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Question: “I just heard that if I name my children as joint account holders to my accounts, then should I become incapacitated or pass away, my children will find it very easy to manage my money during my life or when I die.

Then why do I even need an expensive Will ?“

RLG Attorney answer – In certain areas, making things simple is not always going to give the desired result and in such cases, less is not always more.  People learn the hard way about the pitfalls of this strategy.  This article highlights the importance of getting the right advice from the right professionals who can guide you towards setting up a more comprehensive estate plan.

Let’s take a look at these 2 situations – when someone is alive and when that person passes away

During lifetime

1.      Exposure to Creditors:

A significant red flag in this planning technique is the exposure of assets to the creditors of the named individuals. If you named 2 children on the account and one of them (say your son) gets into financial difficulties or legal disputes, his creditors can now go after all of the assets under his name and yes, his 1/3^rd interest in this joint bank account is now vulnerable to those creditors’ attacks.  Therefore you need to weigh the desire to protect your assets for your children against this undesirable outcome

2.      Loss of Control:

We have also seen unfortunate situations where one child goes “rogue” and either because of spendthrift issues or financial difficulties, they wipe out the account of whatever is in there. Since the child, as joint account holder, has complete and absolute control over the funds within the account, he or she will not need anyone’s permission to operate the account during your lifetime. This may be a reasonable set up if the funds are small or you trust your children to do the right thing but our rule of thumb – don’t set up a joint account if all you are looking for is someone to help you manage the funds during your lifetime… instead execute a General  Durable Power of Attorney

Upon death

3.      Lack of Alignment

If your end goal is to have the assets passing to your children protected from their creditors after you are gone, then setting them up as joint account holders will instead allow the funds to pass to them outright upon your death and become exposed to their creditors (including divorcing spouses).  If you want to protect these assets for your children, then naming them as joint account holders of your assets is not a good strategy.

4.      Unequal Distribution:

If you name only 1 child and tell him or her to distribute the assets to the other when you are gone, then you may have not only inadvertently created a situation where children may imply your favoritism of the named child causing an impact on family dynamics but you may have also created an adverse tax impact on the child receiving the assets in the account.  Also, if you have children with special needs, you just made it harder for that child to receive assets in a protected special needs trust.

Our advice – often, avoiding probate is not always the ultimate goal in estate planning. Don’t be swayed by misinformation that may be out there on what you need to do.  Instead, get the proper guidance and advice of a specialized estate planning attorney who can ensure that your plan is set up in a way that fulfills your objectives both during incapacity as well as after death while addressing your unique needs.

January Question – I just signed my Revocable Living Trust and feel pretty good knowing my assets are protected!

RLG’s Attorney Answer – Not all trusts are “built” alike and unfortunately, your Revocable Living Trust, although excellent for many things (and there will be more on that in the months to come), will not protect your assets.

The best way to understand trusts is that there are two primary types of trusts – Living Trusts (those created during your lifetime) and Testamentary Trusts (those that are created upon death).  However, Living Trusts can be further divided into Revocable Living Trusts (RLTs) or Irrevocable Living Trusts.  And, know that all testamentary trusts are automatically irrevocable – otherwise what would be the point of someone saying in their Wills that they want their loved ones to inherit in trust upon that someone’s death, if the loved one can go ahead and change it.  That would defeat the purpose of that someone’s objectives wouldn’t it?

By virtue of its name, all Irrevocable Trusts offer some type of asset protection – either from the IRS (for death tax purposes) or from creditors & predators of a beneficiary.  So if Irrevocable Trusts are like vaults or treasure chests, Revocable Living Trusts are really like “Cookie Jars” – those glass jars on the kitchen counter – transparent, easy to access, and perfect for managing your sweet assets during your lifetime. However, people often mistake the cookie jar for a vault. The term “trust” creates this illusion of impregnability, leading many to believe that any trust, including RLTs, have a high-security protection.

The charm of RLTs lies in their revocable nature – like a lid you can lift anytime to add or remove cookies. It’s great for sole control and flexibility, but this very feature makes the contents vulnerable to outside hands, unlike the sealed vault. Your assets in an RLT are more like cookies where you can put your hand in to get your cookies out and legitimate creditors can take a bite as well if they wish.

