Do Your Children Know Where Your Assets Are? The Importance of proper Estate Planning!

There are several reasons why it is important to have an estate plan. However, by far, one of the overarching reasons people have told us why they want an estate plan in place is because they want to see their loved ones inherit the full benefit of their hard-earned assets, in a smooth hassle-free manner.

When you pass away, it is the job of the Executor (after he or she gets appointed by the Court) to marshal up all of the assets in the estate, pay off all debts and expenses before distributing the remaining assets in accordance with your Will. To do this, the Executor needs to know what assets you owned at the time of your death.

A good estate plan will include a separate list of assets which the Executor can then refer to and use to make sure the beneficiaries receive what is due and owing to them. If your estate plan does not have such a list, you run the risk of certain assets going unclaimed and subsequently escheated over to the State.

Example, John dies in 2017 and his brother Bill is the named Executor. Bill starts searching through all of John’s desks, drawers and filing cabinets to see what, if any, documentation he can find about John’s assets.  During his search, he uncovers bank account statements from Wells Fargo, so he contacts Wells Fargo to inform them of his brother’s death and has the accounts turned over to an Estate account.  From this account, Bill uses to pay for John’s funeral and other expenses/debts before distributing the rest of the money to John’s children.

What Bill did not know, however, is that John also had an account with Bank of America that was worth $25,000. John had requested these statements to be sent to him online so there was no record of this account among John’s paperwork.  Moreover, John had last used the account in 2015, so in 2018, after three years of inactivity, Bank of America, per its internal policies and state rules, turned over the account to the state.

Once the state has unclaimed property, the owner has a limited amount of time to claim the property before the state can claim the property for itself. Each state has its own rules as to how long owners have to reclaim his or her property.  According to the New Jersey Department of Treasury, approximately 1 in every 10 individuals, has unclaimed property.[1]  Common examples include unpaid life insurance benefits, forgotten bank accounts, utility deposits and unused rebate cards.

In this case, if Bill never learns of the Bank of America account (or if he does not learn of it in time to claim the money for the Estate), then John’s children will be out of luck.

A good estate planning firm should offer as part of their fee, an asset list that incorporates every single asset/account you own along with recommendations on how to retitle ownership into trusts (should you decide to establish one or more) as well as how to properly update your beneficiary designations. These firms would also be mindful of overseas assets that are particularly susceptible to escaping the notice of an otherwise diligent Executor.  Not all estate planning law firms offer detailed spreadsheets prepared in conjunction with the estate plan. Therefore, it is extremely important when choosing a law firm to assist with your estate plan to not only pick one that specializes in estate planning but can also offer these important (yet hidden) value-adds as a normal and commonplace part of its overall fee package. Ultimately, a good law firm’s objectives must be aligned with your own and which can help set up a proper estate plan for you to ensure your loved ones inherit the full benefit of your hard-earned assets.

 

[1] As a fun exercise, check out this link to see if you or a loved one may have unclaimed property right now that may have escheated to New Jersey State: https://unclaimedfunds.nj.gov/app/claim-search

Questions you didn’t know that you did not know about Medicaid planning: What I have learned as a Medicaid specialist at an elder law firm!

Life has a way of going on, the clock is always ticking, and time never stops. However, if that unfortunate time comes when you may need financial assistance from the government to help pay for long term care costs, then your life may come to a screeching halt as you now must look back on your life (five years to be exact) and recall the “why” and “for what” on certain withdrawals from your accounts for this period of time.

Working as a Medicaid Specialist for Rao Legal Group, an estate and elder law firm in Princeton, NJ, I have come to see the value in planning early and preparing for the day when you may need long term care.

The things you do now can change what happens in the last chapter of your life, and so many people don’t even consider the consequences of each and everything they do on a daily basis.

Something as simple as paying your grandson when he mows your lawn every week because that chore has become difficult for you. Did you know that even a small check made out to him for mowing could be called into question later should you decide to apply for Medicaid benefits? And if you wrote out these checks on a weekly basis, then without clear proof that you were getting something in exchange for this payment, Medicaid could likely consider those checks as gifts to him?

