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.
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.
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.
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.
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.
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.
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.
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.