Valentine’s Day

Question:  I just got remarried but I have children from a previous marriage. If something were to happen to me, how do I take care of my spouse during his lifetime but ensure that my assets go back to my children after his death?

RLG advice: So you’ve found love again and are navigating the adventure of a second marriage with kids from a previous chapter. Kudos! Let’s chat about some friendly advice on how to make sure your wishes are honored and everyone gets their fair share.

Step 1 – Get your Valentine a gift of a Last Will & Testament or Revocable Living Trust!: Of critical importance to you who has seen Cupid more than once, is to get your Will or Revocable Living Trust – what we call your foundational estate planning documents – signed asap!  In your documents you will state that what passes to your spouse will go in trust (a QTIP or Qualified Terminal Interest Property trust) so that when your spouse passes, the assets can revert to your children. By spelling out “the-what, the-who, the-when and the-how” in a Will or a Rev Trust, you are giving your loved ones the greatest gift of all – the gift of time that they would have otherwise lost dealing with a messy estate where state law determines who should inherit your assets.

Step 2: Don’t underestimate the power of titling of accounts. Remember your Will can be beautifully laid out but it will only control what is in your own name alone i.e your probate assets. However, for those accounts you own jointly with your spouse or if the account has beneficiaries designated (i.e. non probate), then such accounts will pass directly to the joint tenant or named beneficiary outside of your Will or Rev Trust.

Step 3: Deeds must also be re-titled differently. You and your new spouse need to have a frank conversation on what should happen to the family home when you are both gone.  Is this a home you bought together? Is this home yours but he moved into after you got married?  If the end goal is that your children should benefit from this when you are not around, then titling of the deed becomes critical.  If the deed has the magic words “husband and wife” or “married couple” at the end of your names, then the house get a “Tenancy by the entirety will automatically pass to your wife, outside of probate and your children will be out of luck. ).  Talk to your new spouse and figure out whether it makes sense to keep title in your name alone so you can either dictate what happens to it in your Will or Trust, or if you agree to create mirror image Wills that you both agree not to change upon the death of one, this could also ensure that your children will be the final beneficiaries under either Will.

  1. Don’t forget the Elective Share. The law in NJ provides that unless you both had contractually agreed to not receive anything from the other spouse’s estate, if you disinherit your spouse in your estate planning documents, your spouse has a claim for his or her Elective Share against your estate. This means that the disinherited spouse has the right to receive upto 1/3rd of your augmented estate (i.e. probate and non-probate assets). So before you decide to omit your spouse without your spouse’s consent and waiver, you will need to make sure that your spouse is properly provided for with your other assets and everyone is treated equitably.
  2. Communication is critical: Grab a cup of coffee and sit down for a heart-to-heart with your spouse (and if your kids get along with your new spouse, then bring them into the conversation too). Talk to them about your dreams, concerns, and expectations. Then, turn those dreams into reality with legally binding documents like wills and trusts. It’s like making a promise with a seal of approval! Unfortunately, the best laid plans can fall prey to expensive and lengthy court battles when disgruntled beneficiaries make claims that this is not what the deceased wanted.  Explaining things to family during lifetime and supporting that with documentation can bring closure to your grieving family.

Remember, estate planning is about giving your loved ones the gift of time which in turn creates peace of mind and a happy home for everyone. This Valentine’s Day, give the gift of love, laughter, and a happy home to your family!

 

 

 

 

Which Bills Should You Pay First When Serving as the Executor or Administrator of an Estate?

The Executor (when there is a Will) or Administrator (when there is no Will) of an Estate has several responsibilities. One of them is to pay off the debts and expenses of the Estate.

But what happens in those situations where the estate has very few assets but a whole lot of debt (i.e. potential creditors of the estate who have valid claims against the Estate to get paid back for monies owed by the decedent during the decedent’s lifetime)?

In such situations, it is important to point out that not all creditors stand on equal footing. Some have higher priority than others, which means they should pay paid first. So, the first most important advice we can give you is to consult with an attorney immediately.[1]  This means, don’t feel the need to immediately write out checks to different companies or individuals whom you may think needs to get paid just because a bill came your way.  All parties know that an Executor/Admin needs time to (1) get appointed; (2) take care of funeral arrangements; (3) marshal up the assets and liabilities in the estate, including tax burden if any; and (4) finally start paying off the liabilities. If you start to pay the bills as you receive them, instead of in order of priority, you run the risk of running out of funds, and then being sued by a higher priority creditor because you mismanaged the Estate.