Or, how about when your daughter and her family were kind enough to help by doing your grocery shopping for you. Maybe you’re not able to shop on your own, or you simply don’t have the energy for it. When your family pitches in to help you by paying for certain things with their own money, of course you want to reimburse them for the items purchased. Did you write a check? Did you take some cash out of your ATM for this purpose? Are they doing your shopping every week? Did you remember to keep the receipts and keep an accurate record? Do you have a loan agreement in place? If not, Medicaid may look at these checks or withdrawals as gifts, too. And they have up to five years of these transactions, so maintaining proof of all these receipts/reimbursements may be useful to justify such expenses.

Perhaps you have a son who is hardworking and providing for his family by working two jobs, but suddenly, he is unable to work because of an accident. Now, the bills are adding up for him, and his family needs groceries and the electric bill is overdue. This is a time when you would like to help them out, buying food or paying a bill — isn’t that what families do for one another? But what if we told you that Medicaid would treat that as a gift, which could in turn disqualify you for a certain period from receiving government assistance if this transaction occurred within five years of your Medicaid application.

Have you ever needed to have someone move into your home to help with bills? Or maybe you just have a friend who needs a place to stay temporarily. Your friend wants to pay rent to you for the time at your home. Has a rental agreement been prepared? What will Medicaid require as proof of the payments made to you?

On the flip side, sometimes people have worked hard and are lucky enough to have some assets set aside to pay for the needs of their families. They may have even been frugal enough to save this money for the future, along with paying a mortgage on their home. What if your house needs some repairs? Have you hired a contractor to help with some renovations? Did you have them write up a contract? Or did they want you to make out the check to cash? Are you aware that if you do not have accurate records and receipts, then Medicaid might look at those expenses as gifts, too?

Finally, if you own your home — have you considered what could happen if you became ill and needed long term care? What will happen to your home? Have you thought about the rules surrounding Medicaid and the agency’s rights to assess a lien on your home upon your death?

Maybe you have other assets, another property besides your primary residence? Or perhaps you have acquired some stocks and bonds, an IRA, or even a life insurance policy? All such assets will be looked at by Medicaid as countable assets that would need to be completely spent down prior to applying for Medicaid.

Another area to consider is the rising cost of care. You could have a small “nest egg” built up, one you worked hard to put away, and you believe that some of these investments will allow you to live out your life on these assets with a small portion passing down to your loved ones. But with the rising costs of long-term care, one major health event could land you in a situation where that nest egg is depleted and without proper advanced planning, you may not be able to protect your assets.

It can be daunting to apply for Medicaid benefits — trust me, I know this first-hand in my role as a Medicaid specialist and assisting clients and their families with their Medicaid applications.

If you meet the clinical eligibility requirements for Medicaid, you still must jump over the hurdle of meeting the financial eligibility requirements. If you don’t meet with a qualified elder law firm to help you with your planning, you could be missing out on the opportunity to avail yourself of certain strategies to help you to protect some of your assets and still qualify for Medicaid.

Some final questions: Have you set up a Financial or Healthcare Power of Attorney? How about a Will? It is so important to have these Estate Planning documents prepared. When you are suddenly not able to make decisions for yourself, it is imperative that you have someone in place that can make those decisions for you. When the day arrives that you no longer can care for yourself, you want to be ready.

The best advice I can offer to you is to do your research, get your Estate Planning documents prepared by a qualified elder law attorney, and then have your questions addressed by the attorney so that you can be ready when the day comes that you need help. Don’t wait until you already need the help, because remember, life has a way of going on, and the clock is still ticking.

Estate Planning Is Not Just for the Wealthy!

We have this saying here at Rao Legal Group (RLG): It does not matter whether you have $10K or $10M – if you have anything of value that you would like to pass on to someone, then you need to have your proper foundational documents in place to formalize your intentions. A cornerstone of foundational documents is your Will, an important element that determines what happens to your assets upon death. The Will can answer important questions such as:

  • What will you leave for your children or your favorite charity?
  • Who should take care of your minor children if you are not around?
  • What do you want your funeral arrangements to include?
  • How will your estate taxes be paid?

Unfortunately, more than half of the adults in the United States do not have a Will, which means when those individuals die, their assets (provided they were solvent) are distributed based on the laws of the state where they lived. There will be no consideration for what the person wanted during their lifetime.

