In that case the laws of the state of the person’s domicile at the time of death control how his or her assets and debts are to be handled, who is to be appointed to administer those assets and debts and who receives the deceased person’s property. If a New Jersey resident dies without a Will leaving a spouse or a domestic partner and either children of the same marriage or no children, then the law provides that the spouse or domestic partner inherit the entire estate. If the deceased person had children from a prior marriage or relationship, then the spouse or domestic partner inherits the first 25% of the decedent’s assets but not less than $50,000 or more than $200,000, plus half of any balance. The children take the remainder. There are other rules about inheritances by parents, children, grandchildren and more collateral relations which collectively are called intestate succession. Sometimes these laws reflect what the deceased person wanted. Many times they do not. However, since the drafters of state laws cannot know what each individual would have wanted they can only set up rules for something called probable intent. In addition to providing for how assets are to pass, where there is no Will the state law establishes the order of persons with the authority to administer the estate. Again, this may reflect what the deceased person wanted but it also may not. Finally, when a person dies without a Will the local probate court will generally require that the administrator post a bond to ensure that the administrator will follow applicable rules and will not steal from the estate. This cost is generally avoided with a Will which provides for the appointment of an Executor and that such Executor may serve without bond. In short, the absence of a Will prevents a person from choosing who is to inherit his or her property and who is to handle payment of bills and disposition of the assets and frequently cost the inheritors unnecessary expense for a bond and to navigate various matters involving the deceased person’s estate.
Probate is a legal procedure for the appointment of someone to administer a deceased person’s assets and debts. The assets are assembled, debts are determined and paid and the net of these two items is distributed to the person’s heirs. Probate is state specific and generally applies to a person’s assets and liabilities within a given state, meaning that in some cases, particularly where an individual owned real estate in more than one state (for example, a principal residence in New Jersey and a vacation home in another state) probate procedures may be required in multiple jurisdictions. Probate in New Jersey is handled smoothly and hassle free if the deceased person had a properly drafted Will. A person dying with a Will is said to die Testate. Most people have all heard of a Last Will and Testament. The word Testament is actually another word for Will. Where a person dies with a Will he or she would have named someone in the Will to act as Executor. A person who dies without a Will is said to die intestate. In that case the person’s estate will be handled by a court appointed administrator. Probate is administered in the probate court or surrogate court in the county where the deceased last resided. Probate in New Jersey is generally an informal procedure, and it starts with an application rather than a formal in-court complaint or petition. The person named as Executor usually files the application, often but not always through his or her attorney. Probate applications can be filed at any time 10 or more days after the date of death. Fees generally are $250 or less, depending upon the number of pages in the Will, whether a trust is included and the number of court certificates the family orders. The process includes submitting the original Will to the probate court for review to make sure it is written following legal requirements, is properly signed, witnessed and acknowledged by a notary. Provided that there are no questions or problems with the document it will be admitted to probate and the Executor will be appointed. In New Jersey the time for completion of the probate process varies from county to county – barring unusual circumstances certificates confirming the acceptance of the Will and appointment of the Executor or, if no Will, appointment of the Administrator, will be issued not more than 10 days to 2 weeks after the filing of the probate application (in some counties certificates are issued on the same day).
In New Jersey the probate process is quick, relatively painless and inexpensive. In some states, however, probate can be costly and time consuming, so much so that people residing in those states or having assets which may become subject to the probate rules in more than one state will arrange their affairs to avoid it, including having a type of trust specifically designed to keep assets out of the jurisdiction of the probate courts. We would be pleased to discuss with our clients whether such a trust might be appropriate for their specific situations.
Most people, when they speak about joint property, are referring to assets owned by a husband and wife or by a parent and child with rights of survivorship, meaning that such assets would become wholly owned by the survivor upon the death of one of the owners. However, that is only one of the ways that property can be owned by more than one person. In New Jersey, when a husband and wife own real estate together they generally are presumed to hold title as tenants by the entirety. There is a unique benefit this form of ownership provides – if a creditor obtains a judgment against one spouse the creditor cannot levy against tenancy by the entirety property or force it to be sold to satisfy the judgment. From an estate planning perspective, tenancy by the entirety means that when one spouse dies the survivor automatically becomes the sole owner of the property. In New Jersey, tenancies by the entirety only apply to real estate. However, in other states personal property may be included. For example, in Florida bank accounts may also be held in tenancies by the entirety. The classification of persons entitled to tenancy by the entirety status in New Jersey has been changing as our laws relating to domestic partnerships and civil unions undergo modification. It is likely that persons in those types of relationships, when registered under state law, will also be entitled to tenancy by the entirety status for property they own together.