Each state has its own rules on what priority each creditor has. In New Jersey, our statute NJ Rev Stat § 3B:22-2 (2013) states that the order is as follows:

  1. Reasonable Funeral Expenses
  2. Costs of Estate Administration
  3. Debts for the reasonable value of services rendered to the decedent by the Office of the Public Guardian for Elderly Adults
  4. Debts and taxes with preference under federal law or the laws of this State. Medicaid liens fall in this category as well[2]
  5. Reasonable medical and hospital expenses of the last illness of the decedent, including compensation of persons attending him or her
  6. Judgments entered against the decedent according to the priorities of their entries respectively
  7. All other claims

Sometimes, it is not obvious which creditor has the superior claim. For example, if the decedent owned a house, and the house had a mortgage, then the mortgage company would have a superior claim to the house than the Office of the Public Guardian, even though mortgages are not on the above list. Similarly see footnote 2.

Finally, not everyone seeking money from the Estate has a valid claim. Just because you are asked to pay does not mean that you should. If you are unsure if a debt is valid, you should request to see supporting documentation.

Conclusion: If you are the Executor/Administrator of an Estate, and you are having trouble determining which creditors have a valid claim or how to prioritize the claims you know to be valid, you should consult an attorney for assistance. Any payments made to the attorney/law firm should be covered under the Estate assets, so you do not have to use any of your personal funds to engage the attorney’s services.

 

[1] At this time, our office offers a 30 minute complimentary consultation with our team where you can present your issues, and we can guide you on whether or not you can handle matters on your own or if you need a professional to assist you in moving forward.

[2] But be very careful here, because certain Medicaid liens trump all others so, please consult with an Elder Law firm before paying debts of someone who was on Medicaid before he or she passed.

What to Know if You Are the Executor

The executor of an estate has an important job. He or she has been entrusted to follow the wishes of the deceased, and it is important that the executor understands the expectations set in the will, understands the law in the presiding state, and is able to adhere to both as much as possible.

The executor has eight main tasks:

  1. Introduce the will into court for probate
  2. Notify the next of kin and the beneficiaries
  3. Locate all assets
  4. Identify all debts and obligations
  5. Pay the obligations in the order of priority
  6. Filing income and/or estate tax returns, where applicable
  7. Distribute the remainder to the beneficiaries
  8. Close the estate

How to Introduce the Will

Every county has a procedure for introducing the will into the local surrogate’s court.

Typically, the executor must provide the original will, an official death certificate, the required information about the deceased, the names and address of the next of kin and the beneficiaries, and the required identification information about the executor.

If the court accepts all the documents, then it will issue the Letters Testamentary and the Executor Short Certificates. This documentation establishes that the executor can act on behalf of the estate, and it will be needed when interacting with different fiduciaries or institutions on behalf of the estate.

Notify the Next of Kin and the Beneficiaries

Once the court accepts the will into probate, the executor must notify the next of kin and the beneficiaries. The executor must also make a copy of the will available to them upon request.

New Jersey requires that notice be sent through certified mail. New Jersey also has a time limit for notifying beneficiaries. The clock starts once the will has been accepted into probate.

An attorney can help make sure that the executor meets any statutory deadlines. An attorney can also help if a beneficiary’s address is unknown or cannot be found.

Once the necessary parties have been noticed, the executor must turn over to the court proof that the beneficiaries received proper notice and that they received the notice in time.

Locate all Assets

The executor must find all assets that the decedent owned. If these are probate assets, the executor must get control of them so they can be used to pay off the decedent’s debts. The rest can be distributed in accordance with the will.

Unless the decedent had prepared his or her estate planning documents through a specialized estate planning firm that prepared a comprehensive asset spreadsheet as part of the estate plan, it is hard to know what the decedent owned or how to get control of it. Moreover, the decedent could have lived in different states or countries having different assets in different places. Sometimes, the custodian of the property is not cooperative. An attorney can be helpful if you are having trouble locating the decedent’s assets or getting estate assets released.

