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.

Gift-Giving and Taxes

‘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.

Things we still need to be grateful for in 2019…!

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.

Changes to the Kiddie Tax

Now that the new tax law has been underway for a few months now, this is probably a good time for a refresher on how the new changes affect the kiddie tax that could impact some families.

 

The kiddie tax was first introduced in the Tax Reform of 1986 to close the loophole through which wealthy parents and grandparents would transfer assets the produced investment income to their children or grandchildren so that the child would be taxed at the lower tax rate. The tax was imposed on a portion of the affected child’s unearned income at the parent’s marginal rates if that was higher than the child’s rate.

 

Today, the new changes have revised kiddie tax in that those under 18 and those who are full time students between the ages of 19 & 24 at the same rate as trusts & estates.  This means that any income over $12,500 would be subject to the highest tax bracket of an individual or a married couple filing jointly.  The following table represents this new kiddie tax rate:

 

UNEARNED INCOME SUBJECT TO KIDDIE TAX TAX RATE
Up to $2,550 10%
$2,551 to $9,150 24%
$9,151 to $12,500 35%
Over $12,501 37%

So unless you are such high earners that the kiddie tax would still be a savings, wait until your kids turn 25 (and are hopefully out of school) before making them wage-earners of your businesses or recipients of your unearned income.

Revocable Living Trusts: Misunderstood

I have been, for a while now, one of “those” New Jersey attorneys who likes to recommend Revocable Living Trusts (RLTs) for my clients perhaps more often than a majority of my fellow New Jersey colleagues.  When I first started to practice in the area of trusts & estates, I spoke the same language as many of these attorneys when it came to recommending Wills over Revocable Living Trusts.  They all said: “NJ is a probate friendly state; there is really no need to set up living trusts here.  And those attorneys who are “churning” these trusts out like mills are only doing it to make a fast buck!”  And I believed them…after all, when you are new in the field, you naively treat what the more experienced colleagues are saying like gospel.

 

Fast forward a few years later and I realized that these very same attorneys had dismissed a crucial benefit (among a few others) in setting up RLTs.   Investment/brokerage accounts in a RLT do not get “frozen” upon the death of the account holder unlike those assets passing under a Will.  You see, in NJ, the State Tax Branch obligates institutions to freeze accounts of those decedent estates with over $675k (in 2016)[1] until the Executor provides a waiver from the Tax Branch showing that taxes had been paid.  These waivers could take several months to be issued after the filing of the estate tax return.  Up to 50% of the precious funds that could have otherwise been allocated to paying expenses are instead tied up for this time causing undue delays.  The RLT avoids the waiting period completely – taxes still have to be paid, but when assets are in a RLT account, the Executor-Trustee does not have to jump through hoops to get bills paid or to make other necessary expenses.

 

But…we are now in 2018 and NJ does not have an estate tax starting this year.  This means families can just sign a self-executing waiver to release accounts over to the estate and distribute them to Class A[2] beneficiaries almost immediately.  So although I now recommend RLTs less frequently than before, I still find that certain clients can benefit from having RLTs in place for the more than the usual set of reasons.  RLTs are still beneficial to (i) avoid probate in multiple jurisdictions where an individual owns properties in other states; (ii) it allows assets of an incapacitated individual (especially a business owner) Grantor to be managed by the successor Trustee of the RLT instead of relying on the Agent’s authority under a Financial Power of Attorney; or (iii) keep things between family members where privacy is very important to the Grantor.  Moreover, RLTs are still extremely beneficial where self-executing waivers cannot be used i.e. when assets pass to beneficiaries in testamentary trusts or (2) when someone other than lineal descendants of the decedent (i.e. non-Class A beneficiaries) stand to inherit from the decedent’s estate since the inheritance tax in NJ is still alive and well.

