As a newbie estate planner, many moons ago, I heard the “gurus” of estate planning tout the benefits of New Jersey being a “probate friendly” state. This meant that New Jersey’s court systems were easy on a family’s representative to adhere to the rules and formalities to admit the Will to probate and was also relatively inexpensive In fact, I remember an incident at a Continuing Legal Education seminar once when an older, more experienced estate planning attorney berated a young managing attorney of a boutique Trusts & Estates firm for what he called “churning out” Revocable Living Trusts (or “Rev Trusts”, as we often call them) just to make more money. The older attorney felt that the younger attorney should respect the long-standing tradition of creating the simpler and less expensive Wills, like most New Jersey attorneys were doing at the time. Boy, times have changed! Today, some of those very “gurus” have come to realize the valuable role Rev Trusts play in many a client’s life – and not just because these clients have property out of state (which used to be one of the primary reason for setting up these trusts), but because their benefits far outweigh their downsides, which we will address later on in this article.
Do not get me wrong – having a Will is still far better than not having anything at all. It is better to formalize your intentions to ensure that the people who you want to receive your assets ultimately end up getting your assets, rather than letting New Jersey’s intestacy laws determine who those assets go to. For example, many starry-eyed newlyweds (am I dating myself if I refer to them as DINKs – Dual Income No Kids?) who haven’t begun to think about death or incapacity may be surprised to know that in the unlikely event that something should happen to them or their partner, if there is no will in place, their new spouse will need to share the assets of the estate with their parents. For those who would want their assets to go solely to their spouse, setting up a Will that stipulates this is a crucial step. An added bonus for newlyweds, Wills are less expensive (note that I did not say “cheap”) than Rev Trusts, and for these newlyweds, a simple Will package may be all that they need to get their affairs in order. And keep in mind, Rev Trusts (contrary to popular misconception) do not offer creditor protection or estate tax savings. They are purely meant to serve as Will substitutes or as one client called it – Rev Trusts are just “Wills 2.0”!
So one may ask the question – “If a will is good enough for the hypothetical newlyweds, why won’t it suffice for me??”
Well, planning becomes more complicated once you have children to pass on your assets to, and as your family grows you may begin to form opinions on how children ought to inherit the “gift” passing from you to them upon your death. Also, as the assets grow over time, investments also become more complex. Once you have reached this stage of life, you may begin considering how the benefits of a Revocable Living Trust apply to you, such as:
- They afford privacy (it is not a public document like the Will)
- They offer smooth succession upon incapacity
- So long as all assets are properly re-titled into the trusts, or at least have the trust named as a beneficiary, they completely avoid the courts (which may make a huge difference, especially if you have assets in multiple states some of which may have an expensive and cumbersome probate process, such as New York, California or Florida)
- They travel with you. For example, imagine that you set up a Rev Trust in NJ and transfer assets into it, and then move to New York, you can still keep the same trust (but you may want to just have a NY attorney restate the trust to make it compliant to NY law).
However, there are 2 additional important considerations that you may not have thought about:
- With the Rev Trust, the cost of probating a Will upon death is avoided (or at least minimized). If you think about the savings in probate costs down the road, you may not mind paying a small premium for a Rev Trust plan now rather than three times that amount down the road (it could be as much as $5k now compared to $15k later).
- Having a Revocable Living Trust can save your beneficiaries valuable time. Imagine you are concerned about how your children (or other non-spousal beneficiaries) will inherit your assets, and you create a testamentary trust to protect the assets passing to them. If you are a resident of the state of New Jersey and have a testamentary trust in place but no Rev Trust, your beneficiaries will be forced to wait 9-15 months (maybe more if the Tax Branch is understaffed) until they receive their full inheritance. This is because New Jersey has an interesting rule: If assets do not flow into a trust at death (such as when the decedent has a Rev Trust), then the Executor can easily sign a self-executing waiver and transfer all of the assets immediately to the estate, and then to the beneficiaries. However, if assets are to pass into a trust, then the Executor/Trustee has to file a tax return with the State of New Jersey Estate and Inheritance Tax Branch and patiently wait until the waiver is received before the full amount of assets can be transferred over.
