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!

 

 

 

 

Wills and Estate Planning Demystified – FAQs on Trusts & Estates!

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

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

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

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

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

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

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

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

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

 

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

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.

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.

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