Identify All Debts and Obligations

New Jersey has specific rules about the order of priority when it comes to paying the decedent’s debts. It is important that the executor pays the bills in the correct order because if the funds run out, and the executor paid lower priority bills before higher priority bills, the creditor could sue the executor for its loss.  Additionally, the executor has to be aware of whether or not federal or state death taxes are due from the estate and must review the will to see who (the estate or the individual beneficiaries) are responsible for payment.

In New Jersey, the costs of the administration are one of the higher priority bills, which includes any attorney’s fees and the executor’s commission. New Jersey also regulates how much the executor is allowed to be paid based on the size of the estate. If the estate is large or difficult to manage, it may make sense to hire an attorney to help with the administration and ensure that the proper procedures are followed.

Filing Income Tax Returns, Where Applicable

Depending on how long the estate will be kept open, the executor has a duty to report all income earned by the estate during this time. The deadline for this filing is based on either a calendar year or a fiscal year and must be reported on a Form 1041. NJ no longer has an estate tax, but if the worldwide assets of a decedent are greater than the exemption, or if the decedent was a NY resident with significant assets, then a federal estate tax return or NY state estate tax return may be due. Finally, where the estate assets are below the threshold, there may still be a need to file an estate tax return to elect portability.[1] In these cases, it is extremely important that the executor review the will carefully to see who can pay the taxes—the individual beneficiaries or the estate out of the residue.

Distributing the Remainder to the Beneficiaries

Once the bills have been paid, the executor is to distribute the rest of the assets in accordance with the will. Not all gifts to beneficiaries have the same priority. There is a difference between an equal distribution of estate residue to the children of the decedent and giving specific assets/bequests to specific beneficiaries.

It is important that the executor understands the difference and correctly distributes the assets, or else he or she can be held personally liable for any mistakes.

This is especially important when the executor is one of the beneficiaries. The executor has the ability to make decisions on behalf of the estate including liquidating assets and distributing the cash, he or she must act in accordance with the will. The executor cannot use his or her position to unfairly distribute assets or disadvantage another beneficiary. An attorney representing the estate can also act as a check to make sure the executor is not exceeding his or her authority. New Jersey also requires paperwork be completed before the distributions to the beneficiaries. This involves securing releases from all beneficiaries to avoid personal liability for the executor for nonpayment of taxes or for making distributions to beneficiaries with outstanding child support obligation subject to wage garnishment. An attorney can help prepare all of the needed forms and make sure everything is properly accounted for and signed.

Closing the Estate

Once the bills have been paid and the assets have been distributed, the executor should file any outstanding estate or inheritance tax paperwork, where applicable, and then close the estate by filing a final court filing.

Closing the estate is important because if the estate is left open, then the executor is still personally liable should any new creditors emerge or if any beneficiaries complain after accepting his or her share.

Final Remarks

An estate administration will take at least nine months from the decedent’s death until the estate can be closed. In some cases, the administration can take much longer, potentially years depending on the size of the estate, the number of beneficiaries involved, the location of the assets, or any complications that arise along the way (for example. if there is confusion as to ownership of any assets or if any provisions in the will are unclear).

An attorney can help the executor by ensuring the proper procedures are filed, that the required paperwork is completed and submitted, and by acting as a buffer between the executor and the next of kin, beneficiaries, or the fiduciaries and institutions involved. All of this can ultimately help save the executor time and stress during what will be a difficult situation.

 

 

 

[1] Portability refers to the act of taking over a deceased spouse’s unused exemption which is to be added to the surviving spouse’s exemption.

Inheritance Planning: Stark Differences between U.S. Beneficiary & Indian Nominee Rights!

Certain persons of Indian descent, their progeny and spouses could qualify to register as Overseas Citizens of India giving them permanent residence rights among other things.  Similarly in the United States, qualified individuals may acquire lawful permanent status in many ways including via employment or through family connections.  Lawful permanent residents are popularly known as green card holders.  Inheritance laws apply equally to citizens and permanent residents in these two countries.  Recently, a few of us (accounting and legal professionals) from both India and the US, were researching inheritance planning issues related to “Overseas Citizens of India” and discovered significant differences in the United States and India when it comes to the succession of bank accounts from a deceased account holder to his or her ultimate beneficiaries.  We will discuss these differences in this article as they apply to citizens and permanent residents.