Now for the cons of a Rev Trust. After drafting several hundred Wills & Trusts for our clients as well as assisting a similar number of families with probate upon the death of a loved one, I really and truly believe that the cons of setting up a Rev Trust boil down to just 2 compared to a Will:
- Its more expensive than a Will to set up – almost double in cost; and
- It’s a 2-step process – unlike a Will plan, which is complete upon signing, in the case of Rev Trusts, you still need to “fill ‘em up” after you sign the trust agreements and when the trusts become effective. This is an essential part of the process that leaves many clients nervous, intimidated, and downright fearful of the administrative hassles they expect to encounter. That said, like anything else that reaps huge rewards at the end (no pain, no gain, right?), in my humble opinion, the short-term hassles seem worth it in the long run.
Families (especially non-spousal beneficiaries) find inheriting assets smooth and hassle free when they inherit assets from Rev Trusts. They don’t have to run around from institution to institution trying to transfer over the assets into the estate, struggle with the court formalities to ensure all of the court’s rules & regulations are adhered to, pay large retainers to attorneys to help these families with the probate process, file tax returns when necessary, and where applicable get trustees qualified in Court once assets are ready to be distributed to the beneficiaries’ trusts. These delays and added costs (which add up in the long run) make setting up Rev Trusts more desirable – maybe not for all clients but more and more for a good number of New Jersey residents.
In conclusion – most of our clients who have shied away from Rev Trusts over these years, have really done so because of the cost factor – they said they were not quite ready to spend on a trust just yet. And while that is a legitimate concern, there are some people whose estates are too complex to be properly covered by a simple last will and testament package. Although the price tag may seem high at first glance, spending some extra effort and money on a Revocable Living Trust now can prevent one’s loved ones from dealing with a mountain of bills and paperwork in the future.
Rao Legal Group, LLC is committed to providing comprehensive estate plans which include both Last Wills & Testaments or Revocable Living Trusts. Our packages not only include the main document that will cover you (and spouse) upon death but our well designed General Durable Powers of Attorney (authorizing someone to handle financial affairs) and the Healthcare Power of Attorney (authorizing someone to handle healthcare decisions) will ensure that you are adequately protected upon incapacity as well. Call us today – we are just a phone call away!
Amidst an ongoing pandemic, you may have heard some well-meaning declarations urging you to make sure your health care documents are in order. However, there are many kinds of health care documents, and it can be difficult to know what you need and what gaps there may be in any documents you already have prepared. This article is not intended to serve as legal advice, but it may provide an overview of the available types of health care documents so that you are prepared to speak to an attorney about ensuring you have a plan in place that is comprehensive and accurately represents your wishes.
The first and most general document is the HIPAA waiver. The Health Insurance Portability and Accountability Act (HIPAA) sets national standards for the protection of personally identifiable health information. Because of this Act, doctors and other health care professionals are limited as to who they may share health information with, including family members of their patients. A HIPAA waiver authorizes doctors, hospitals, and long-term care facilities to disclose protected health information to certain individuals named in the document. A public health emergency does not mean HIPAA no longer applies; while certain jurisdictions have adjusted guidelines to allow doctors to communicate with those involved in the coordination of care, without a waiver in place, communication is not guaranteed. Executing a HIPAA waiver when competent makes clear who you want your doctors and other caretakers to speak to and give advice regarding your care. Without one, family and friends may be unable to receive information from doctors while you are being treated, which can add additional stress and uncertainty to a situation that is already stressful for your loved ones.
While many advanced health care directives include a section for HIPAA rights, if this is separated out into a stand-alone document, then not everyone who you may name in a HIPAA waiver needs to be or should be able to make health care decisions on your behalf. In that case, to give someone that power, you should execute a Health Care Power of Attorney (HCPOA). A power of attorney is a document that allows named people to act in your place. Many people are familiar with this kind of document as it relates to finances (authorizing someone to deal with your bank on your behalf, organize to have your bills paid, etc.), but it exists for your healthcare too. A HCPOA names someone who can legally make decisions about your care with health care providers. Depending on what powers you include, this document may authorize them to consent to (or refuse to consent to) your medical treatment, hire or fire medical personnel, make decisions about the best medical facilities for you, visit you when visiting is otherwise restricted, gain access to your medical records, and get court authorization if a hospital or doctor refuses to honor your own wishes or your authority as the authorized representative. A HCPOA does not automatically authorize someone to consent or refuse consent to organ donation, as the document’s authority terminates upon your death. However, in some states as in New Jersey, you may choose to draft the document in a way that covers authority over the disposition of your body. Additionally, you may even choose to have your healthcare representative make end-of-life decisions if you do not want to execute a Living Will (see more on that below) which shifts the responsibility over to one or more doctors. Therefore, the importance of this document is immense. Instead of only relying on doctors who you may have a limited or no relationship with, you can designate someone you trust to carry out your wishes regarding end of life if you are unable to. Although most states allow family members to step in as care coordinators (with an order of preference usually beginning with the spouse), a lack of this document can still be problematic and cause unnecessary tension and stress on the family in deciding the best course of action thereby taking precious time away from coping with your illness.
