In an interesting overlap between trust and inheritance tax laws, a recent NJ case shows us that transfers to trust are not exempt from inheritance taxes when the Grantor(s) retains benefits or strings of control. As some of you may already know, the State of NJ does not have a gift tax for gifts made during lifetime except that when gifts are made within 3 years from the date of death, these gifts will be brought back into the estate for the purposes of calculating inheritance taxes. NJ is one of the few states that imposes an inheritance tax for assets passing to anyone other than a spouse, parent(s), child, stepchild, or grandchild a/k/a/ Class A beneficiaries
In the case of the Estate of Mary Van Riper v. Director, the clients had transferred their home into an irrevocable trust. The trust allowed them to live in the home until their deaths but then after both of their deaths, the home would pass to their niece. The estate argued that the home had been “gifted” into the trust more than 3 years from the date of death of the clients so this asset should not be subject to inheritance taxes; however the court held that by retaining the ability to live in the home until their deaths, the Grantor-clients had not made a completed gift and as such the asset was indeed going to be subject to inheritance taxes.
The solution therefore is to have the Grantors make a completed gift of the home into the trust but then work out a rental agreement with the Trustee(s) of the trust based on an arm’s length transaction so that the Grantors can continue to live in the home paying rent each month; the disadvantages here are the loss of the “stepped-up” basis afforded to the home upon transfer to the trust as well as the disallowance of the property tax exemptions that would normally have been available for a primary residence. Consult an estate planning attorney who can guide you on the pros and cons of such transfers applicable to your specific case.
 35-5-2623 Estate of Mary Van Riper v. Dir., Div. of Tax., Tax Ct. (Cimino, J.T.C)
Have you ever heard of Revocable Living Trusts and wondered who needs these types of trusts? The term “trust” is often used by many professionals in the wrong context, causing a lot of confusion among clients who don’t know exactly what these trusts do and how they can benefit an individual or a family. In my opinion, a New Jersey resident does not really need a Revocable Living Trust (“RLT”) unless he or she has very specific needs.
Don’t get me wrong – I love RLTs because of the benefits they offer, but they may not be for everyone. This is where an initial intake session between the client and an estate planning attorney becomes very important. This session is an opportunity for the attorney to really listen to the client’s needs and figure out what their estate plan should look like. Let’s consider some examples: if privacy is paramount to the client, and they don’t want the whole world to know who their beneficiaries are or how their estate is to pass upon death, then a Last Will & Testament will not work for them. For clients with businesses who are concerned about their succession plan in the event of incapacity, a RLT would likely be a good route. For clients with properties in other states, a RLT plan is infinitely superior to a Last Will & Testament because it avoids probate in multiple states. If a NJ resident dies with assets over the estate tax exemption (currently $2m) then it may be prudent to set up a RLT to avoid the inheritance tax lien, which would be placed on half of the estate assets until tax waivers are obtained. (Waivers can take anywhere between 3-9 months after the filing of the estate or inheritance tax return which can be a frustratingly long time to wait).
However, contrary to popular belief, a RLT does not provide asset protection nor does it save estate taxes any more than a properly drafted Will does. Irrevocable trusts are the types of trusts that offer both creditor protection as well as estate tax savings. As their name suggests, these trusts are irrevocable and function very differently than a RLT. For example, many clients are surprised to learn that they cannot be a trustee or a beneficiary of this trust unless established in a special jurisdiction.
So, the next time you hear the word “trust” thrown around, be sure to ask what type of trust is being referred to, and then consult with an estate planning attorney to see whether it will suit your specific needs.
Multi-generational families have diverse estate planning needs. Young parents in the 30s and 40s who need Basic Last Wills and Testament to name Guardians for their minor children and simple Powers of Attorney to designate financial or health care agents in the event of incapacity often find themselves worrying about their own aging parents, typically between the ages of 65 & 90, and whether the parents have taken care of their own estate plans.