On the US side:

Probate vs. Non-probate accounts: In the US, an account can be a probate asset or a non-probate asset, depending on how it is set up.

A probate account is an account owned in the sole name of the individual account holder, with no beneficiary designation(s) attached to it. Upon death, the probate account goes through the probate process, which is the legal route by which these accounts make their way through the Last Will & Testament (“Will”) of the deceased account holder (“decedent”) over to the beneficiaries named in the Will. Where there is no Will, the account has to pass through the intestacy laws of the State in which the decedent resided and the beneficiaries (or heirs) of the decedent are determined by State law. In either case, the probate process involves court supervision or oversight.

By contrast, if the account is non-probate, then it does not go through the same channels and instead the account passes directly to the beneficiary or beneficiaries by operation of law, by contract or by trust. Joint accounts, or accounts with a “Transfer on Death or TOD” beneficiary or a “Payable on Death or POD” beneficiary[1], life insurance policies or retirement accounts with beneficiary designations or assets inside of a Revocable or Irrevocable trust, are all considered non-probate assets.  Except in limited circumstances (typically in matters of public policy, state law etc.), once an individual is named as a beneficiary of an account or is joint account holder with another, this individual becomes the legal owner of the account and inherits the account automatically – outside of the court system.

Therefore, in the US, upon on the death of an individual, things are relatively straightforward (especially if there is a Will in place).  All probate assets in the name of the decedent pass into an estate account that is set up by the Executor named in the Will. To open the estate account, the Executor will need to appear at his or her bank of choice armed with a Death Certificate, photo ID, a Tax Identification Number or TIN# (in lieu of the decedent’s Social Security Number for taxes), and a Letters Testamentary (or Appointment Letter) procured from the Court.  Similarly, if there was no Will, the same process is followed except that the individual stepping forward to serve – now called the Administrator – has to post a bond to secure the estate assets (as an insurance for the ultimate beneficiaries) before he or she can obtain the Letters of Administration from the Court.

It is pertinent to note that in either case, Courts as well as the banks do not proceed without first obtaining proper documentation from the individual stepping forward to serve and banks will likely be subject to liability if they fail to obtain the necessary documentation.  More importantly, it is unheard of for banks and other institutions to transfer probate assets of a decedent directly to an account belonging to the Executor/Administrator.  These accounts must be transferred to the estate account of the decedent and held there until the estate administration formalities are completed, including payment of any taxes/debts or other obligations of the estate, before money passes to the beneficiaries.

On the India side:

A bank/financial account can be held individually or jointly.  Joint accounts can be held: ‘either or survivor’, ‘anyone or survivor’ or ‘former or survivor.’  Account holders are also often referred to as First Holder and Second Holder where if the first holder dies, the second holder automatically receives the beneficial interest in the account.  However, all accounts (including those that are individually owned) can have nominee designations.  Unlike the US where a nominee designation would be treated as a beneficiary designation, the person named as the nominee receives payment from the bank only “as a trustee of the legal heirs of the deceased depositor, i.e. such payment to him shall not affect the right or claim which any person may have against the survivor(s)/nominee to whom the payment is made.” [2]

So here is where things can get quite tricky, and often messy, when the nominee designations don’t match up to either the beneficiaries listed under the Will or, the account holder dies intestate i.e., where there is no Will, when the nominee designations do not reflect the lawful heirs of the estate.

Let’s start with what a bank is instructed to do –  in an effort to alleviate the “tortuous procedures …[that] caused considerable distress” to family members upon the death of a deceased account holder, the RBI or Reserve Bank of India issued a circular stating that where accounts have a valid nomination, the bank has to follow a 3-step protocol, before paying out the balance directly to the survivor(s)/nominee, with full discharge of any liability against the bank for making such payments.

The three steps outlined were that the bank:

  • exercise due care and caution as to the identity of the survivor(s)/nominee and valid proof of demise of the accountholder;
  • make sure that there was no court order restricting the Bank/institution from making such payment; and
  • makes it clear to survivor(s)/nominee that payment is being made to him or her only as a trustee of the funds and that valid beneficiaries to the funds could have a claim against the survivor(s)/nominee.