Consider this hypothetical (but not uncommon) scenario:

Bill has no children and intends to leave his estate to his brother, Tom. Bill dies unexpectedly and never executed a Will or established a Trust during his lifetime. According to the laws of his state, Bill’s estate goes to his estranged wife, Susie, whom he had not spoken to in the past three years, but from whom he had not legally divorced.

Tom hires a lawyer and goes to court, but there is nothing the Court can do to help Tom because the law is on Susie’s side.

Bill did not get around to setting up his Will, because he did not expect to die when he did.  Unfortunately, many people die unexpectedly, highlighting the need for a Will. What we hear often from clients who come to us to assist them with probating the estate of a loved one is that the decedent (the person who died) had planned to set up his or her Will but never got around to it. If Bill had created his estate plan, Tom would have avoided the unnecessary emotional and financial stress of dealing with litigation against Susie and would have received his inheritance, as his brother wished.

Many people also have the misconception that they do not need a Will because their estates are “straightforward,” in that their assets will automatically pass to their loved ones because they don’t have estranged wives or children from a prior relationship. But even for these individuals, having a Will is preferable than to dying intestate (without a Will). With a Will, you can name an executor or guardian of your choice; you can ensure that your assets pass to your spouse or children in trust instead of outright, which is invaluable if you have concerns about remarriage or spendthrift children; and you can clearly identify who must pay the estate taxes and how the distributions should be made to your loved ones. To put it simply, a Will makes it easy for the people handling your estate to know exactly what your wishes are.

When there is no Will, then you die “intestate,” and the laws of intestacy of that state control what happens to your assets. This means that someone will have to be appointed as the administrator (not Executor) of the estate, who will then need to get bonded before he or she can start doing the same work as the Executor, making the process lengthier and more expensive.

By creating a valid Will, you can make it easier and less expensive for your heirs to inherit your estate, and you can ensure that the right people become beneficiaries.

In conclusion: Estate Planning is not for just the wealthy. It is nothing more than the act of getting “what you have” over to “who you want to inherit.”  We at RLG will help you formalize those intentions to give you peace of mind, knowing that your wishes are being carried out properly and in a seamless manner.

My aunt named me “POD” beneficiary of a bank account before she died, but the bank refuses to give me the money!

Decedent had a bank account in her own name worth $50K. She named her nephew as a “Payable On Death” or POD beneficiary of this account, unbeknownst to her spouse and children. He was her favorite nephew, who’d cared for her a lot during her lifetime, and she had hoped he could quietly liquidate the funds upon her death and use the funds to pay back some of his college fees.

Little did she know, this little act of love would cause so many adverse ramifications, and the series of events that unfolded next were nothing short of a nightmare for the poor nephew.

The nephew was dealt a nightmare because New Jersey imposes an inheritance tax for assets more than $500 passing to all non-Class A beneficiaries. The nephew in this case would be a Class D beneficiary, who would be required to pay a 15% tax on the amount passing to him, minus the $500 exemption.

Worse, the bank would put a freeze on the account until he was able to produce a waiver from the State of NJ Tax Branch, and the only way to secure this waiver would be if the Executor of the Estate (or Administrator, if there was no Will) files a NJ Inheritance Tax Return (ITR) with the Tax Branch reporting the distributions from the estate. All of this must be accomplished within eight months of the date of death. NOTE: There is a blanket waiver that allows the nephew to receive 50% of the assets in the account (i.e. $25K) immediately, but he would have to wait for the balance after the estate administration was completed and final waivers issued.

Had the aunt consulted with an estate planning attorney before her death, she would have learned that gifting during her lifetime would have no gift tax ramifications in New Jersey (NJ does not have a gift tax), and apart for a minor reporting requirement on a Form 709 to report gifts over $15K per year, she could have effectively transferred the funds over to her nephew achieving the very objective she was trying to accomplish. Better even, if she had paid the college directly with the amount, it would not have been deemed a gift at all.

It is critical to consult with an attorney before making significant decisions to ensure that these choices do not morph out of control and cause unintended consequences that could have easily been avoided.