Conclusion: RLTs are nothing more than Will substitutes and both RLTs and Wills can have language within them to set up testamentary trusts for their loved ones upon death. Its only Irrevocable Living Trusts set up during the lifetime of someone that can get assets out of his or her estate to save on estate taxes or provide asset protection during the lifetime of that person. RLTs are effective during lifetime and when assets are in them, they can be convenient, flexible, and perfect for daily use. However, mistaking them for impenetrable vaults might leave you with a trail of crumbs.

 

Rekha will be discussing why estate planning for parents with loved ones with special needs is even more important particularly from the legal perspective.

Discover how to create a comprehensive estate plan that safeguards your loved ones, ensures financial security, and addresses the unique needs of individuals with disabilities. Gain valuable insights on wills, trusts (both revocable and irrevocable), guardianship, and government benefits. Don’t miss this opportunity to gain peace of mind and build a brighter future for your family.

Registration link is below. Registration is FREE but Required!
https://tinyurl.com/BrightTomorrows

Questions? Reach out to pep@sknfoundation.org

 

 

In honor of this month let us take a closer look at Special Needs Trusts that are crucial estate planning tools designed to protect the financial well-being of individuals with disabilities. We will delve into the essential aspects of special needs trusts, their benefits, and the considerations involved in setting up and managing them.

 

1. What is a Special Needs Trust?

A special needs trust is a legal arrangement that allows funds to be held and managed for the benefit of an individual with a disability. It is established to supplement and not supplant government benefits so additional financial resources can be provided to him or her to enhance the quality of life without jeopardizing their eligibility for assistance programs like Medicaid and Supplemental Security Income (SSI).

 

2. Types of Special Needs Trusts:

There are different types of special needs trusts, including First-party or self-settled trusts, third-party trusts, and pooled trusts. First-party trusts are funded with the individual’s assets, such as an money earned by the individual prior to the disability, or inheritance or personal injury settlement When the individual dies, any money remaining in this trust must be paid back to the StateThird-party trusts, on the other hand, are created by someone other than the beneficiary typically a parent or grandparent, for the benefit of the individual with disability. Money left over in these types of trusts upon death of the beneficiary can be redistributed among other family members. Pooled trusts are managed by nonprofit organizations, combining resources from multiple beneficiaries for investment purposes.

 

3. Preserving Eligibility for Government Benefits:

One of the primary advantages of special needs trusts is the ability to protect the individual’s eligibility for government benefits. These trusts ensure that the assets held within the trust are not considered as owned by the individual, preventing them from exceeding the income and asset limits set by benefit programs. As a result, the individual can continue receiving essential government assistance.

 

4. Using Trust Funds for Supplemental Needs:

Special needs trusts allow funds to be used to cover a wide range of supplemental needs beyond what government benefits provide. These may include medical and dental expenses not covered by insurance, therapy and rehabilitation services, educational expenses, transportation costs, assistive technology, home modifications, and recreational activities, sometimes even air-fare for the individual along with a companion. Therefore, the Trust funds are used to enhance the individual’s quality of life and promote their overall well-being.

5. Protection from Exploitation and Mismanagement:

Establishing a special needs trust also provides an added layer of protection for individuals with disabilities. By appointing a trustee to manage the trust funds, you can ensure that the funds are used responsibly and in the best interest of the beneficiary. This protects the individual from potential exploitation or mismanagement of their financial resources.

 

6. Selecting the Trustee:

Therefore, trustee selection can become a crucial decision in establishing a special needs trust. It is important to choose someone who is trustworthy, reliable, and capable of handling financial matters. We prefer appointing a professional trustee (like Plan NJ or Bryn Mawr Trust) rather than a family member or close friend to ensure proper management and adherence to the trust’s terms.

 

Conclusion:

Special needs trusts are powerful tools that enable families to protect their loved ones with disabilities, preserve eligibility for government benefits, and enhance their quality of life. Understanding the different types of trusts, their benefits, and the proper management of trust funds is crucial in ensuring the long-term financial security and well-being of individuals with disabilities.