Perhaps the parents are significantly wealthy and there is a need to engage in advanced estate planning to eliminate or reduce the federal or state estate tax burden; or maybe the elderly parents want to ensure that the inheritance passing down to the kids are protected from outside creditors. On the flip side, some parents may be of modest means so Medicaid planning may be a necessity to ensure long term care. For such families, a solution to address all of the varied multi-generational issues is to consult with an estate planner who does both high-end estate planning as well as Medicaid planning. Such a skill-set in the attorney is crucial to understand the nuances of estate planning from both the IRS’ perspective as well as the state Medicaid offices. For example, individuals hear from their financial advisors that they can gift upto $14k (in 2017) to their children & grandchildren to reduce their estate tax burden at death but are upset when they discover that for Medicaid purposes, the $14k would be treated as an uncompensated transfer triggering a penalty which could in turn delay Medicaid eligibility. Similarly, a couple that get their Wills drafted by an estate planning attorney not familiar with Medicaid laws, find out the hard way that although their Wills were perfectly suited in case of death, that these Wills were not properly drafted for a Medicaid eligible spouse who may suddenly be deemed ineligible should the well-spouse unexpectedly pass away leaving all of the assets outright to the other.
Rao Legal Group, LLC is well-versed in both aspects of estate & elder law planning and will be able to help you and your parents navigate through the diverse processes in a way that best fits the entire families’ needs.
In the past year, I have seen several situations where a very young spouse (also a parent of young children) passes away unexpectedly. Families who were reasonably affluent prior to the death of their loved one sometimes come into a more wealth due to life insurance payout(s). From an estate planning perspective, it is a good idea for the surviving spouse to elect for something called “Portability” on a timely filed federal estate tax return. Portability refers to the ability of a surviving spouse to tack on the deceased spouse’s unused [gift] exemption (DSUE) to their own lifetime exemption. This allows for more of the couple’s money to pass onto their children, federal or state estate tax-free, upon the surviving spouse’s death.
The strategy is recommended even for young surviving spouses who are not extremely wealthy since the likelihood of his or her estate appreciating over the course of the lifetime is high or if there is a decrease in the federal exemption during this time.
It is important to note here that if the surviving spouse who elected portability is now considering remarriage, it would be prudent to consult with an estate planning attorney immediately. Portability only applies to the last deceased spouse’s unused exemption. Therefore should the second spouse die after using up his or her lifetime exemption, then the surviving spouse is out of luck with respect to the DSUE.
 For 2017, the federal lifetime exemption is $5,490,000
This week’s legal tip is about the New Jersey estate tax repeal. Some sources have postulated that the New Jersey estate tax may not end up being repealed in 2018 as originally planned. As you may already know, Governor Christie signed a bill to increase the NJ estate tax exemption from $675,000 to $2 million and to eliminate the estate tax completely in 2018. In lieu of the estate tax, the bill imposes a $0.23 gas tax. Last fall, however, New Jersey residents voted “yes” to allocating the funds from the gas tax solely on infrastructure, instead of adding them to the general budget. This means that in December of 2017, New Jersey will likely have a serious deficit. Sources are speculating that the government will then realize that the estate tax repeal may not make good financial sense.
So what does all of this mean for estate planning going forward? For anyone considering getting their estate affairs in order, it may be prudent to plan with the possibility that we could continue to have a $2 million exemption, and that the estate tax may not be repealed. Therefore, for those of you (especially unmarried individuals) with an estate over $2 million and assets that include significant life insurance policies, consider setting up a revocable living trust as well as an irrevocable life insurance trust. This will help not only minimize your estate taxes but also create a smooth probate-free flow of assets to your loved ones.
Time and again I get the same type of call – an elderly individual tells me that their spouse was admitted to a facility several years ago, which they were paying for privately, but now the money has run out. They tell me they need someone to help file a Medicaid application for their ill-spouse, but are concerned there may not be sufficient funds to cover the attorney’s costs. While I am sure this must be an agonizing call to make for that individual, it is equally upsetting for attorneys like me who practice in this space. Although we genuinely want to help these families more than anything else, we often have to turn these vulnerable seniors away because we can’t afford to take on any more pro bono cases. These individuals often end up choosing less expensive services, who may not be able to give them the specialized guidance and legal advice that they need.