Complementing the two above documents, especially if you have particular intentions on end-of-life decisions, is the Living Will. The Living Will lays out specific directions about types of treatment you want or do not want should you go into a terminal state where there is no meaningful chance of your recovery. It can be as comprehensive or as limited as you want, depending on your preferences of different types of treatment. Typical procedures mentioned in a Living Will might be blood transfusions, CPR, dialysis, use of a respirator, surgery, or palliative care. Particularly amidst the continued spread of the COVID-19 pandemic and as people realize that they may not desire to be put on a respirator should they be hospitalized with this illness (where a number of people who need to be hospitalized end up on respirators), you should consider whether you want to revisit these preferences noted in this document. This is especially important when you may not have communicated your preferences to your HCPOA. Without a Living Will, the person making health care decisions on your behalf will have to guide those decisions. It’s a significant burden that you will be imposing on him or her so you should make thoughtful decisions. You should speak to both your elder care attorney and members of your family to decide the pros and cons of executing a Living Will, and if one should be included in your plan. Having this important discussion ahead of time will allow you to decide whether or not entrusting family with this decision is a good idea.
Finally, there is another document called the POLST or Practitioner Orders for Life Sustaining Treatment. Similar to a Living Will, this is also a directive for a specific method of care during the end of life stages; however, a POLST is typically executed somewhat later on than a Living Will might be. They are generally intended for patients who are at risk of a life-threatening clinical event or who may experience a life-threatening clinical event while already under facility care (thus, most facilities have long-term residents sign one upon entry). It is a form made legal with a signature from you (or your agent) and your doctor that is portable between different medical institutions like hospitals and nursing homes, or even to your home, without needing to be changed each time. Every state has its own form, but there is some reciprocity across states. POLST forms are often filled out by a nurse or social worker when someone is admitted to the hospital and the patient is at risk of significant deterioration; this is what makes them so important right now. In June 2020, ventilators have become vitally necessary for many patients suffering from severe cases of COVID-19. At-risk groups such as the elderly or those with underlying medical conditions have difficulty coming off a ventilator, and some people would rather die in dignity than spend weeks or months on a ventilator or other artificial life-extending device. However, if that person does not have proper documentation directing their health providers to follow their wishes—if they don’t tell a doctor or loved one that they don’t want a ventilator—the patient will be put on a ventilator if the situation arises and it is necessary to prolong life.
When we consider health care documents from these perspectives, it is clear that a lack of articulated intentions results in stress, confusion, and poor health outcomes (where a positive health outcome is measured by patient satisfaction with care as well as physical health). The creation of advanced health directives is an action taken to protect both yourself and your loved ones from unnecessary grief in the future. Planning for incapacity, no matter the source of the incapacity, is a vital part of any sound estate plan that is unfortunately sometimes overlooked until it is too late. The best thing you can do to prepare yourself and your loved ones is speak to a specialized estate planning attorney to implement your own advanced health directives. Rao Legal Group, LLC (“RLG”) is committed to providing comprehensive estate plans which always include advanced health care directives and financial powers of attorney to help you and your loved ones plan for incapacity. We are only a phone call away.
- 1. https://www.hhs.gov/hipaa/for-professionals/special-topics/hipaa-covid19/index.html
- 2. https://www.nolo.com/legal-encyclopedia/living-will-power-of-attorney-29595.html
- 3. https://www.nolo.com/legal-encyclopedia/living-will-power-attorney-medical-issues-29536.html
- 4. “Importance of POLST During the COVID-19 Pandemic” webinar given by Goals of Care Coalition of New Jersey
During this time of worldwide uncertainty, many of us are facing huge portions of our lives suddenly being moved online. Telecommuting has proven that we can do plenty of our daily activities from home—but there are still limitations. Historically, the signing and notarization of estate planning documents is not something that can be done without all participants sitting together at a table with the physical documents between them. In many places and for many kinds of documents, this is still true, but remote online notarization is a practice that is gaining more recognition.