This article highlights the importance of having a Last Will and. Testament drafted by an attorney; but it fails to mention another important estate planning vehicle – a Revocable Living Trust – that could have not only avoided the family drama related to Aretha Franklin’s objectives on how and who her assets should go to but could have kept this entire affair very private and out of the Court’s and public’s scrutiny. Same destination but a different (and in this case, a critically essential) route to get there!

 

https://www.wealthmanagement.com/estate-planning/aretha-franklins-will-drama-over?fbclid=IwAR23XBxa68i7EIXDztXQTnnQtT_WJSs8ZY4fILOF_MChg3HOKFV_IMroK7Y

Most banks will not allow minors to set up bank accounts by themselves. To get around this, many parents set up joint accounts with their children, so the child can deposit money they get from working, gifts, etc.

Joint accounts are easy to set up, but they may not be the best way to get your child access to a bank. They can expose the child and the parent to unnecessary risk.

Problems for the Child

A joint account is owned by both individuals 100%. This means that either the parent or the child can take all of the money out no matter who put in the money.

This means the child can be exposed to the parent’s creditors.

Example 1

John is 15. He works at a retail store after school, and his mother, Sally, opens a joint account with him, so he can get his wages via direct deposit.

Unfortunately, Sally had some outstanding credit card debt. She ignored the summons from the credit card company; the company got a default judgment against her, and then went to court to get her bank account garnished.

There were insufficient funds in Sally’s account, so bank took the money from John’s account and gave it to the credit card company.

Unfortunately, John has no recourse. The bank was required to turn over the money as it was legally John’s AND Sally’s. John can only hope that his mother straightens out her finances and is able to pay him back in the future.

Problems for the Parent.

Most parents set up joint accounts with  their child wherever they already do their banking. This exposes the parents’ other accounts.

Example 2

Annie opened a joint account with her daughter, Marcia, when Marcia was 17 for her to put in money she was gifted from relatives. Annie occasionally sends $50 to her daughter for fun money, but Annie does not pay attention to this account and does not consider the money in the account to be hers.

When Marcia went to college, Marcia continued to use the joint account and never opened a solo one. Unfortunately, Marcia is spendthrift. She really likes to shop, and she spent more money than she had in her account.

Since the account was tied to one of Anne’s other account that served as an overdraft protection, this account was depleted due to Marcia’s excess spending.  Annie was furious and complained to the bank, but she was out of luck.  Because Annie was on Marcia’s account, she was liable for her daughter’s overspending.

Alternatives to a Joint Account.

Joint Accounts are the most common way for parents to set up accounts for their minor children, but they are not the only option. Here are two other options for parents who may not want to have a joint account with their child.

Custodial Accounts

One option for parents is establishing a custodial bank account. With a custodial account, the child is the owner and primary beneficiary, but there is an adult (usually the parent but it can be a financial institution) who oversees the account until the child is 18 (or 21 in some states), which is when control of the account is given to the child.

The advantages here are that the parent’s money and the child’s money are separate, so the child is not exposed to the parent’s creditors, and the child cannot overdraw the account.

Neither John nor Annie would have been in trouble if they had custodial accounts instead of joint accounts.

Prepaid Debit Cards

Another alternative to a joint account is a reloadable pre-paid debit card.

Several institutions allow parents to set up pre-paid debit cards for their minor children.

No two cards, however, are exactly the same. Before signing up for one, the parents should review the terms carefully, and make sure they understand what their rights and obligations are with that institution.

For example, some cards offer parental monitoring and control or are designed to teach the child how to save and invest wisely. Usually, these features come with a monthly fee.

If the parent prefers to be more hands-off approach, there are a number of cards that are free to use, but do not offer parental monitoring, so the child is left to his or her own devices.

In addition to the ability to control or monitor the child’s spending, parents should also consider if the card offers overdraft or fraud protection.

Be aware that some institutions do require the parent to also have an account if the minor child is to have his or her own debit card; this could expose the parent to the same risk that a joint account would.