Every time I get a call like this, the one thing that crosses my mind is: had this individual consulted a specialized elder law attorney before their loved one was admitted to a facility, there may have been ways to ensure that the Community Spouse (or the well-spouse) had enough money to live on for the duration of his or her life, to get the ill-spouse eligible for Medicaid, and to even protect some of their hard-earned assets for their children.
An esteemed colleague of mine used to say “you should not buy flood insurance after a flood”. Similarly, in elder law, it is prudent to explore the myriad of options available to harness both public and private resources, so we can help our elderly before it’s too late.
Individuals of different net worth have one thing in common: they are all protective of their retirement assets, no matter the amount. Most of these individuals also realize the importance of naming a spouse as the primary beneficiary of these retirement accounts, so the spouse can roll them over into his or her name and preserve the tax deferral for the duration of the life expectancy of the spouse. When it comes to contingent beneficiary designations however, most people are stumped. In my experience, they either leave this section blank, or end up naming their children as outright beneficiaries. This may be fine if you trust your kids to do the right thing i.e. inherit the IRA and keep it there for as long as is permissible to maximize both the stretch and the compounding interest. But if you think your child might cash out at the next available opportunity to buy that dream car or take an exotic vacation, then you might consider having the assets go into a testamentary trust set up for your child under your Last Will & Testament or Revocable Living Trust (“RLT”). In these situations, consulting a specialized estate planning attorney is prudent.
Your retirement accounts are non-probate assets so they don’t pass under the Will or RLT. Instead, they pass by beneficiary designation. Your attorney will guide you on how to title the beneficiary designations on your retirement accounts so that the child’s trust is the designated beneficiary and not your child outright. Additionally, if you have children who are spread out in ages, or if you want to name your grandchildren as beneficiaries, then you might want to consider a Stand-Alone Retirement Trust, which would preserve the maximum stretch available based on each individual beneficiary’s life expectancy while ensuring that these assets remain protected in trust – out of the reach of the beneficiary’s creditors, a divorcing spouse, or even themselves!
Asset Protection comes in many flavors but when it comes to protecting your primary residence, it may be difficult to have your cake and eat it too. A lot of people think that putting a home into an irrevocable trust is the easiest solution. However, not many people think through the mechanics of setting up such a trust and its impact on taxes. There are a few different taxes to consider, but for the most part, an estate attorney is concerned with gift taxes, estate taxes (or death taxes), income taxes and/or capital gains.
The reason why irrevocable trusts are popular as an asset protection tool is because the Grantor (i.e the person setting up the trust) can gift an asset into this type of trust for the benefit of other individuals. This means that once the asset has left the dominion & control of the Grantor and is placed in the trust, the Grantor stops receiving any benefits from the trust. The asset is then removed from the estate of the Grantor for estate tax purposes and is therefore out of the reach of creditors. Depending on how the trust is structured, the Grantor may still be liable for the income taxes, but in most cases that ends up being the better tax consequence.
However, in the case of putting a primary residence into an irrevocable trust, if the Grantor (and his/her spouse) wants to continue to live in the home, they would either need to pay fair market value in rent to the trust, or set up a Qualified Personal Residence Trust (“QPRT”). A QPRT is an estate tax avoidance strategy (rather than a creditor protection strategy), and once the Grantor-homeowner outlives the term of the QPRT, he or she will then have to pay rent to the trust from that point onwards. With these and other strategies that a homeowner may employ, there may be loss of other benefits related to homeownership. For ex. Once the home is out of the estate, the homeowner loses the valuable capital gains exclusion upon sale during lifetime; he or she may not be allowed to take property tax deductions/exemptions; and the beneficiaries will lose the stepped-up basis afforded at the death of the homeowner.
So when it comes to protecting your home, make sure to consult with an estate planning attorney who can counsel you on how to effectively accomplish your goals and objectives. You may not be able to have your cake and eat it too, but we can definitely help you enjoy a few flavors.
