Category Archives: Trust & Estates

Before You Retire: Steps for Planning In Advance

By Joseph L. Goldman, Esq. and Naomi B. Collier, Esq.

The article below appeared in the November issue of Meadowlands USA newsletter.

As the average life expectancy in the United States seems to increase with each passing year, having a secure retirement plan is more important than ever. Retirement planning encompasses much more than simply saving enough money to live on after you stop working—it is an ongoing and dynamic process.

While it is tempting to put it off, the best time to start planning for retirement is well in advance of when you are actually ready to retire.

Consider the following suggestions as you start down the long, winding road that is your retirement:

  1. Get organized. Organizing and understanding your finances is a great starting point. Create a balance sheet that contains your financial information, including asset type and value, and how owned. Consider how the assets will be distributed upon your death. Consolidate your account log-in information and corresponding passwords—and ensure that your advisors and trusted family members/friends can access the information in the event of your incapacity or death.
  1. Build your team. Pick professional advisors that you trust to work with you towards your goals. Make sure your team works together. By gathering a well-rounded team, including an attorney specializing in estate planning, a financial planner, an accountant and an insurance adviser, you will have put in place a system with built-in checks and balances.
  1. Create a budget and savings plan. Carefully monitor your spending patterns and expenses to determine how much you will need to live during your retirement years. This will enable you to work with your advisors to create realistic current and projected budgets, and tailor your savings approach. Review spending and expenses (at least annually) to reflect any significant changes.
  1. Consider retirement goals. Think about your life after retirement. Consider where you might live, your desired retirement lifestyle, any ongoing obligations, as well as expected and unexpected health care expenses. Consider the impact of these factors on your finances in retirement.
  1. Review your estate planning documents. Review your existing estate planning documents to make sure they still make sense. Have the documents reviewed by a trust and estates attorney to ensure that they reflect current law. If you do not have documents in place (including a will, durable power of attorney, and health care proxy/living will) consult with an attorney qualified to assist you with preparing and implementing these documents.
  1. Review your beneficiary forms. Even if you have estate planning documents in place, be mindful that certain assets pass outside of a will. For example, life insurance, IRAs and retirement plans generally pass to the designated beneficiaries. If your beneficiary designation forms are not coordinated with your estate planning goals, your objectives may not be realized. Be aware that failure to designate individual beneficiaries may also have adverse income tax consequences.
  1. Consider estate tax implications on your estate. It is also important to discuss with your attorney whether your estate will be subject to estate tax. While the federal exemption has increased dramatically over the years ($5,450,000 in 2016, indexed for inflation), some states continue to have much lower exemptions ($675,000 in New Jersey). If your estate will be subject to estate and/or inheritance tax, consider how it will be paid and/or whether you can minimize those taxes.
  1. Consider long term care implications on your estate. Consider how you will fund your long term care, if necessary. Are your assets sufficient to self-fund such care? Alternatively, evaluate whether long term care insurance is a viable option or if qualifying for government benefits might be necessary. Consult an attorney versed in elder law to better understand the options available to you.
  1. Talk about it. Most people do not want to think about what will happen when they die or become incapacitated, let alone talk about it! However, having a discussion with the important people in your life when you still can, before you are in a crisis situation, beats the alternative. Ensure that everyone understands your wishes as related to health care decisions, why you made certain provisions in your estate planning documents and how you wish your affairs to be handled if you are unable to handle them yourself.

Not all roads to retirement are alike and events often occur that require adjustments to your plan.  However, if you create a retirement plan in advance, select the right advisors to help you implement and oversee your plan and make adjustments as necessary, you will go a long way to helping yourself enjoy a successful and rewarding retirement.

New Jersey Passes Law Repealing Estate Tax By 2018

By Trusts & Estates Group

On October 14, 2016 Governor Christie signed into law the much discussed gas tax hike bill, ultimately repealing the New Jersey estate tax in its entirety.  Beginning on January 1, 2017, a decedent will not be subject to New Jersey estate tax unless his or her taxable estates are greater than $2,000,000 (a significant increase from the current $675,000 New Jersey estate tax exemption).  For individuals dying on or after January 1, 2018, the New Jersey estate tax is repealed entirely.  A decedent domiciled in New Jersey and dying in 2016, however, will remain subject to New Jersey estate tax if the value of his or her taxable estate exceeds $675,000. MORE

New ABLE Act Helps Save on Behalf of the Disabled

By Louis Pashman, Esq.
lpashman@pashmanstein.com

A little more than a year ago, our blog posted an article about special needs trusts.  There is now another avenue available for saving on behalf of individuals with disabilities.