In addition to tenancies by the entirety, both real estate and personal property such as bank accounts and securities may be owned by two or more people as joint tenants with rights of survivorship. Joint ownership by persons who are not married – say a parent and child or a brother and a sister, is not presumed and ownership must be specifically registered to establish a joint tenancy with rights of survivorship or “jtwros”. Although not common, more than 2 people can be joint tenants with rights of survivorship meaning that the last surviving joint tenant will eventually become sole owner.
Another form of ownership by two or more persons is called tenancy-in-common. In this format each person owns a share of the property, not necessarily an equal share, and when an owner dies his or her share passes to that owner’s heirs, not to the surviving owners. In a tenancy-in-common situation the death of one of the owners sometimes creates problems if the property involved is not readily divisible and one party wants to sell or dispose of it but the other wants to continue the status quo. In extreme cases where the parties are not able to reach agreement they may wind up in court with an action either to divide the property, called partition, to have one side buy out the other or to have the property sold to a third party.
It is important to understand the implications of these forms of ownership because the way that property is owned can be at odds with a person’s estate planning goals. Take the case of a parent who titles some of her bank accounts as joint tenancy with rights of survivorship with one child but has a Will that provides that all her assets are to pass to children equally. In that situation property law trumps the Will and the bank accounts will pass to the one child who is the surviving joint tenant and only the remaining assets get divided equally among all of the children. The same result applies where there are accounts made payable upon death to fewer than all beneficiaries. The accounts with such designations will pass to the named beneficiaries and the person’s Will would only govern how accounts and assets without such provisions are to pass upon the parent’s death. Frequently, a mother or father will add children onto accounts as joint owners to enable them to handle the parent’s finances if he or she later becomes unable to do so. However, a simpler method and one which would avoid possible inequity among all children would be to grant the child a power of attorney, not to name him or her as a joint owner with survivorship rights.
Bottom line: The way in which assets are owned may be as important as an individual’s documents in effecting distribution of his or her assets upon death. It is, therefore, important to make sure that assets are titled consistent whatever provisions may be included in a person’s Will or Trust Agreement.
Nothing arouses passions and jealousies more than feelings of injustice within families. Grown children, sometimes with grandchildren of their own, remember real or imagined slights from 40 or 50 years ago. Even after parents are gone, such feelings can be unleashed from a Will. It can represent a last act of parental love and acceptance or disappointment and rejection. Writing a Will can therefore be a real challenge. One must not only face mortality but also deal with the very real circumstances within ones own family. For that reason, many people opt for equal shares to their children. But is equal always equitable? There are no pat answers to the question of how to divide property; life is too complicated for that, and each situation is different, but here are some thoughts to consider:
There is a common misconception that each child must be left something – one dollar, five hundred dollars, something. This is because the law treats the failure to mention a child, whether natural or adopted, whether born in or out of wedlock, and whether or not recognized as the child of the deceased person, as an unintentional oversight, allowing the omitted child to claim the same share of property he or she would have received had the parent died without a Will. All children should be named in the Will and any disinherited children should be specifically noted. Providing a reason for the disinheritance is not required. A statement in the Will that the maker intentionally make no provision for his or her son or daughter should be sufficient.
In addition to leaving out a child entirely, there are some situations where unequal treatment may nevertheless be fair and appropriate. Sometimes that inequality may involve giving more or less to one child. Other times it may mean that one child receives his or her share without restriction while the share for another child is paced in a trust. One example of a circumstance which might lead to different treatment for children might include a circumstance where one child received substantial assistance during his or her parent’s lifetime while another may not have. Should the extra amount one child received be treated as an advance against inheritance? Another example might involve a family with a physically or developmentally challenged child. This child might need more or less than an equal share of the parent’s assets to provide that child with quality of life. A further possibility might be of one child who has acted irresponsibly or in a way that merits a parent feeling disappointed or aggrieved by the child’s behavior? Each of these situations presents difficult decisions for parents which may be addressed by leaving a greater or lesser share to one child or another or by leaving one child’s share in trust for him or her with certain restrictions on use and distributions while distributing the share left to another child directly to him or her without such restrictions.