Attorney-Client Confidentiality with Aging Clients

Although the subject of attorney-client confidentiality and its nuances are drilled into every aspiring law student throughout law school and beyond, most clients don’t have an understanding of what exactly this means in the context of the attorney-client relationship. To them it’s vague, and they only have a simplistic understanding of this concept.  A few clients even believe that attorneys have the discretion to disclose confidential client communication. Complications arise when a prospective client wants one or more of their children in an initial meeting, or when they want a non-attorney professional advisor in the room. Sometimes the client’s financial advisor, in his or her eagerness to provide a holistic approach to their clients’ wealth management, expresses an interest to the client and the attorney to be included in these initial discussions. All these situations make it challenging for the attorney to educate their clients about confidentiality and explain the risks of disclosure. Clients do not realize that they are the only ones protected and the only ones authorized to waive this protection.

Because attorneys have special ethical responsibilities, it becomes more complicated and challenging when representing clients with diminished capacity. Here, attorneys are bound by the Model Rules of Professional Conduct (RPC 1.14) and have a duty to maintain (as far as possible) a normal attorney-client relationship with such clients and ensure they are treated with the same degree of respect and attention that any other attorney-client relationship is afforded.

For example, earlier we stated that complications are possible when a client wants one or more of their children in an initial meeting. Some of the risks of waiving confidentiality with respect to the presence of only one child in the room with a mother or father could be that the other children could bring an action of undue influence, where they could assert that the child in the room pressured the mother or father to disproportionately change the disposition of assets.

It is important for the attorney to utilize different interviewing techniques during the meeting to maximize client capacity and his or her participation in the discussion. Attorneys have to be on high alert to make sure the client is not facing any substantial physical, financial, or other harm, by someone else, who could often be a close family member. In such cases, it becomes the attorney’s ethical duty to consider disclosure of confidential information to other certain individuals or entities who may be able to take action to protect the client from such harm.  At the same time, the attorney needs to be extremely careful that such disclosure is only what they believe is necessary to protect the client.

One potential conflict we face when we have concerns about the client’s capacity is to choose between the client’s wishes or the client’s best interest. Here we need to consider several factors to resolve the conflict – type of representation sought, forum in which the services are to be provided, involvement of other parties in the matter, etc.

Ultimately, its critical for attorneys to balance the client’s needs for decision-making assistance with the clients’ other interests, including autonomy, safety, independence, financial well-being, health care, and personal liberty.

Revocable Trusts – Common Misconceptions

A few days ago, I was explaining the concept of “funding” to clients who were new to the world of estate planning, and I was struck by the fact that what I’d always thought were commonly understood concepts were actually the cause of significant gaps in the clients’ understanding of what trusts do and how they operate. The two main areas of confusion appear to be in: 1) figuring out exactly how trusts differ from wills; and 2) the mechanics of how accounts are transferred into trusts, which make the trust the “new owner” of those accounts. This article hopes to shed light on these two seemingly simple (or so I thought!) concepts: trusts and trust funding.

We’ve heard people use the word trusts in different settings and under different circumstances. Many mistakenly believe that all trusts offer asset protection. However, not all trusts are made equal – trusts can either be living (i.e. inter-vivos trusts set up during the lifetime of the Settlor or Grantor) or testamentary (i.e. those that become effective upon the death of an individual). All testamentary trusts are irrevocable, but living trusts can be revocable or irrevocable.

Living trusts are typically stand-alone entities that become effective immediately upon the signing of the trust agreement. Those that are revocable are called Revocable Living Trusts, RLTs, or Will substitutes. These RLTs allow a Grantor (also called a Settlor or Trustor) to set up the trust and retain full control of the trust assets as a Trustee, while enjoying the full benefits of the trust assets as a beneficiary. There are several benefits for setting up an RLT, but more notably, RLTs are meant to avoid probate upon death and the associated hassle-ridden probate process in some states.

In contrast, Irrevocable Living Trusts cannot be changed once established. The Grantor transfers assets into trust by assignment, sale, gift, or loan, and then completely gives up control over the assets. The two main benefits of irrevocable trusts are: 1) assets are removed from the Grantor’s estate upon his or her death, thereby avoiding estate taxes; and 2) assets are protected from both the Grantor’s creditors as well as the creditors and predators of the beneficiaries. Properly designed trusts may even escape Medicaid recovery and preserve assets for the Grantor’s ultimate beneficiaries should the Grantor be receiving public benefits. Regardless of which irrevocable trust is used, these trusts are typically sophisticated planning techniques established as part of an individual or married couple’s advanced planning. They should always accompany a robust foundational plan complete with a Will and/or an RLT, a General Durable Power of Attorney, and Advanced Healthcare Directive. For more information on the benefits of an RLT, check out our earlier posts on this subject.[1]

When it comes to “funding” trusts though, it is important to note that this term of art refers the act of transferring accounts into the trust or retitling assets into the name of the trusts and has nothing to do with refinancing or getting loans to trusts. The following comparison may help provide a better understanding of how RLTs[2] actually “receive” assets.