In New York, Governor Cuomo recently signed an executive order amidst coronavirus precautions allowing the use of remote online notarization statewide; this is an unprecedented usage of executive orders.1 Some have called for guidance from the highest state courts regarding this action, seeking assurance that the order will be allowed to stand before its validity is confirmed. At the same time, other states are considering the option to take similar measures in order to respond to the spread of coronavirus worldwide—these orders may have even been signed by the time of this reading.
For a few weeks, New Jersey lagged behind many states who had already jumped on the bandwagon. Both houses of the New Jersey state legislature debated whether “certain notarial acts” could be performed remotely since mid-March, but it took until nearly a month later for an Act to be signed into law. On April 14, Governor Murphy signed a bill into law that allows for certain kinds of remote notarization during the Public Health Emergency and State of Emergency declared by the governor in Executive Order 103 of 2020.2 Frustratingly, this Act excludes the signing of wills and codicils. However, it is at least applicable for matters such as the creation of HIPAA waivers, healthcare directives, and powers of attorney.3 Firms have developed creative strategies to sign estate planning documents during the past month of waiting to hear whether the bill would pass; now that we have a path forward, we can use remote online notarization in conjunction with these strategies to ensure that we continue to serve our clients’ needs without face to face conference room type meetings.
Overall, 23 states have approved remote online notarization in some capacity, though the requirements and breadth of this ability differ from state to state. Efforts are underway to establish federally recognized remote online notarization.4 The SECURE Notarization Act is a proposed bill in the Senate that aims to do exactly that, legalizing remote online notarizations nationwide—possibly immediately, should it be passed. Currently, the text of the bill is not available, but a summary of the bill indicates that it will provide minimum security standards for the usage of remote online notarization as well as provide certainty for recognition of online notarization between states. States would continue to have the flexibility to implement their own remote online notarization standards above the federal baseline.
As with many other things during the unfolding COVID-19 outbreak, the status of New Jersey’s remote online notarization is still uncertain as the situation continues to unfold. If you are concerned about how best to get your documents executed within the state during this time, the best thing you can do is speak to a specialized estate planning attorney who you can trust to evaluate your options and explain what options may potentially be on the way in the coming days to look out for. Here at Rao Legal Group, LLC (“RLG”) we are utilizing phone calls and video conferences to continue to provide our clients with the outstanding service we are known for while keeping the distance necessary to protect our communities. We are available to help you—call us today to learn more about how we can help you prepare for the future at a time when it’s more important than ever to do so.
- 1. https://www.governor.ny.gov/news/no-2027-continuing-temporary-suspension-and-modification-laws-relating-disaster-emergency
- 2. https://www.njleg.state.nj.us/bills/BillView.asp?BillNumber=A3903
- 3. https://www.njleg.state.nj.us/bills/BillView.asp?BillNumber=A3864
- 4. https://senatorkevincramer.app.box.com/s/baz8p9czm0bijkicxbeb7mb7cxby7mio
Chocolate and flowers have been exchanged, dinner reservations have been made and fulfilled, and Valentine’s day has officially passed. However with the end of February approaching, there is more you can do for your spouse than buying gifts or sharing a romantic evening. Although it’s far from a traditional Valentine’s gift, a well-written and up-to-date estate plan is one of the most important ways you can protect your loved ones. There are many estate planning strategies available to help you meet your personal goals, whatever they may be. In the spirit of the time of year, a nice gift exchange between clients and their spouses is a Spousal Lifetime Access Trust (SLAT).
So, what is a SLAT? A SLAT is a type of irrevocable trust (that is, a trust that cannot be modified without the permission of the trustees/beneficiaries once it is created) where one of the beneficiaries is the spouse of the creator/grantor. Because they cannot be amended, irrevocable trusts result in some loss of control and flexibility regarding the assets contained within them. However, in exchange, they provide tax savings and asset protection from creditors. A SLAT is a type of irrevocable trust set up by one spouse for the benefit of the other, and it can be a valuable estate planning tool for the right client.