Beneficiaries may be young, lacking financial maturity and judgment or may otherwise be unable to manage their affairs. Leaving substantial sums outright to those without the discipline or skill necessary to handle assets should give pause. A Trust Agreement established during life or made as part of a Will is probably the best way to provide for beneficiaries and yet to protect them against themselves. The essential ingredients of a Trust are the person who created it, sometimes called a Grantor or a Settlor, the property placed into it, the person or entity that administers the property, called the Trustee, and the persons or persons who get to use the property, or the beneficiaries. Beneficiaries are further broken down sometimes into current or income beneficiaries and future or remainder beneficiaries, such as when a Trust continues for the life of the current or income beneficiaries and upon their deaths pass to the future or remainder beneficiaries. Sometimes the purpose of a Trust is to save on taxes. However, the type of trust referred to here is designed to administer property for the benefit of someone who might otherwise not manage the trust fund carefully and prudently. A Trust Agreement offers great flexibility. The Trustee may be required to distribute all income to the current or lifetime beneficiary or the Trustee may be given wide discretion about when and how much to distribute. The Trustee may also be given latitude to dip into Trust principal if needed for the current beneficiary, for example for health, support or medical care or for other need. The Trust Agreement can provide that principal be distributed to the beneficiary upon attaining a certain age or ages, say ages 25, 30 and 35, or be held for the lifetime of the beneficiary and pass to the remainder beneficiaries in next generation. Not all beneficiaries need be treated alike – for example, a responsible child can receive an inheritance at a given age while funds can be held in trust for the lifetime of a child with questionable money skills, or who is unable to handle finances.
A particularly complicated subject involves trusts for persons with disabilities. In some cases the individual may be unable to manage money. In other cases, even if the person can handle his or her finances it may not be a good idea to leave him or her assets because that could cause the individual to be disqualified from government benefits. The solution for parents or grandparents who want to provide for their child or grandchild in such a case is the special needs trust. Funds are set aside with a trustee, most likely a family member, for the disabled person. The trustee must be given complete discretion about whether and when and how much of trust income and principal is to be distributed for the beneficiary. Since the beneficiary has no right to demand distributions from the trust the assets in it are not countable for purposes of government benefit programs. With this type of trust the selection of the trustee is even more important than normal because of the unlimited discretion as to whether to distribute anything for the beneficiary.
Executors and Trustees are sometimes referred to as fiduciaries. Fiduciaries have control over property that belongs to someone else. They are expected to manage the property faithfully and prudently. Trustees are named either in trusts which are part of a Will – called testamentary trusts, or in stand alone trust documents.
The main jobs of the Executor or Executors – there can be more than one – are to bring the deceased person’s Will to the local Surrogate’s office and have it admitted to probate, to locate and take control of the assets, to determine and pay the bills, to file any necessary tax returns and to distribute what is left after the bills are paid in accordance with the provisions of the Will. Ideally, the Executor should have some familiarity with the assets and liabilities of the deceased. Usually, when there is a surviving spouse or children one or more of them serve as the Executors. In cases where there is no surviving spouse or child, or where they are not the best choices, someone else, such as a trusted friend or financial advisor or a financial institution may be selected. In order to address the possibility that the first person named may not serve or may start the job but die, become disabled or for some other reason fail to complete estate or trust administration, someone to succeed that person should be named. If no replacement is designated then the surrogate’s court steps in and picks someone and the appointee may not be the person the deceased would have wanted. Executors and Trustees are entitled to be paid and their fees are generally set by set by state law, although they do not have to take the fee and at times waive all or a part of it.
The Executor’s job is over when the bills are paid, tax returns are filed and assets are distributed, sometimes to a Trustee. Depending upon how large and complicated an estate may be, it may take from a few months to a few years or even more to complete. The Trustee’s job begins when he or she receives assets to administer and may go on for many years, such as for the lifetime of a surviving spouse and perhaps even for the lifetime of a child. Trusts can easily be administered over 20 years or more. In addition, while the duties of an Executor are basically administrative, a Trustee may have significant discretion both in how trust assets are to be invested and how and to whom they are to be distributed. A trustee who is to handle the investment of substantial sums should either have skill and knowledge in this area or should know what he or she does not know and be willing to hire an investment advisor. Where family members are available they should be considered for the role of trustees but the person establishing the Trust should be honest about their capacities. If family is not available or the best choice then one can consider trusted friends or family advisors or a bank or trust company. Since a trust may go on for many years and may actually outlive the originally designated Trustee it is very important that successor trustees be named.