If you think of your trust as a cookie jar, then our firm would work with you to take your cookie jar from concept to design to setup. Once you sign the trust agreement, your cookie jar is now ready to be filled with assets or “cookies.” And because your trust is like your alter-ego, it can do almost anything you can do. This means that if you have five bank accounts, each at a different bank, and you want to continue to bank at these five banks, then you can open five trust accounts at these banks. Our office would then provide you with the necessary documentation you need to present to your bank representative, who will then open a new trust account and give you a new account number. Depending on the type of trust you are setting up (revocable or irrevocable), the account will either be associated with your social security number or have its own separate tax identification number (or EIN#) for income tax reporting moving forward. This process of funding may involve several back-and-forth communications with institutions and can sometimes be challenging, especially if the bank representative is unfamiliar with trusts. This is when your choice of law firm becomes critical, so the firm can coordinate with you and the institutions to see this process through to the end. Our hope is that as trusts become more and more mainstream, funding becomes less daunting on Grantors, who can then leave their organized estates to their loved ones in a smooth manner, completely free of the probate process.

This article would not be considered complete if we did not address funding in connection with real property, businesses, and accounts with beneficiary designations. Here is a quick synopsis of how these assets are funded:

  • REAL PROPERTY: Real property must undergo a title change (i.e. the deed needs to reflect the new owner as the trust) in order for this to properly avoid probate. This deed must be recorded at the county clerk’s office just like any other deed. So long as the property is being transferred into an RLT, and the Grantor continues to reside in the property, a lender holding mortgage to the property cannot trigger the due on sale clause as the Grantor is protected by statute.
  • BUSINESSES: Depending on how a business is structured (LLC, S Corp., C Corp.), a Grantor-owner’s interest could be assigned to the RLT.
  • ACCOUNTS: Accounts passing by beneficiary designations, typically retirement accounts, life insurance policies. and/or brokerage and investment accounts with beneficiaries, must be amended to ensure the RLT (or its subtrusts for the various beneficiaries) is the primary beneficiary of these accounts.

While funding is relatively straightforward and may be handled by the Grantor on his or her own, it is always best to do so under the guidance and counsel of the drafting attorney (or even let the drafting attorney’s office handle the funding process for an extra fee) to ensure the transition is completely correctly and efficiently.

 

[1] Benefits of Revocable Living Trusts: https://estateelderplanning.com/2020/09/01/why-revocable-living-trusts-should-not-be-getting-such-a-bad-rap-in-new-jersey/ and Revocable Living Trusts Misunderstood: https://estateelderplanning.com/2018/02/26/legal-tip-of-the-week-22518/

[2] Our focus in this article is to address funding challenges with Revocable Living Trusts and only briefly discusses Irrevocable Living Trusts in passing.

Using Long-Term Care Riders in Estate Planning

For those that reach age 65, estimates show these individuals have a 70% chance of needing long-term care. To protect the assets individuals hope to leave behind to loved ones, one could consider adding an indemnity Long-Term Care (LTC) rider to their life insurance policy.
Though this approach may not work for everyone. Click the link below to learn more from Nationwide about LTC riders while held in an irrevocable life insurance trust.
Source: Nationwide “Using Long-Term Care Riders in Estate Planning”

Per Stirpes, Per Capita, and By Representation – What does this all mean and why this may impact your estate planning!

Per Stirpes. Per Capita. By Representation. Have you come across any of these terms in your (or a family member’s) estate planning documents? If you have, did you truly understood what they meant? Chances are you may have glossed over these terms of art, never giving much consideration, knowing they sounded strange, or assuming they were typos. Whatever the case, you might have put those thoughts aside, not reading into it further.  However, in certain circumstances, these terms may have a large impact your estate planning.