- • Allows the grantor access to trust assets through his or her spouse;
- • Allows the grantor to be responsible for the income taxes on the interest earned by the assets growing within the trust, thereby avoiding the compressed trust tax structure;
- • Offers creditor protection to the beneficiaries as assets in the irrevocable trust are outside of the reach of the beneficiaries’ creditors;
- • Offers protection from children’s potential divorcing spouses;
- • Drafted properly, assets can bypass the estates of the grantor, the spouse, and the ultimate beneficiaries of the grantor;
- • Compared to costs associated with defending lawsuits brought by creditors, these trusts are relatively inexpensive to set up;
- • May avoid state income taxes (if properly set up in specific jurisdictions); and
- • Use of trust protectors within the trust can provide flexibility to otherwise irrevocable trusts
- • Expensive, especially if established in Asset Protection Trust (APT) jurisdictions
- • If the spouse passes away, access to trust assets may pass outside the reach of the grantor’s indirect access as the ultimate beneficiaries will now have full control over trust assets; and
- • Depending on the jurisdiction and when and how the trust is set-up, these trusts may not protect against a subsequent divorce of the grantor
SLATs work best for couples with stable marriages, with significant assets, or with asset protection concerns for both themselves and their loved ones and who have no hint or threat of a potential lawsuit or claim either presently or in the imminent future. For those clients, SLATs present a valuable tool to protect the couple’s estates from creditors as well as increase tax efficiency. Additionally SLATs can protect the ultimate beneficiaries (typically the grantor’s children) from their own creditors. With SLATs, as with any other estate planning strategy, the benefits can be lost if they are not drafted by a knowledgeable and specialized estate planning attorney. If you want to find out whether SLATs can help you in achieving your estate planning goals, don’t wait—call us and schedule a time to speak with us today.
How this program may help ensure your estate plan will never let you & your family down at the critical moment
We hear it all the time when talking about estate plans—“I already have an estate plan in place, so I don’t have to worry.” But there are a few major things people don’t realize about estate planning that can put them at risk of not being prepared when the time comes. Plans need to be constantly updated, monitored and maintained on an ongoing basis. What was set up many years ago may not necessarily be current today. Asset changes, law updates and family changes can cause a well designed plan to fail when the time comes to “test” the plan much later.
If your plan includes Revocable Living Trusts (“RLT”) that were established to avoid probate, then were the trusts fully funded (i.e. were the relevant accounts titled to the name of the trust)? If you had planned for your beneficiaries to inherit in trust upon your (or your spouse’s) death, were beneficiary designation forms updated to make the trust(s) a beneficiary? We advised you during your signing that your asset spreadsheet should be updated by you every year, but do you understand when the documents themselves must be changed by the law firm? To ensure the documents work properly, you will need to keep in mind the changes in the law, purchases of new assets, changes in family structure such as marriage or divorce, births or deaths, relocations of your fiduciaries, and more. If you met with your attorney to draft and sign documents, received a nice looking binder filled with those vital documents, but then put it away in a safe place never to be thought of again during your lifetime, you may be at risk that your documents won’t accomplish what was originally intended. Failing to address critical life or asset changes by updating your new documents will jeopardize the entire plan you put in place. The number one reason estate plans fail is because they are out of date.1
Many good estate planning attorneys are concerned about how to ensure clients’ objectives are fulfilled and how to address ongoing updates long after the representation with the client has ended—we’ve joined an exclusive group of firms who have come up with an answer! We understand that your estate plan isn’t completed when you sign your documents and leave our office; rather, your estate plan is completed when your heirs are able to carry out your wishes set forth in the documents after you are gone. Therefore, we, as your estate planners, need to be available to you on an ongoing basis and remain involved throughout your lifetime to ensure that we maintain the integrity of your plan. This is why we are offering our Annual Membership Program (or AMP) to continue to take on the responsibility of monitoring and tailoring the plans that we have set up for you for the duration of your lifetime.
So if you are an existing client of ours and you created an estate plan with us, consider calling us so we can explain the benefits of AMP and how it can ensure that your plan still functions the way you intended. Additionally, please join us at our office on February 6th, 2020 at 6:00 pm for an AMP workshop where you can get more details of this program and find out how it can help you achieve peace of mind for you and your loved ones. But if you haven’t created your estate plan as yet—we hope you will choose us as your estate planning firm, as we will not only prepare superior quality documents but also stand behind our plans long after they are first created.
