if the principal is less than $500,000, it is often not worth their time or energy to manage such trusts. What often happens is that the friend or relative that you named as trustee to help out your child no longer wants to be involved and resigns from the position.

If you are the parent of a high maintence child, and you want to set up a trust for your child, one thing you can do is make the job of the trustee a little easier is to really specify how you want the money to be spent. The more specific you make the trust, the easier it is for the trustee to say yes or no. The child realizes that the trustee has specific limitations, which makes it easier for the beneficiary and the trustee to get along.

The downside to this strategy is that it limits the flexibility of the trustee. However, for smaller trusts, it may be better to avoid the cost of constant trustee turnover than to try and allow for too much flexibility.