When the recipient of property under a will (or by intestate succession) dies before the death of the person leaving the property, a determination must be made as to who will receive the property. [1]

Per Stirpes (which means “by way of the stems or stocks” in Latin) and Per Capita (Latin for “by way of the heads”) are the two most commonly used methods to divide property.  In some states, there is also a third hybrid method known as “Per Capita at Each Generation” or “By Representation.” New Jersey, like the Uniform Probate Code (UPC), has adopted this hybrid approach.

These terminologies rarely make a difference when all of your named beneficiaries are alive at the time of your death. However, they may make a significant impact when one or more beneficiaries have predeceased you, and have left behind children themselves. This could leave your fiduciaries in a bind if the document does not clearly spell out who should receive the property.

Here is an example which may help understand the concepts better:

Facts: A, the Testator, has 3 children, C, D, and E. C died two years ago leaving behind 3 children – P, Q, and R. D died last year leaving behind 1 child – S. E is alive with no children of her own. If A dies, the terminology specifies how the asset divisions would play out:

  • Per Stirpes: C, D, and E would each get 1/3 share. Since C is predeceased, his children, P, Q, and R would equally share 1/3 of this share (1/6 each); S would get the full 1/3 share of D; and E would get her full 1/3.
  • Per Capita: Here, there would be 5 shares for the total of 5 heads: 3 shares for C’s children, 1 share for D’s child, and 1 for E. Everyone, including E, would get 1/5 of the estate.
  • Per Capita at Each Generation or By Representation: In this method of distribution, each surviving child (or the generation nearest to the designated ancestor) gets a share, and all of the remaining shares are divided equally among the surviving descendants of the deceased children. Therefore, in the above example, E would keep her 1/3 share and the 4 grandkids (3 children of C, and 1 child of D) would get to equally share the remaining 2/3.

Key Takeaway

If you would like your estate to be divided in a specific way, it is important to have a discussion with your estate planning attorney, who can choose the right terminology to help fulfill your objectives.

[1] Robert B. Fleming & Lisa Nachmias Davis, Elder Law Answer Book, Q 4:25 (4th Edition, 2021-2 Supp. 2016)

My special needs child is about to turn 18 – What should I do?

Children with special needs, who are under the age of 18, are considered minors in the state of New Jersey. Until then, parents have full authority to act on behalf of their child(ren) when it comes to making important decisions. But once the child turns 18, parents are often caught off guard when they discover that although the child continues to be dependent on his or her parents long after they turn 18, parents no longer have the same authority as before, as the children are now deemed adults under the eyes of the law. Financial, legal, and healthcare decisions can no longer be made as before, and in the unfortunate situation when one or both parents pass away, assets passing to the child as an inheritance could trigger adverse consequences if the child has been receiving critical government benefits.

So what can you do now to avoid a disaster from occurring?

As a first step, you will need to begin the process of a guardianship (typically, this should be started a few months before the child turns 18). This involves filing a Verified Complaint with the courts, requesting your (and your spouse, where applicable), appointment as legal guardian of your child.  While it is rare for a judge to deny guardianship to a parent, the formalities of the guardianship process still need to be adhered to. 

The application must include, among other things, certifications from two physicians (one of these could be made by a licensed psychologist). The court will then appoint an attorney to conduct an investigation of the interested parties and then prepare a report for the judge, either confirming or rejecting the appointment of the Petitioner. Finally, a hearing is conducted before the judge, so all relevant parties can appear and be heard in court. Once the judge approves the appointment, a final judgment containing the decision is circulated to all parties. 

At this time, the parent(s) will need to appear at the surrogate’s office to become qualified and collect their Letter of Appointment. Be prepared to incur some expenses associated with the filing fees and legal costs, especially if you choose to go with private attorneys for both the submission of your application (as opposed to going pro se) and for the court appointment. Depending on the situation, a court may also be able to appoint an attorney from the Public Defender’s office at no charge to the parents, but this could delay things a bit. A final judgment signed by the judge at the end of the proceeding will then grant you the right to procure Letters of Guardianship.

The next step is to consider whether or not you want to set up Special Needs Trusts (SNT) for your child. Here you have an option to set up (1) a first-party special needs trust and/or (2) a third-party supplemental needs trust as stand-alone trusts. These trusts can hold assets of your child’s or assets passing from you, respectively, without jeopardizing your child’s government benefits. These assets are meant to supplement, but not supplant, any other benefits so your child can have an enhanced quality of life without concern that the critical benefits provided by the government would be denied.  