But interestingly, there is also some indication to suggest that if banks insists that the survivor(s)/nominee produce legal documentation like the succession certification, Letter of administration or probate etc., or ask for him or her to obtain a bond, that would actually “invite serious supervisory disapproval”[3].  Where there are no nominee designations, the bank is “advised to adopt a simplified procedure for prepayment to legal heir(s)…keeping in view the imperative need to avoid inconvenience and undue hardship to the common person.”[4]

It follows that if the nominee designation does not match the Will of the succession rights of the beneficiary, then the legal heir’s only option is to fight it out in court.  In an article on the subject, S.S, Rana & Company cite Supreme Court cases where the Court has held that the nominee is only a custodian of the account[5].  Moreover, Section 72 of the Companies Act, 2013, states that while the nominee shall become entitled to all the rights in the shares and debentures of the company immediately upon the death of the shareholder, the rightful ownership of shares remains with the legal heir and not the nominees[6]. Courts in India have time and again reiterated that the legal heir is the ultimate, rightful owner of the property of a deceased individual, a nominee (pursuant to a nomination given by the deceased during his / her lifetime) would act only as a trustee on behalf of the rightful legal heir(s), and hold such property until the matter of succession or inheritance is decided and implemented. Even in the case of a minor being a nominee and not a legal heir, the natural or legal guardian acting on behalf of such minor nominee has to act as Trustee on behalf of the legal heirs.

Complexities increase where there is no testamentary instrument, and the personal law of the decedent provides a certain set of rules/guidelines for devolution of the estate on the legal heirs.  For example, in the case of a Hindu male, Class 1 heirs (mother, children, grandson of his predeceased son and so on) who get priority over his assets, leave out the father, who is not considered an immediate legal heir and therefore has no right to his son’s assets[7].

Some exceptions to the above are in the case of life insurance or Relief/Savings Bonds where the nominee is also considered the beneficial owner and therefore entitled to the proceeds of the policy or the bonds.

Solution for both countries

It is imperative for anyone with assets located both in India and overseas to execute a well thought succession plan. One must aim at erasing confusion over the nominees and his/or legatees/beneficiaries. One must not only consider setting up a Will (in all countries where applicable) clearly delineating the various beneficiaries under the Will but also to methodically and systematically go through every single account and align nominee designations in accordance with the Will. Nomination and Will must be in harmony.

Those who are US citizens/residents should understand the contrasts that exist in the two countries where a beneficiary designation trumps the Will in almost every case in the United States whereas it follows a completely different treatment in India.  The easiest way to ensure a smooth and a seamless transition to your loved ones in India, is to ensure that the nominee designations mirror your intention, irrespective of a Will being made, listing the true and intended beneficiary of the account.

Our goal as planners and professional advisors is to guide families to pass on their wealth to the intended beneficiaries in a clear and hassle-free manner. This means keeping families out of the judicial system and not have legal heirs bring a court action to assert his or her lawful claim over the estate assets against an unscrupulous nominee.  Unfortunately, in its efforts to make things stress-free for grieving families, the Indian banking system may have inadvertently made it more difficult for lawful beneficiaries to claim what may have been theirs.

 

Contributing Authors:

Poorvi Chothani, Esq. is the founder and managing partner of LawQuest, an employment and immigration boutique law firm. Poorvi, a graduate of University of Pennsylvania, is admitted to the bar in India and the USA and is a registered and practicing solicitor, England and Wales.

Sujatha R. Krishnaswamy is a Chartered Accountant & MBA from Georgia Tech.  She is also the co-founder of Crestworth Management Partners Pvt. Ltd., management consultants & tax advisors, based in Bangalore, with a special focus on Indian and U.S. taxation for individuals.

Roopa P. Doraswamy, B.A., L.L.B (Hons), J.D., is a Co-Founder at Flywork Innovations Pvt. Ltd, a SaaS enabled marketplace for legal and compliance.  She is a graduate of National Law School of India University (NLSIU) Bangalore and Northeastern University School of Law, Boston

Sushma Nagaraj, B.A., L.L.B from Bangalore University, India is a qualified lawyer in India who manages an independent private law practice.  Her specialty is in the areas of estate, trust and property laws in India.