In December 2014, the President signed the Achieving a Better Life Experience (ABLE) Act.  The purpose of the legislation is to assist families in saving private funds for disability-related expenses to supplement (not replace) private insurance, Medicaid, SSI or other sources.  Of course, there are restrictions.

The account may not exceed $100,000 for purposes of SSI (the consequence is that SSI payments are suspended, not terminated, until the account is below $100,000) and the account cannot exceed the limitations placed on qualified tuition plans (529 accounts).  The annual contribution from all sources cannot exceed the annual gift tax exclusion amount, currently $14,000, and must be in cash.  Contributions are not tax deductible but accumulate tax-deferred.  Withdrawals are taxed to the beneficiary but only to the extent they exceed qualified disability expenses.  The disability must have occurred before age 26.

Accounts are deemed owned by the beneficiary.  Therefore, on the death of the beneficiary any amounts remaining after payment of outstanding disability-related expenses can be claimed by the state to reimburse for the amount of medical assistance provided after establishment of the ABLE account.  This is a major difference from special needs trusts.  On the death of the beneficiary of a special needs trust any remaining funds pass in accordance with the trust instrument.  On the other side, there is no income tax benefit for special needs trusts.  In addition to the federal income tax benefit of ABLE accounts, states may permit state tax benefits as well (Massachusetts has already done so).

There is much more detail to be worked out, but ABLE does seem to offer an alternative to special needs trusts in appropriate circumstances.

Estate Planning Tips for Your Art Collection

By Eleanor Lipsky, Esq. and Joseph L. Goldman, Esq.

Many collectors view art as more than a financial investment and often do not wish to readily part with a piece of sentimental and aesthetic value. Nevertheless, when an art collection is part of a taxpayer’s estate a number of estate, gift and income tax strategies should be considered.

Prior to ATRA 2012 (American Taxpayer Relief Act of 2012), estate tax planning often involved gift and estate tax strategies designed to eliminate appreciating assets from an estate in order to reduce estate and gift taxes.  After ATRA, the federal estate tax exemption has been made permanent at $5,000,000 (indexed for inflation) so fewer taxpayers are subject to federal estate tax.  At the same time, federal income tax rates have increased, so income tax planning has become more relevant.  Accordingly, it may be advantageous for taxpayers not subject to estate tax to leave appreciating assets in their estate to get a “stepped-up” basis at their death. This would reduce potential income tax on the gain when sold by the beneficiary or heir who received the asset.

An art collector should seek regular qualified appraisals of the collection, perhaps even annually, to get a better understanding of how the collection is appreciating.  In the case of a gift or a charitable contribution, such application can help substantiate a work’s value if there is an IRS challenge, protecting a collector from additional taxes and penalties for undervaluation.  Further, if a piece is worth more than $5,000, a taxpayer seeking a charitable income tax deduction will need to include a qualified appraisal with his or her tax return.  Qualified appraisals may also be necessary when artwork is left as a bequest in a Will.  For estate tax purposes, an appraisal must be included with the estate tax return for any piece worth more than $5,000 or for a collection of similar items worth more than $10,000.  For gift tax purposes, a qualified written appraisal is typically the best way to disclose a gift of artwork on a gift tax return.    It is important to check out the appraiser’s credentials to ensure that the appraiser is an expert in the type of item.  A qualified appraiser who makes a false or fraudulent overstatement of value, may be subject to a civil penalty.

A taxpayer transferring an art collection containing at least one item valued at $50,000 or more may request an advance ruling from the IRS to ensure that the IRS will later accept the taxpayer’s valuation.   An advance ruling may be requested only after the property is transferred and must include IRS Form 8283 (“Noncash Charitable Contributions”), along with a qualified appraisal, to make the request.  An advance ruling costs $2,500 for the first three items and $250 for each additional piece.

An art collector who donates artwork to charity can also receive a substantial income or estate tax deduction.  For instance, a taxpayer who donates to a public charity a painting purchased years ago for $1,000 that has a fair market value of $10,000 today and satisfies all tax criteria for deducting the donation will receive a $10,000 charitable deduction for income tax purposes.  Donations may also help avoid capital gains taxes.  This is helpful because while most assets are subject to a 15% capital gains tax rate (in 2013), art is subject to a higher rate of 28%.