Apart from income tax, the estate of a New Jersey resident may be subject to New Jersey Inheritance Tax, New Jersey Estate Tax or Federal Estate Tax. In some cases the estate of a New Jersey resident with out of state property may also owe tax to that state. The good news as far as New Jersey is concerned is that either the Inheritance Tax or the Estate Tax but not both will apply, but the bad news is that the tax which is the greatest is the one that will be due. Here is how these taxes currently work:
New Jersey imposes a tax on inheritances based upon the legal relationship of the deceased to the beneficiary. Spouses, registered civil union partners, parents, children, step-children, grandchildren and charities do not pay New Jersey Inheritance Tax. In addition, certain transfers, such as life insurance proceeds payable to a designated beneficiary, payments of state benefits to certain New Jersey retirees are not subject to inheritance tax. Inheritances by more collateral relatives such as brothers and sisters, sons-in law or daughters-in-law, nieces, nephews, cousins and by unrelated third parties are taxed. Where the tax applies it is assessed at 11% for siblings and in-laws (after a $25,000 exemption per applicable recipient) and at 15% for nieces, nephews, cousins and non-relatives. When the New Jersey Inheritance Tax applies a tax return and the tax itself are due to be filed and paid within 8 months from the date of death.
New Jersey also imposes its own version of an estate tax. This tax applies on all estates where more than $675,000 passes to beneficiaries other than a surviving spouse or a charity. This is a graduated tax, which originally was equivalent to a credit for state death taxes allowed under the Federal Estate Tax system but which has functioned independently since Federal Estate Tax laws were amended in 2001. When the New Jersey Estate Tax applies a tax return and the tax itself are due to be filed and paid within 9 months from the date of death. Where both the inheritance and the estate tax apply the larger of the two taxes, which usually but not always is the inheritance tax, will be due. Extensions of time for the payment of the inheritance or estate taxes will be granted, but at a price, 10% interest is imposed upon the late payment, unless there is some really good reason for lateness, in which case application may be made to reduce the interest on the unpaid tax from 10% to 6%. These taxes are liens on New Jersey property until they are paid. When the deceased had New Jersey bank accounts or securities registered in New Jersey, generally the accounts cannot be closed and the securities sold until the state issues consents to transfer, also called waivers. Some beneficiaries have had the experience of having a bank or other financial institution allow the withdrawal of up to half the balance in an account of a deceased family member until these waivers are issued. The restricted withdrawal results from New Jersey law which allows the state taxing authorities to charge the financial institution up to half the value of the account if the funds are withdrawn and thereafter the state is not able to collect the tax due from the Executor or the beneficiary. New Jersey now has a form called a self-executing waiver or Form L-8 which banks are allowed to give to the families of depositors to allow the accounts to be closed where the beneficiaries are all exempt from inheritance tax (usually spouses and children) and the total estate is valued at not more than $675,000.
It should be noted that there are significant differences among the states about state level transfer taxes. Some states are like New Jersey with both inheritance and estate taxes. Some states, like Pennsylvania, have only inheritance taxes, some states, like New York and Illinois, have only estate taxes, and some states, like Florida and Georgia, do not have either tax at this time. In addition, where one or both of the taxes apply the rates of tax and the property taxed may be different.
While state taxes are important and may be the only taxes to apply to a given estate, depending upon the size of the estate and the identity of its beneficiaries, the federal tax may be the larger issue because when it does apply it is at a much higher rate. The Federal Estate Tax laws, originally enacted in the early 1900s, have been modified many times over the years. It is likely that further significant changes will take place, probably starting in 2012. The changes have involved what is subject to tax, what is allowable as a deduction from the tax, what amount can pass exempt from the tax and what can pass to a surviving spouse free of the tax. Many techniques have been developed to eliminate or minimize Federal Estate tax. Most of them center on maximizing the value of each person’s exemptions. Frequently trusts are employed to get the most out the exemptions while preserving. The availability and utility of one trust format or another will depend upon the size of a person’s estate, the assets owned, the person’s personal family situation, the applicable tax rates and exemptions, both federal and state, and other factors. There are certain assets that upon transfer have multiple consequences, for estate and gift taxes, for income tax and for long term planning. These would include but not be limited to life insurance and retirement accounts. These items need to be considered as part of an integrated estate plan in order to minimize taxes and to maximize what can be retained in the family. For example, life insurance may be owned in a separate trust which, if drawn and administered properly could be entirely excluded from estate tax. Retirement accounts could be set to benefit not only spouses and children but also grandchildren in what are sometimes referred to as stretch accounts, it being the principal concept that the longer money stays invested on a tax deferred basis the greater the overall return is likely to be.