1. Bonazzoli, V. E. (2017). How an ordinary lawyer creates and sustains an extraordinary client care program. Parker, CO: Outskirts Press.
‘Tis the season of giving—this December, countless gifts have been and will be exchanged between families, friends, coworkers and neighbors. In America, even many people who don’t celebrate gift-giving holidays like Christmas exchange gifts at the end of the year in accordance with the traditions of their friends and families. The last thing any of us want to be thinking about while selecting or opening gifts, is taxes, and normally, we don’t have to. But, if the end of the year has inspired you to think about bigger gifts—like property, or perhaps a new car for your loved one—here are some things you may want to be aware of before you actually write out that check.
Every individual currently has a lifetime estate and gift tax exemption which can either be gifted during your lifetime or left to one or more individuals as part of your estate after your death. There is no gift or estate tax owed to the federal government for gifts below the exemption amount. In 2019, the exemption is $11.4 million per person ($22.8 million for a married US citizen couple). However, this amount is not set in stone and a lot may depend on who is at the helm running the country. For example, before the 2019 tax law changes went into effect, the estate and gift tax exemption was $5.25 million and prior to 2012, it was at $3.5 million per person. If we listen to the media right now, there are talks that we may very well be going back to the $3.5 million amount even as early as next year. Since the IRS has clarified that those individuals making gifts now in order to take advantage of the current exclusion amounts will not be adversely affected should there be a decrease in the future, making large gifts now may not be a bad idea.
Keep in mind, the lifetime exemption exclusion amount is not the only amount to consider when gifting—in addition to your lifetime estate and gift tax exemption, there is a $15,000 annual gift tax exclusion (2019 amounts). This amount is per donor per year, so a joint gift from spouses to a child and the child’s spouse can add up to as much as $60,000 per year gift to your child and his or her spouse. Once you exceed that amount, the excess gift will be deducted from the overall lifetime exclusion amount. There is no gift tax, but the excess gift needs to be reported on a gift tax return the following year along with your income tax filing.
A few points to note: In your haste to see the surprise and joy on your loved one’s face, do not gift away highly appreciated property. We have a lot of families who deed over their primary residences or gift stock that they had purchased several years ago that have accumulated significant gain. This could result in an unexpected and adverse capital gains tax at the time of sale. Finally, if you or your loved one is a non-US citizen, be careful to consider the specific nuances associated with gift giving, as the rules slightly differ here: see what I have written about previously in New Jersey Law Journal.
There are few things better than the warm feeling you get from seeing a loved one enjoy a gift you have given them—but it will benefit both of you in the long run if you are intentional about your gift-giving and plan out ways to avoid tax inefficiencies in doing so. When making gifts, speak to your estate planning attorney, your CPA and your financial advisor to make sure that you approach gift-giving the right way and you can begin the New Year with your right foot forward.
This Thanksgiving, there are several things that we need to be grateful for—and hey, we are after all an estate planning firm, so naturally we’re talking from the estate planning perspective.
Many of you may already know that we are currently in a taxpayer favorable environment and so it behooves us all to at least take notice, if not take advantage of, some of the planning techniques that are still around for the foreseeable future. Changes may occur in the administration a lot sooner than we all anticipated, so the “wait and see” approach is now no longer prudent—being thankful for the current environment may mean acting now rather than later. Some of the tax law changes that are being talked about will directly impact YOU. It isn’t only the wealthiest people who need to pay attention; the moderate to high net worth client may have big changes waiting around the corner [fn: our definition of moderately wealthy is anyone who has or might soon have a net worth of 3.5 million dollars and above if single and over 7 million dollars if married (and U.S. citizens)].
The current gift exemption is the highest it’s ever been—but it might be going down:
Currently, our lifetime tax exemptions for gifting are $11.4 million per person; $22.8 million for a married couple (2019 amounts). This is both an estate and gift tax exemption, which means that if you don’t gift anything during your lifetime, your estate has this entire amount as an exemption upon your death for estate tax purposes. However, there are proposals in Congress to lower this amount—some to as low as $1 million for the gift exemption and $3.5 million for the estate exemption. While this may not be an immediate concern to most of us, it might become critical for those who are in the $3.5 to $7 million range in asset net worth as planning opportunities for those in that net worth range might be extremely limited.