A taxpayer donating art work should keep in mind that it is best for the donation to be related to the charitable organization’s charitable purpose.  For example, donating a painting to be displayed at a tax-exempt art museum allows a taxpayer to deduct the painting’s fair market value, for up to 30% of the taxpayer’s adjusted gross income.    If the amount deductible exceeds this limit, it can still be carried forward for up to five years.  On the other hand, if the donated artwork is not related to the organization’s charitable purpose, the deduction is limited to the taxpayer’s cost basis, but up to 50% of the taxpayer’s adjusted gross income.

Another way to donate artwork to charity is to create a charitable remainder trust (CRT).  This allows the trustee of the CRT to sell the art tax-free and reinvest the proceeds in income-producing assets.  The beneficiary receives income from the trust, while the named charity receives what is left at the end of the trust term.  It is important to note that since the donation is not related to the CRT’s tax-exempt purpose, the donor’s current income tax deduction is limited to the donor’s basis in the art, up to 50% of the donor’s adjusted gross income.  Additionally, the donor’s current income tax deduction will be limited to the actuarial value of the charity’s remainder interest in the artwork.

For those art collectors who are not quite ready to part with a piece permanently by a donation of artwork to a museum, consider donating an undivided fractional interest in an artwork to a charitable organization instead.  If a taxpayer donates a one-third (1/3) interest in a sculpture worth $5 million to a museum, the museum will have the right to display the sculpture for four (4) months out of each year.  The benefit of a fractional donation is that the donor can enjoy the sculpture for the rest of the year, while still receiving a sizeable charitable income tax deduction.  This is also a good alternative when an outright donation exceeds the donor’s adjusted gross income percentage limits.  Donating a fractional interest reduces the amount of the income tax deduction, minimizing the need to worry about the five-year carry forward period, discussed above.  A museum will usually be willing to agree to receive a fractional interest during a donor’s lifetime only if the donor agrees to donate the entire interest in the painting to the museum in the donor’s Will (or revocable trust).  The donor’s estate would then be entitled to a charitable estate tax deduction for the donor’s remaining interest in the painting, based on the painting’s value at time of the donor’s death.

Before donating to charity in a Will, a collector should consider the unlimited marital deduction.  The decedent can leave the artwork to his or her surviving spouse and then have the surviving spouse donate the artwork to the charitable organization during the surviving spouses’ lifetime.  This gives the surviving spouse an income tax charitable deduction without a federal estate tax on the artwork in the estate of the deceased spouse because of the unlimited marital deduction.  The advantage to this added step is that the surviving spouse will inherit the artwork at a new cost basis equal to the fair market value on the date of death of the first spouse.  The surviving spouse can also bequeath the artwork in his or her own Will and receive a 100% estate tax charitable deduction.   A taxpayer making a bequest of artwork to a charitable organization, through a Will should describe the artwork with as much specifics as possible.  Additionally, since a charity can renounce a bequest, the Will should include an alternative beneficiary as well.

Finally, a collector may choose to keep the collection in the family and only leave artwork to heirs and other beneficiaries through specific bequests in his or her Will.  Specific bequests can reduce conflict among family members and avoid some of the income tax issues connected with residual gifts.  A taxpayer should discuss his or her plans with family members in order to avoid issues and surprises later on.

No matter how you choose to plan for your art collection’s future, you should consider the tips discussed above to gain the best possible return on your valuable investment.

An Issue We Hope You Will Never Have to Deal With

By Louis Pashman, Esq.
lpashman@pashmanstein.com

For people who have disabled dependents, there is a device called a special needs trust.  A special needs trust is intended to allow a disabled individual to maintain eligibility for certain needs-based government benefits such as Medicaid, supplemental security income and others.  Assets in a special needs trust are not considered “available assets” for those purposes.

In order to achieve the purpose of a special needs trust, the trust must be properly created and administered.  The requirements for creation and administration of special needs trusts are precise and complex.  This is not intended as a tutorial on how to do it.

Two recent decisions addressed certain very specific issues related to special needs trusts.  Special needs trusts implicate both state and federal law.  One obligation of a trustee is to take care that certain state-permitted acquisitions by the trust do not disqualify the beneficiary from federal benefits.

In The Matter Of A.N., a Minor, 430 NJ Super 235 (App. Div. 2013) examined that question.  A trustee sought to purchase a home for the benefit of the disabled beneficiary, permitted by the State.  The trustee sought approval of the transaction from the Chancery Division and also sought an instruction regarding the impact of the transaction on Medicaid eligibility.  Such an application must be served on the Division of Medical Assistance and Health Services (DMAHS), the agency that makes Medicaid eligibility determinations.  After review, the court decided that the Chancery Division could review and approve the transaction but could not issue any direction on future Medicaid eligibility.  Only DMAHS could do that after an application for Medicaid had been filed.