Deciding whether to make gifts to children or grandchildren while a parent is alive or to leave assets to them after death is not always easy and like so many other things in the estate planning area, depends upon personal circumstances. Parents naturally want to help their children and to see them succeed. However, parents also need to secure their own financial futures, particularly in retirement, when there can be expensive costs for medical and other care needs without income or assets to cover those expenses. Moreover, parents sometimes need to fight the urge either to give with strings attached or to give so freely as to take from their children the incentive to develop responsibility and self-reliance.
Three practical considerations in favor of making gifts now might include first, that a smaller gift now when it might be needed could be of greater value than a larger bequest later when the recipient might not need it, second, that the donor or person making the gift gets to enjoy while alive seeing the benefits to the done or recipient, and third some early giving may have beneficial tax consequences due to reduction in the size of the taxable estate of the donor. For those who elect to make gifts and can afford to do so, they can give up to $13,000 per year per recipient without any gift tax consequence. This is called the annual exclusion amount. A married couple can make gifts of up to $26,000 per recipient per year. I addition, gifts which take the form of direct payment of medical bills to hospitals and doctors or education expense to the educational institutions can be made without gift tax issues. Gifts to plans qualified under Internal Revenue Code Section 529, called 529 Plans, can help fund the cost of education for grandchildren and, depending upon the plan, may allow the grandparents to retain significant control over the gift until it is actually used. Interest and dividends earned on the assets in the 529 plan accumulate free of income tax provided that the funds are eventually used for the grandchild’s education expense.
In addition to the annual exclusion gifts and gifts for education and medical care, gifts that are taxable can be made without actually incurring a tax so long as the taxable gifts are kept under allowable exemptions.
There are rules relating to income tax basis which may bear upon whether to make gifts of cash or appreciated assets and depending upon the health and financial condition of the persons contemplating making the gifts, there may be Medicaid qualification issues to consider. A discussion about whether making gifts, timing of gifts and what type of gifts, if any, should be made should be included as a part of overall integrated estate planning.
While everyone hopes for good health and well being for as long as possible, none can predict the future. As one ages, how does he or she plan for the management of his or her affairs in light of such uncertainty? Here is where a power of attorney can be of great use. A power of attorney is a document under which someone is named agent for another person. Attorney means agent. Attorney at law is an agent for legal matters. Attorney in fact is an agent for financial matters, who acts based upon authority granted in a document for the principal, the person who granted the authority. A power of attorney can be general and broad or can be limited to a specific matter, such as a specific bank account. A more general power would include the ability to act as agent for all bank accounts and securities, the power to pay bills, file tax returns, take care of insurance matters and in general handle the affairs of the principal. Powers of attorney can either be what are called springing powers, which spring into effect when the principal becomes disabled, or durable powers, which are effective when signed and remain in effect until revoked. Most times we use the durable power because if a power is limited to when a person is disabled there may be a need to go to court to prove disability before the power of attorney could be used. This would not be needed with the durable power.
Note that just because people are husband and wife or parent and child does not mean that they can handle the financial affairs of others. They must have legal authority to do so. Absent a power of attorney the affairs of a disabled person will sit in limbo until there is a court appointed guardian. The process of guardianship appointment is both expensive -the testimony of two physicians and the fees of attorneys for the family, the claimed incapacitated person and sometimes for the court -are required, and not particularly. A power of attorney, which is inexpensive and generally part of an overall estate plan document package, eliminates this cost and emotional toll. A power of attorney may be revoked by the principal signing a revocation form. to be effective the revocation should be delivered to the person holding the power; otherwise he or she might act entirely innocently thinking that the power was in force.
Most people are familiar with the Karen Ann Quinlen case, or with its results, when a patient’s right to die was first recognized by the New Jersey Supreme Court, and the Terry Ann Schiavo case in which a family’s battle over a comatose woman was played out in the Florida courts and the nation’s court of public opinion. Today, one can eliminate these issues by signing a document in advance of the need for health called an advance directive. In New Jersey a single document contains both instructions to health care providers and designation of health care representatives. In some states these documents are separate and may be called health care proxies and living wills. Although in New Jersey a patient cannot legally commit suicide or be assisted in that endeavor, he or she can refuse treatment when at an end of life stage, provided that the decision is expressed in writing. Perhaps one of the greatest gifts a parent can give a child, more than money or property, is to take the end of life decision out of the child’s hands. Having a signed advance directive will resolve possible disputed about treatment and will lets the children or other family members feel that they are honoring their parents’ last wishes.