Grantor trusts are highly tax efficient—but they may no longer be an option:
Until now, estate planners have been able to successfully set up irrevocable trusts as an estate planning strategy; these trusts remove an asset from a client’s name while allowing them to still take advantage of the client’s income tax brackets instead of the trust’s compressed tax brackets due to certain provisions in the tax code. However, now it seems like grantor trusts may no longer be a viable planning vehicle due to ongoing talks that the grantor trust may be eliminated. If that truly is the case, planning NOW ahead of those changes may be vital to avoid paying increased taxes as part of your estate.
GRATs remove taxes on asset appreciation—but they may also disappear:
Grantor retained annuity trusts (or GRATs) are commonly used as planning techniques to minimize taxes on certain taxable estates; they allow clients to pay taxes on the transfer of an asset upfront, meaning that any appreciation in the asset’s value will pass ownership at the end of the trust’s term tax-free. However, these may no longer be around by the end of 2020. This also means that wealthier clients may not be able to sell, loan or transfer assets to these trusts either, thereby removing these popularly used techniques from the planning vocabulary.
Irrevocable life insurance trusts (ILITs) allow clients to make large lifetime gifts—but they may be affected by the annual exclusion:
Until now, we have always recommended that grantors try to utilize unlimited annual exemptions per donee trust beneficiary so large annual premiums to trust would not need to be reported as eating into a client’s lifetime gift amount. However, there’s some talk about limiting the annual exclusion amount to $20,000 per year per donee and $10,000 per year per donor in total, so that strategy may be turned on its head. Estate planners need to think about the future of such strategies and what impact these changes will have on clients who have large premiums coming out this year into the trusts.
So what does this mean?
Not much for those with estates that fall well under the estate tax threshold as of right now (or even if there’s a decrease in exemption). But for those moderately wealthy and high net worth clients, it may be wise to start planning with the horizon in mind. Taking advantage of the high gift exemptions now might be a good idea, but doing it in such a way that it is protected inside of a trust is prudent. There is a lot of opportunity for families with either less wealthy parents or more wealthy children to allow them to either utilize their exemptions or their children’s exemptions to ensure planning strategies are implemented now (well before the 2020 storm happens) for maximum benefits no matter what comes in the future. This is especially true where spouses may need to transfer assets to one another to allow for enough time to pass between such transfers (i.e. 2019-2020) so that planning strategies for both spouses’ assets can be implemented.
For those clients with irrevocable life insurance trusts or ILITs, they might want to take advantage of paying the future premiums in advance of any changes to avoid being impacted negatively by the new annual gift exemptions proposed by the Democratic party in Congress.
Finally, while there is no guarantee that any of these above changes are going to be written into law, and we certainly do not want the tax tail to wag the estate planning dog, we can be both thankful and mindful at once. We currently have in place the highest recorded exemptions in history and access to a number of crucial strategies to preserve our clients’ assets. So if any of the information above concerns you and you want to benefit from implementing some of these techniques to grandfather them into your estate plan ahead of a potentially-changing tax regime, then we hope you will call our office right away so we can put into motion a plan that you can be thankful for—in 2020 and well beyond.
Leona Helmsley, a hotel owner and real-estate investor known by many as “The Queen of Mean,” died in 2007, leaving behind over $4 billion in assets. At first, it would seem like she did everything to leave her estate organized the way one is supposed to; she left a 14-page Will behind with little ambiguity as to how her sizable assets would be divided upon her death, neatly packaged into individual testamentary trusts for her grandkids to be set up after her death and to be paid out over time. And yet, the final Court ruling did not conclude until earlier this year in 2019—a full 12 years since her passing—due to various disputes by disgruntled beneficiaries.1 She had a Will, so why did the probate process take so long?
The answer comes back not only to the unusual size of her Estate, but also to the language of Mrs. Helmsley’s Last Will and Testament. While it was explicit in reflecting who would receive what amount of money and how, her intentions guiding such declarations were less clear. She had disinherited two of her four grandchildren, and yet her Will’s only mention of them was as follows:
“I have not made any provisions in this Will for my grandson CRAIG PANZIRER or my granddaughter MEEGAN PANZIRER for reasons which are known to them.” 2
This declaration was in stark contrast to the $12 million dollars left to her dog, Trouble, who she wished to have buried beside her (an impossibility due to New York State laws barring animals from being interred alongside human remains). This significant apparent inequity in pay-outs caused a foreseeable Will contest by the disinherited heirs, leading to a Court settlement on this issue in 2008.3 It’s possible that despite what she thought were clear instructions to disinherit her grandchildren, the lack of clearly laid out reasons for their omission and the large bequest to her pet opened up questions on the testator’s state of mind which ultimately resulted in a favorable outcome for the disinherited grandchildren.