Conclusion

There are different options for parents who want to help their child better access his or her money. A joint account is often used by married couples and generally are preferred in such situations.  However, there could be problems when owned by parents together with children so it is worth exploring your option to see what works best for you and your family.

 

 

 

 

Most banks will not allow minors to set up bank accounts by themselves. To get around this, many parents set up joint accounts with their children, so the child can deposit money they get from working, gifts, etc.

Joint accounts are easy to set up, but they may not be the best way to get your child access to a bank. They can expose the child and the parent to unnecessary risk.

Problems for the Child

A joint account is owned by both individuals 100%. This means that either the parent or the child can take all of the money out no matter who put in the money.

This means the child can be exposed to the parent’s creditors.

Example 1

John is 15. He works at a retail store after school, and his mother, Sally, opens a joint account with him, so he can get his wages via direct deposit.

Unfortunately, Sally had some outstanding credit card debt. She ignored the summons from the credit card company; the company got a default judgment against her, and then went to court to get her bank account garnished.

There were insufficient funds in Sally’s account, so bank took the money from John’s account and gave it to the credit card company.

Unfortunately, John has no recourse. The bank was required to turn over the money as it was legally John’s AND Sally’s. John can only hope that his mother straightens out her finances and is able to pay him back in the future.

Problems for the Parent.

Most parents set up joint accounts with  their child wherever they already do their banking. This exposes the parents’ other accounts.

Example 2

Annie opened a joint account with her daughter, Marcia, when Marcia was 17 for her to put in money she was gifted from relatives. Annie occasionally sends $50 to her daughter for fun money, but Annie does not pay attention to this account and does not consider the money in the account to be hers.

When Marcia went to college, Marcia continued to use the joint account and never opened a solo one. Unfortunately, Marcia is spendthrift. She really likes to shop, and she spent more money than she had in her account.

Since the account was tied to one of Anne’s other account that served as an overdraft protection, this account was depleted due to Marcia’s excess spending.  Annie was furious and complained to the bank, but she was out of luck.  Because Annie was on Marcia’s account, she was liable for her daughter’s overspending.

Alternatives to a Joint Account.

Joint Accounts are the most common way for parents to set up accounts for their minor children, but they are not the only option. Here are two other options for parents who may not want to have a joint account with their child.

Custodial Accounts

One option for parents is establishing a custodial bank account. With a custodial account, the child is the owner and primary beneficiary, but there is an adult (usually the parent but it can be a financial institution) who oversees the account until the child is 18 (or 21 in some states), which is when control of the account is given to the child.

The advantages here are that the parent’s money and the child’s money are separate, so the child is not exposed to the parent’s creditors, and the child cannot overdraw the account.

Neither John nor Annie would have been in trouble if they had custodial accounts instead of joint accounts.

Prepaid Debit Cards

Another alternative to a joint account is a reloadable pre-paid debit card.

Several institutions allow parents to set up pre-paid debit cards for their minor children.

No two cards, however, are exactly the same. Before signing up for one, the parents should review the terms carefully, and make sure they understand what their rights and obligations are with that institution.

For example, some cards offer parental monitoring and control or are designed to teach the child how to save and invest wisely. Usually, these features come with a monthly fee.

If the parent prefers to be more hands-off approach, there are a number of cards that are free to use, but do not offer parental monitoring, so the child is left to his or her own devices.

In addition to the ability to control or monitor the child’s spending, parents should also consider if the card offers overdraft or fraud protection.

Be aware that some institutions do require the parent to also have an account if the minor child is to have his or her own debit card; this could expose the parent to the same risk that a joint account would.

Conclusion

There are different options for parents who want to help their child better access his or her money. A joint account is often used by married couples and generally are preferred in such situations.  However, there could be problems when owned by parents together with children so it is worth exploring your option to see what works best for you and your family.

 

 

 

 

 

New Jersey is one of the six states that has an inheritance tax.[1] This means that if you live in New Jersey (or if you own property in New Jersey), the beneficiaries of your estate may need to pay a tax depending on how much they inherit, what type of asset they inherit, and their relationship to you.

Who is exempt and who has to pay?