Finally, you should definitely consider setting up or updating your own existing estate plan to ensure that all of your assets passing to your child upon death are protected by either having the assets pass into the stand alone SNT that you set up (see above paragraph), or have it pass into a SNT under your Will. It is  important to consult with the estate planning attorney as to which trust should hold the inheritance.  Inadvertently naming the wrong SNT could result in having the assets inside of the trust going to the estate, instead of the family or other heirs.  

Primer on Spousal Access Trusts – What you need to know about this important estate planning technique!

Very often we meet clients looking for a more nuanced estate planning with specific assets – they may want to (1) protect assets from creditors; or (2) they would like to minimize the estate tax liability upon death. For these clients, Irrevocable Trusts are a critical piece of advanced estate planning that can accomplish these goals. It is important to remember here that these trusts are set up in addition to (and not in lieu of) their foundational planning, which typically consists of Wills or Revocable Living Trusts, as well as the Financial or Healthcare Powers of Attorney.

Irrevocable Trusts come in many flavors – insurance trusts or ILITs, gifting trusts for children, residence trusts or QPRTs, and a whole lot more in between. These trusts can either be established locally (i.e. situs of the trust is New Jersey), or a NJ resident can situs his or her trust in other U.S. states with favorable Domestic Asset Protection Trust laws (also called DAPT states).

This post discusses the popular Spousal Access Trusts or SLATs, where the spouse of the Grantor or Settlor of the trust is a named beneficiary, while the trust continues to accomplish its primary objectives regarding creditor protection and estate tax savings. It is key to remember here that if the 2-SLAT approach is being utilized (one trust each for the husband and the wife), then utmost care must be taken by the drafter of these trusts to ensure the trusts are not identical to one another, which would run afoul of the reciprocal trust doctrine.

Consider the following when establishing these trusts in New Jersey:

  • Pros:
    • There is no need to get an outside Independent Trustee who is a resident – a trusted friend would be able to serve in this role.
    • There is no need for outside counsel review.
    • You can accomplish the current asset protection goals even with the spouse as a beneficiary, but the Grantor[1] of the trust cannot become a beneficiary of the trust if the two primary objectives of creditor protection and estate tax savings are desired.
  • Cons:
    • The Grantor cannot be (or be added back later) as a named beneficiary.
    • Death of a spouse-beneficiary can make things problematic for the Grantor, who will now no longer have access to the funds in the trust.
    • If the 2-SLAT approach is being used, then there is higher probability of IRS scrutiny if both trusts are sitused in NJ.

However, if we go outside the state of NJ to one of the DAPT states[2], these trusts become more sophisticated and robust, but are also expensive – not only for set up but also in annual costs. The following are some considerations:

  • Pros:
    • The Grantor can be added back as a beneficiary after the trust is set up.
    • There are greater asset protection laws in these DAPT states, so creditor challenges are much harder.
    • With the 2-SLAT approach, situsing these trusts in two different DAPT states ensures even greater asset protection.
    • Resident Trustees can be Directed Trustees where they are only acting upon the direction of another – this keeps costs down each year.
    • This approach has potential to avoid IRS/Creditor scrutiny, especially where an independent, objective third party is serving as a trustee.
  • Cons:
    • This route is more expensive, because these are sophisticated trusts part of advanced planning.
    • Co-counsel needs to be retained to get the trusts reviewed by attorneys in that state.
    • Resident Trustees are a requirement.
    • Although trustees may be “Directed Trustees,” depending on the DAPT state, annual fees may vary between states and could become quite costly.

To minimize costs, some alternate solutions include:

  1. Staying within NJ and set up both trusts within the state, but be willing to give up some of the added benefits of DAPTs.
  2. Creating one trust in a DAPT jurisdiction and another trust in NJ, so you can take advantage of the “pros” for at least one trust, where the Grantor can be named back as the beneficiary.

 

 

 

[1] Grantor refers to the individual setting up the trust and is often used interchangeably with the terms Trustor or Settlor.

[2] As of 2020, there are at least 19 states that are now considered to be DAPT states and which have amended their statues to offer strong creditor protection and favorable treatment towards Grantors’ irrevocable trusts. http://www.actec.org/assets/1/6/Shaftel-Comparison-of-the-Domestic-Asset-Protection-Trust-Statutes.pdf