Better foresight by Mrs. Helmsley and her drafting attorney of an inevitable Will contest and the Court’s possible ruling in favor of family members over pets may have prevented this situation. While Mrs. Helmsley’s Will was probated in New York, both New York and New Jersey allow Wills to be contested due to incapacity or undue influence even if there is a standard no-contest provision written into the Will. Full disclosure in a Will or better yet, setting up a Revocable Living Trust to ensure the courts are not involved, may have avoided this lengthy legal battle. Furthermore, a Revocable Living Trust would have kept all this messy family drama out of the public eye.
Of course, that’s not all there is to say regarding Leona Helmsley’s Will and the Estate Administration that followed; even at the end of probate, there was another issue regarding Executor compensation that was only finalized this past August. This matter was brought before the Court in 2016, and finally in 2019 the Court awarded $100 million to be divided equally between four Executors, with an additional $6.25 million to be paid to the Estate of the fifth Executor. This was over the objections of New York Attorney General’s office, which claimed that the compensation was an exorbitant amount and suggested it be cut by as much as 90 percent, based on a third party expert evaluation.
The Court upheld the Executors’ request for the $100 million fee, explaining that their efforts could not be accurately measured by an hourly compensation and that these Executors faced extensive challenges in dealing with the administration of the Estate. This decision resulted in fees paid to the Executors five times more than the original individual bequests included in the Will.
Was this decision in line with Mrs. Helmsley’s intentions? Most likely not. Generally, statutory laws dictate how much an Executor is entitled to as compensation out of the Estate barring any specific provisions about this in the Will. Therefore, if you have thoughts on how you would like your Executors to be compensated for their work, or if you would like to provide flexibility in their fees that the law does not, a specialized estate planning attorney can advise you on the best way to include such considerations in your Will.
Leona Helmsley’s Will, though it encompasses more assets than most of us are likely to have in our lifetimes, illustrates several of the nuanced challenges faced when writing a Will. Sandor Frankel, the attorney who drafted her Will, had nearly 40 years of litigation experience, but he was not an estate planning lawyer. This outcome for Mrs. Helmsley’s estate highlights the importance of working with a specialized Estate Planning lawyer who understands how to effectively deter Will contests and draft documents with the end goal of avoiding court intervention. Ensure that your Estate does not face these challenges after your passing by drafting your Will with a lawyer who understands how to plan for the needs of your unique situation.
As an estate planning attorney, it is my job to talk about death and taxes in a very matter of fact manner. When I sit down with my clients to design their documents, I try to take emotions out of the conference room as we go through what should happens at first death or second death. When we come to the final part of the Will design, I ask – “In the unlikely event that all of you (you, your spouse, your kids, your grandkids) are not around to take their share, who would you want your assets to go to?” – and I get this uncomfortable laugh and oftentimes responses like “Wow, I did not think about that!” or “Whoa, that is crazy – who thinks that far?” or at times “C’mon, that is never going to happen so do you really need me to answer that?”…but I still go through the motions until they come up with an answer and once the documents are signed, this is likely to go into distant memory hoping that it will never be addressed…ever!
So when I heard about the Indian family of 4 (Thottapilly family ages 41, 38, 12 & 9)¹ who went missing on April 5, 2018 in Northern California while on a road trip and their bodies were later found submerged in the river into which their SUV crashed, all I could think of is that this remote provision was not that remote after all!
It could have been any family, this could have been any happy vacation – all it takes is a set of unfortunate conditions -Mother Nature at her worst or a terrorist act or human error. Whatever the case may be, it goes back to the sad truth that nothing is certain except for death and taxes…and its not “if” but “when.” Perhaps at this point we may not really care what happens to our assets if those closest and precious to us are gone but, by putting in place a contingency plan for both predictable and unpredictable events, you at the very least ensuring that your assets don’t pass to those you who dont want them going to and this may very likely happen if you leave behind no Will and your assets pass through the laws of intestacy.
Consult with an estate planning attorney today and make sure that your overall objectives for your assets, whether remote or not so remote, are fulfilled!