The other recent case, J.B. v. W.B., 215 NJ 305 (2013), examined the use of special needs trusts as part of a divorce and resulting support obligations.  That case was complicated because it involved modification of an existing property settlement agreement, but putting that aside the court noted

“A special needs trust in conjunction with a thoughtful plan to gain eligibility and and receipt of government benefits, including Medicaid, SSI, and Division of Developmental Disability (DDD) programs, permits a family to provide health care, income, housing, and vocational services for their disabled, dependent child.  The redirection of a child support obligation from a parent to a trust designed to meet the present and future needs of the dependent, disabled child should not be considered exceptional or extraordinary relief, if such a plan is in the best interests of the unemancipated child.”

As noted earlier, this is not intended to give guidance on how to prepare or administer a special needs trust, or even if such a trust is appropriate for your circumstances.  It is intended only to point out two recent cases of interest.  Should you have to deal with these unfortunate issues, we are ready to help.

A Good Time to Review Your Estate Plan

By Joseph L. Goldman, Esq.
jgoldman@pashmanstein.com

Many of you are currently gathering your income tax information for filing your 2013 income tax return.  You might want to take a little extra time to review your existing estate plan and estate plan documents (Will, Power of Attorney, Health Care Directive) to reflect current state and gift tax law, and changes in your family situation.

For 2014, the top federal estate tax rate is 40%.  The federal exemption amount is up to $5,340,000 ($5,000,000 indexed for inflation) per individual.  That amount is $10,680,000 for a married couple, if each owns at least $5,340,000 in their own name, or if they can take advantage of “portability”.

The New Jersey exemption amount remains at only $675,000.  That means that for couples with assets of over $1,350,000 there can be New Jersey estate tax due on the death of the surviving spouse, even if their assets are well below the federal estate tax threshold.

The New York exemption amount is currently $1,000,000, although Governor Cuomo has proposed raising it to conform with the federal exemption amount.  So under current law in New York, for couples with assets of over $2,000,000 there can be New York estate tax due on the death of the surviving spouse.

There is no “portability” for state estate tax purposes.

In addition to tax considerations, changes in your family situation, such as marriage or divorce, births or deaths, or a change of residence to another state, may call for updating your estate plan documents and your estate plan.

Consider also the use of gifting strategies, life insurance planning, and use of lifetime trusts for both tax and non-tax purposes.

So A Family Member Died and You Can’t Find the Will

By Louis Pashman, Esq.
lpashman@pashmanstein.com

The general rule is that a will must be executed with certain rather specific requirements.  NJSA 3B:3-1 and 2.  When New Jersey adopted the Uniform Probate Code, however, it adopted the “harmless error” doctrine, NJSA 3B:3-3.  Most states have not adopted that provision.  The statute provides that a writing will be treated as if it complies with the formal requirements of execution if it can be shown by clear and convincing evidence that:

  1. The document presented was intended by the decedent to be his will; or
  2. A complete or partial revocation of a will; or
  3. An addition to or alteration of a will; or
  4. A partial or complete revival of a formerly revoked will or portion of the will.

In Re Estate of Ehrlich, 427 NJ Super 64 (App. Div. 2012) examined the “harmless error” statute.  That court found that an unexecuted copy of a will could be admitted to probate under the circumstances of that case.  Those circumstances were, it must be noted, compelling.

First, the decedent was himself a lawyer and the copy presented was on formal legal size paper with the decedent’s office name and address printed on each page.  There was a notation in the margin of the first page, in decedent’s handwriting, that the original had been sent to the person named in the document as the executor (that individual predeceased decedent and the original will obviously was never found).  The document was prepared just before decedent was to undergo life-threatening surgery.  Decedent survived the surgery and years later he talked to others about the will and the possibility of revising it.  The primary beneficiary was the only relative with whom decedent had any meaningful relationship.

One of the appellate judges dissented.  He would have held that the statute does not permit admission to probate of an unexecuted document, only a defective will.  The Supreme Court refused to hear the case.

It seems that the lesson to be learned from this is that an unexecuted document can be admitted to probate as a will, but it will not be easy.  The evidence showing that the Ehrlich document met the requirements of NJSA 3B:3-3 was overwhelming .  As the court noted, “the greater the departure from … [NJSA 3B:3-1 and 2] formal requirements the more difficult it will be to satisfy … [NJSA 3B:3-3].”