 

In conclusion, RLTs are more expensive and there may be no need to set these up for straightforward estates.  However, for the right client, I recommend RLTs because even though both Wills and Trusts work fine in our “probate friendly” jurisdiction, RLTs work better in the long run and the client’s family’s life is made just a little (and in some cases, a lot) easier.

 


[1] The NJ estate tax exemption was at $675k for several years before going up to $2m per person in 2017 and finally disappearing in 2018.  For now, until the next legislative change occurs, there is no estate tax in NJ; but there is still an inheritance tax on assets transferring to all non-spouse and non-lineal descendant beneficiaries.
 
[2] Class A beneficiaries include parents, spouse and children of the decedent

Things I Learned at Heckerling

Two weeks ago, I was fortunate to be able to attend the 52nd Heckerling conference on Estate Planning.  This is a conference where the best & brightest minds in estate planning deliver tips & strategies on the latest planning techniques.  It was even more fortuitous for me, as a first-time attendee, that this year’s conference was all about the new tax code which went through a complete overhaul late last year.

This new law informally referred to as the Tax Cuts and Jobs Act of 2017 is also officially known as:

H.R. 1 – An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.”  It was numbered Public Law 115-97.

Heckerling did not disappoint!  As Jonathan Blattmacher, the guru of estate planning put it (and I summarize), the change up of the tax environment presents a unique & exciting opportunity to those attorneys who may want to master these new laws and gain a competitive edge over the older and more experienced attorneys who had become comfortable with the old tax regime.  Here is what I learned:

 

  • • The new mantra is income tax savings rather than estate tax savings. While moderately wealthy and high net worth (“HNW”) clients still need to keep thinking about estate tax savings & creditor protection with 2026 in mind[1], for the vast majority whose assets are well below the newly increased thresholds ($11.18m exemption per person; $22.36m for a married couple), we ought not to be too concerned about estate tax savings but rather we need to focus on income tax reduction techniques;
  • • Having said that, the estate tax conversation has not completely gone away for the moderately wealthy and HNW clients who need to plan quickly and prudently in light of the very real possibility that the law may very well in fact sunset in 2025 (or earlier if there is a legislative change). A relatively young client with $5m in his or her estate right now can easily be looking at an estate over $10m estate in 2025 which in turn, translates to a sizeable taxable estate especially if the exemption limits drop considerably;
  • • Roth IRAs should be looked at as the golden goose that keeps on giving. The compounding interest and income tax free nature upon withdrawals makes Roth IRAs not only attractive but critical to amassing wealth, says Natalie Choate the Queen of Retirement Accounts.  More importantly, there are several tips & techniques that can be taken advantage of, if your income is over the income cap for Roth contributions;
  • • The lack of being able to take State and Local Tax (or SALT) deductions on our federal taxes is concerning to those of us living in high income tax states; however, the new law also presents interesting opportunities to get around this problem, especially with the use of nongrantor trusts;
  • • Conversions from partnerships or S corps to C corps for some individuals or businesses may make practical sense for some businesses to get the lower effective tax rate for corporations; having said that, this needs to be explored careful since the conversion could be a taxable event as well as irrevocable; and
  • • Businesses that are providing a service (i.e. doctors, lawyers and accountants, but interestingly not engineers or architects), don’t enjoy the same benefits as regular corporations under this new tax law; but here too, there may be some planning techniques that could be utilized to bypass this restriction.

All in all, it was definitely an exciting time to be part of this conference this year.  The strategies we had been implementing for so many years need to be revisited and changed based on the current tax climate.  Our earlier conversations that focused on the gift & estate tax will now need to include capital gains, cost basis and income tax planning as well.  And finally, now more than ever, it is important for all us – the financial planner, the CPA and the estate planning attorney – to put our heads together to provide a comprehensive team approach to a client’s wealth building and preservation goals.  These plans need to maximize income tax efficiency, utilize the available estate & gift tax exemptions prudently and at the same time fulfil the client’s personal succession planning goals.


[1] The new tax law is scheduled to sunset in 2025