Rekha V. Rao, J.D. from the Elisabeth Haub School of Law at Pace University is the principal and founding member of Rao Legal Group, LLC.  She is licensed to practice in New York and New Jersey and has developed her firm’s niche in the areas of estate planning, estate & trust administration, elder law, guardianship, and special needs planning.

Priya Gidwani is the CFO and founding member of Rainmaker. As a CFO with emerging, growth and mid-market companies, Priya’s experience spans everything from helping to launch start-up enterprises to managing finance for mid-size companies. Priya also has significant experience of working in the US with companies like Siebel Systems Inc. and Providian Financial Corporation. Priya is a Chartered Accountant from India and holds a Master’s degree in Accounting from Illinois State University.

 

[1] Note that not all bank accounts have or offer a POD or TOD designation but if it does (part of the contract), then such accounts will pass directly to the named beneficiary or beneficiaries and bypass probate

[2] Settlement of Claims in respect of deceased depositors – Simplification of Procedure; RBI/2004-05/490, DBOD. No. Leg. BC. 95/09.07.005/2004-05, 2(A)(2.1)(c),

https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=2284&Mode=0#:~:text=Banks%20are%20advised%20to%20settle,(s)%2C%20to%20the%20bank’s [emphasis added]

[3]  Id. at 2(A)(2.2).

[4] Id. at 2(B)(2.3)

[5] In its article, Legal heir or Nominee? Who is the rightful owner?, some cases cited to are: Shalkti Yezdani v. Jayanand Janat Salgaonkar, Smt. Sarbati Devi and Anr. V. Smt. Usha Devi, Uma Sehgal and Ors. vs. Dwarka Dass Sehgal And Ors etc.,

https://s3.amazonaws.com/documents.lexology.com/6edb5a5b-1308-4947-bfac-5f69d1f58278.pdf?AWSAccessKeyId=AKIAVYILUYJ754JTDY6T&Expires=1650889871&Signature=dfN8XJOf4BRwSKqO3v4VdBueUbE%3D

[6] Id.

[7] Wrong Nominee and right nominee for bank A/cs, FDs, mutual funds, financial assets by Pragati Kapoor & Preeti Motiani, ET Online (2021), https://economictimes.indiatimes.com/wealth/legal/will/wrong-nominee-and-right-nominee-for-bank-a/cs-fds-mutual-funds-financial-assets/articleshow/85396026.cms?from=mdr

New Jersey’s Intestate Share Title 3B:5-3: Intestate share of decedent’s surviving spouse or domestic partner

The intestate share of the surviving spouse or domestic partner is:

a) The entire intestate estate if:

  1. No descendant or parent of the decedent survives the decedent; or
  2. All of the decedent’s surviving descendants are also descendants of the surviving spouse or domestic partner, and there is no other descendant of the surviving spouse or domestic partner who survives the decedent.

b) The first 25% of the intestate estate, but not less than $50,000.00 nor more than $200,000.00, plus three-fourths of any balance of the intestate estate, if no descendant of the decedent survives the decedent, but a parent of the decedent survives the decedent.

c) The first 25% of the intestate estate, but not less than $50,000.00 nor more than $200,000.00, plus one-half of the balance of the intestate estate:

  1. If all of the decedent’s surviving descendants are also descendants of the surviving spouse or domestic partner and the surviving spouse or domestic partner has one or more surviving descendants who are not descendants of the decedent; or
  2. If one or more of the decedent’s surviving descendants is not a descendant of the surviving spouse or domestic partner.

 

IN PLAIN ENGLISH

If your spouse or domestic partner dies without a Will, then

  • You, as the surviving spouse, can inherit the entire estate only if you and the decedent had children together, and these children were the only children from that marriage (and there were no other children from other marriages or relationships).
  • If you are the surviving spouse, and you and the decedent had NO CHILDREN together AND if the decedent’s PARENTS are still alive, then you are entitled to get the first 25% of the decedent’s estate up to the first $50K and 75% of the remaining balance. The decedent’s parents get the rest!
  • If you are the surviving spouse, and you and the decedent HAD CHILDREN/DESCENDANTS FROM OTHER MARRIAGES OR RELATIONSHIPS who are alive, then you are entitled to get the first 25% of the decedent’s estate up to the first $50K and 50% of the remaining balance. The other children get the rest!