Class A beneficiaries are exempt from the inheritance tax. Class A beneficiaries are your spouse, children, stepchildren, grandchildren, parents, or grandparents. They do not have to pay an inheritance tax in New Jersey. This means that not all of your relatives are Class A beneficiaries. You may love your niece as a daughter, but she could be subject to an inheritance tax if you leave her a part of your estate in your Last Will & Testament or Revocable Living Trust.

Class C[2] includes your siblings and your son in law (or daughter in law). The first $25,000 is exempt, but anything more than that is subject to a tax that starts at 11% and is based on a graduated scale.

Class D beneficiaries include everyone else who is not in A, C, or E. Your nieces, nephews, friends, or significant other are Class D. There is a $500 exemption after which they have to pay at least 15% on any inheritance which is subject to the tax.

Class E beneficiaries are tax exempt entities such as charities. They do not have to pay an inheritance tax.

What Assets are Subject to the Inheritance Tax?
Most assets are subject to the inheritance tax including bank accounts, IRAs, real property, personal property. Life Insurance, however, is not subject to inheritance tax in New Jersey.

Notable Exceptions

Interestingly, Life Insurance is not subject to Inheritance Tax.  Payments from certain pension plans such as the New Jersey Public Employees Retirement System, the New Jersey Teachers’ Pension and Annuity Fund, and the New Jersey Police and Firemen’s Retirement System are not subject to Inheritance Tax. Also, in New Jersey, there is no inheritance tax on gifts made during lifetime so long as the gifts were made 3 years before death

How Does this Impact Your Planning?

Since not everyone is subject to an inheritance tax and among those who are, not everyone is subject to the same rate, it would be wise to consult with a specialized estate planning attorney when creating your estate plan so that you can maximize the amount of money going to your beneficiaries and minimize the amount going to taxes.  Additionally, it would be important for your beneficiaries to know who has to pay the inheritance tax – by making the estate pay the taxes out of the residue, it would make it  easier for the Executor to administer the estate as he or she can avoid chasing after the various non-Class A beneficiaries to pay up, but it also would mean that less money would go to the residuary beneficiaries.

Example:

Bob is a widower. He and his late wife never had children, but he has two siblings, two nephews, and three close friends who he would like to include in his Will. He would like to give his seven beneficiaries 1/7 of his total $500k estate.

Half of Bob’s estate comes from his life insurance policy; in which Bob had named his wife as the beneficiary but never updated it when she died, nor had he named any contingent beneficiaries. This means Bob’s estate became the beneficiary upon his death and his seven beneficiaries now have to pay inheritance taxes on their respective shares

Result: Each beneficiary inherits $71,428, but the siblings would only have $66,321 after taxes and the other beneficiaries would have $60,714 after taxes. Out of the $500,000 estate, $63,784 or 12.7% will go to the State.

What could Bob do differently?

If Bob goes to an estate planning attorney, the attorney can advise Bob that his beneficiaries are subject to an inheritance tax, and that his nephews and friends are subject to a greater tax than his siblings.

With this awareness, Bob can be more strategic in how he distributes his estate, can reduce the total amount paid in taxes, and can allow for each beneficiary to inherit more money.

Instead of splitting the estate in 7 equal parts, Bob can split his life insurance amongst his five class D beneficiaries, giving each one 20% of the policy. To make it up to his siblings, Bob can give each sibling 30% of his estate and divide the remaining 40% amongst the class D beneficiaries, giving each one 8% of the estate.

By doing this, each sibling will receive $69,500 instead of $66,321, and the nephews and friends will receive $67,000 each instead of $60,714. Out of the $500,000 estate, only $26,000 or 5.2% goes to taxes.

Conclusion

An estate planning attorney can help you achieve the best results for your beneficiaries. Not only would the attorney have advised Bob on proper titling of all probate and non-probate assets but could have helped ensure which beneficiaries inherit what amount and from where. Just splitting the estate equally might sound fair, but as you saw with Bob, it created a not so great outcome for all of his beneficiaries.

[1] Iowa is phasing its out and is set to be gone by 2025.

[2] Class B no longer exists.