 In most states (NJ/NY/PA included), self-settled trusts established to benefit the Grantor do not offer creditor protection.
A question was posted recently in a financial column asking what options a beneficiary of an estate has when the Executor is so overwhelmed with her responsibilities that she seems paralyzed into inaction. The questioner said that it had been 8 months since the Executor was charged with the responsibility, but that nothing seemed to be getting done though money pouring out of the estate to pay for attorney’s fees.
This question illustrates the frustration of the questioner not only with the process but against the family member that could well have been caused by perceived ineptness of that individual in getting the job done. Because of this, I want to discuss setting clear expectations for the timeline of estate administration matters.
Generally in New Jersey, where there is a small estate and assets are below a specific threshold, an Executor may be able to easily wrap up the estate affairs by merely signing a small estate affidavit or self-executing waivers like an L8 or L9 to release assets to the beneficiaries. This process could take anywhere between a few weeks to a few months. But for those estates that may be either ridden with debts, or have significant retirement accounts, or non-Class A beneficiaries, or subject to death taxes (estate or inheritance), the Executor has to proceed with caution.
From the tax return standpoint, the NJ Treasury gives the Executor 8-9 months to file the inheritance or estate tax returns for the estate. The reason for this length of time is so that the Executor can assess the exact amount of assets in the estate by securing date of death values or getting formal appraisals where needed. Debts will need to be paid off but again cautiously because there is an order of priority for creditors and tax obligations will need to be satisfied before final distributions are made to the beneficiaries. If the Executor has retained qualified counsel, then named beneficiaries of annuities or retirement accounts will also be guided on how to properly claim their share of the proceeds in a way that would avoid adverse tax consequences. Finally, the Executor will be instructed to perform judgment searches on all beneficiaries to ensure there are no outstanding child support judgments against the beneficiary and each beneficiary will need to sign a release waiving liability against the Executor before distributions are made. All this could take anywhere between 9-15 months, longer if other complications arise.
Therefore, patience is key when it comes to estate administration matters. It is also important to consult with a qualified probate attorney who can guide the Executor every step of the way. Paying out attorney fees may actually end up saving the estate money down the road if unnecessary taxes were avoided or litigation by disputing beneficiaries thwarted.
 Moneology column in MarketWatch
 $10,000 for non-spousal beneficiaries. See N.J.S.A §3B:10-4
This week’s tip came about as a request from an existing client who wanted me to discuss the topic of codicils. So here goes…
A codicil is nothing more than a short amendment (1-2 page document) that addresses minor changes in an existing Last Will & Testament (“Will”). You may have prepared an elaborate Will a few years ago and you just don’t want to have to redo all of that only to name a new Executor as the current one named in your Will informed you that he was relocating and will no longer be in a position to serve; or, you just discovered that your childhood friend who you trust more than anyone else in the world has moved to NJ and has agreed to take on the role of being a successor Guardian for your minor children after your sibling.
When confronted with situations like these, you may be able to establish a codicil to address these changes instead of preparing brand new Wills. In a codicil (so long as you properly follow the same formalities of execution as you would do in a Will), the minor changes are incorporated into the existing Will. And, depending on the type of changes being made, it is possible for the Testator to make these changes himself or herself without having to go to an attorney. While I always recommend consulting with your estate planning attorney first before proceeding to undertake these changes on your own, it may very well be that your attorney will agree that the simple changes you have discussed could very well be taken care of by you.
However, note that there are other situations (however minor you think they might be), when the setting up of a codicil may not be a wise decision. For example, if you want to disinherit a beneficiary or even slightly alter a beneficiary’s rights under a Will, it is almost always a good idea to prepare a brand new Will revoking all others before it to avoid the confusion a codicil could create. With a new Will, the old Will is revoked and the new document will speak to your clear intent as to why you have chosen to undertake certain actions. This, in the long run, can potentially avoid expensive legal battles between beneficiaries down the road.