 

TAKEAWAYS

  • Understand the difference between probate assets and non-probate assets (check out our website for our blog posts about that) and know that the intestate estate only deals with probate assets.
  • If you are (1) newly married; (2) do not have children; or (3) have a blended family, get yourself a Will now!!

Estate Planning Is Not Just for the Wealthy!

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

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

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

Consider this hypothetical (but not uncommon) scenario:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Consider the following when establishing these trusts in New Jersey:

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

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

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

To minimize costs, some alternate solutions include:

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

 

 

 

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

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

Navigating Cultural Differences in Estate Planning

For those of you who don’t know, I am of South Asian descent. I grew up in Bangalore, India and came to the United States as a young adult in the 1980s. Growing up, I was surrounded by extended family members – my aunts, uncles, cousins, and grandparents were part of my everyday world. It wasn’t until I came to the United States that I discovered that the family structure I was accustomed to was not a familiar concept in the United States. Culturally, in India the family structure is very different from that of its US counterpart  – we treat our extended family as part of our nucleus. Although less common now,  the “joint family system” was the norm for many Indian families, and some households still function like this today. In the joint family system, the oldest son typically does not leave the family home.  Instead, after he gets married, his new wife joins her husband in the family home. Children are then raised in the family home, growing up alongside their cousins, aunts, uncles, and grandparents. In fact, in Indian culture, cousins are referred to as “cousin-brother” and “cousin-sister”, which I think is an excellent illustration of how close extended family members are. I was surprised to discover this term was alien in the United States!

So why does all this matter in the context of estate planning? Because at the heart of estate planning is family, and the US legal system considers family much differently than India, especially  when it comes to estate, inheritance, or gift taxes. For example, in estate planning cases US law treats extended family differently than how it treats the immediate nuclear family. As a result, I am often confronted with a situation among my South-Asian clients where uncles and aunts, who treat their nieces and nephews as their own children, are bewildered that there is a separate taxation structure if they wanted to divide their estate equally among their children, nieces, and nephews.

There is also a culture clash when it comes to attorney-client privilege. For many South Asian families, it is presumed that sons or sons-in-law who become the head of the household (when the father or father-in-law passes away) can speak on behalf of their parents or in-laws when it comes to estate planning. This is compounded when not all members of the family speak English fluently.  Many South Asian immigrants (most commonly homemaker wives) who came to the US in the mid 20th century never really became fluent in the English language and must rely on their children to serve as interpreters for them.

However, according to N.J.S.A 2A: 84A-20 (3), a client is a someone who consults with a lawyer for the purpose of getting legal advice, and any communication that is made during this relationship is subject to attorney-client privilege.  The client expects that the attorney will act in the best interests of the client at all costs and will protect the client from any undue influence. The presence of some other person could nullify this privilege and could lead to disclosure in a court of law.  Most Will contests are due to the presence of a third person (a sibling, a friend etc.) in the room  who may be unduly influencing the client to set up a Will that may be contrary to his or her initial objectives.

Therefore, for US attorneys who are not familiar with the Indian family dynamics, there is confusion and misunderstanding when they represent their Indian clientele and discover that they are not just interacting with the individual or couple who signed the engagement agreement, but often their extended  family as well! The attorneys are (and rightfully so!) concerned that: (1) there may be ulterior motives behind the children asking to speak on behalf of the entire family; (2) there is no clear understanding on who is the client really is in this situation – especially if the person who is paying the attorney fee is the child; and (3) there is destruction of attorney-client privilege due to the presence of a third party (even though the third party is an adult child).

As a lawyer of South Asian descent, I have a unique advantage when working with Indian families to create an estate plan. I understand the nuances of Indian culture enough to parse through the various family dynamics to see if there are in fact any ulterior motives that may negatively impact my clients. I am also able to communicate with an elderly client in a few of the Indian languages to see if the clients really want their child or children to speak on their behalf for the remainder of the representation. Based off my experience, one way we can circumvent the  stringent rules for attorney-client privilege to account for  the cultural differences is to have clients execute broad powers of attorney that name their children and/or extended family as the authorized representatives of the clients to communicate on their behalf.  Although this may also be of concern should there be an abuse of this power, at least for the right family situation, this can  serve as a good simple option.