Special Needs Planning Mistakes

1. Disinheriting the child.
When a special needs child is disinherited, that child will need to depend on government benefits such as Medicaid and Supplemental Security Income (SSI).  While these programs can be greatly beneficial, it is not wise to rely solely on them to provide security.  Instead, establish a special needs trust (SNT) which will not preclude a child from government benefits, but will provide protection in the event that government benefits are reduced or insufficient.

2. Creating a generic special needs trust.
Parents of special needs children are accustomed to providing a level of care for their child beyond that which is specified in a generic special needs trust.  However, working with an attorney familiar with this area of the law can allow parents to establish a SNT that provides for the particular needs of their child.

3. Failing to prepare a letter of intent.
In addition to a well established trust, the trustee of the SNT should be provided with a letter of intent conveying important information about the specific health needs, daily activities, and preferences of the child with special needs.  This letter can prove to be an important document in assisting the child’s new caregiver in aiding the special needs child.

4. Choosing the wrong trustee.
There is no more important decision when establishing a SNT than choosing the person who will manage the trust for the special needs child when the parent is no longer living.  The trustee must be competent, financially responsible, and ethical.

5. Failing to properly fund the trust.
Providing for a special needs child often requires a plan that allows for liquidity when needed.  A great way to ensure funding for the child when necessary is to establish a permanent life insurance policy naming the SNT as the beneficiary.

6. Failing to invite contributions from friends and family.
A SNT allows for members of the extended family and others who may care about the special needs child to contribute to the trust or to name the SNT as a beneficiary of their own estate planning.

7. Procrastinating.
It may seem obvious, but it is crucial to prepare to protect a special needs child early.  It’s impossible to predict when a parent or guardian will die or become incapacitated and a special needs child will often rely solely on the preparations made by the parent.  Don’t delay in establishing a SNT and ensuring that your child receives the best care possible.

Estate Planning for Non-Traditional Families

Estate planning for traditional couples usually consists of having a Will, Financial Power of Attorney, Medical Power of Attorney and Advanced Health Care Directive.

There are typically three types of couples that need planning significantly different from that of traditional couples:

1.Same Sex Couples
2.Couples where at least one party has children from a previous relationship; and
3.Couples who are in a long term hetero-sexual relationship but are not legally married.

For all non-traditional couples it is even more important to prepare Wills, Financial Powers of Attorney, Medical Powers of Attorney and Advanced Health Care Directives. However, while the documents stay the same, the methodology is very different.

The laws for same sex couples vary widely by state, and the federal government does not recognized the validity of a same sex marriages or civil unions for tax purposes or for most other purposes. If one partner dies without a Will, in most states, the state intestacy law will not direct that the money goes to the surviving partner.

Since state law will usually not protect the rights of same sex couples, it is imperative for gay and lesbian couples to prepare a Will, Power of Attorney and Health Care Directive. Additionally, trust and tax planning becomes even more important as does coordination of the couple’s other assets. This is particularly true if there are children involved.

Even in states where the law is favorable, same sex couples must plan to minimize the federal estate tax, as the unlimited marital deduction only applies to heterosexual couples. Planning must also be done to minimize state estate taxes and state inheritance taxes if the couple is thinking about moving to another jurisdiction.

For couples where at least one party has a child from a previous relationship, many of the traditional planning techniques do not work because the goal is not always to provide for the spouse first and then for the children. Special planning is needed to ensure that both the needs of the surviving spouse and children from the prior relationship are addressed. Legally, such couples are pretty much in the same boat as same sex couples unless they living a jurisdiction that has common law marriage. If no planning is done, the surviving partner gets completely cut out.

Ignoring the issue not only leads to litigation, but a more expensive estate administration process and higher taxes. If you are in a non-traditional relationship, we strongly recommend seeing a competent estate planning attorney in a jurisdiction near you to flush out all the issues that affect you.

How to Limit a Estate Executor’s Personal Liability for Taxes

An estate’s executor or adminstrator, also know as a personal representative (“PR”), is personally liable for paying the decedent’s remaining tax bills, be they income taxes, gift taxes or estate taxes. See 31 U.S.C. §3713(b) and IRS Manual (10-16-2007).

There are three risk-management tools every probate lawyer needs to know about and incorporate into his or her practice:

•IRS Form 56:
A Form 56 needs to be filed twice: when your PR first gets appoint to let the IRS know who your PR is and where to send all tax notices; and again when your PR finishes his job and is discharged. What you’re doing here is making sure that any correspondence from the IRS having to do with the decedent’s taxes gets to your PR right away; the last thing you want is your PR to get sued for failing to pay the decedent’s back taxes because the deficiency notices went to the wrong address. Also, the instructions to Form 56 state that the filing of a Form 56 when your PR is discharged will “relieve [the PR] of any further duty or liability as a fiduciary.”

•IRS Form 4810:
Not only do you want to make sure the IRS knows your PR exists and that this is the person they need to contact for all matters related to the decedent, you’ll also want to “shake the bushes” to make sure there are no unpaid back taxes involving the decedent. You do this by filing a Form 4810 (Request for Prompt Assessment for Income and Gift Taxes). A cautious PR will wait for the IRS to respond to this assessment request prior to making any distributions to the estate’s beneficiaries. You don’t want all the cash to go out the door only to be surprised by some huge tax assessment that puts your PR in the uncomfortable position of having to ask heirs to give money back to pay back taxes.

•IRS Form 5495:
At the same time your PR files a Form 4810, he’ll also want to simultaneously (but separately) file a Form 5495 (Request for Discharge from Personal Liability for Decedent’s Income and Gift Taxes). This is another way to make sure your PR gets the heads up on any of the decedent’s unpaid back taxes. If Form 5495 is properly filed, the IRS has nine months in which to notify the PR of any deficiency for the decedent’s applicable income or gift tax returns. If the PR pays the additional tax, or if no notice is received from the IRS within nine months from the date of filing Form 5495, the PR is then discharged from personal liability.

Even if you’re working with a CPA who’s supposed to be taking the lead on all the tax issues, you need to know that these protective measures exist and ensure the PR gets the full benefit of them.

Watch Out! There Still is a State (Including New Jersey) Estate Tax

Despite the new and generous federal estate tax exemption of $5 million per estate and $10 million per couple, many less wealthy families still have to plan for estate taxes–state estate taxes that is.

The $10 million exemption makes state death tax planning all the more important. You will pay more if you’re in a state that has its own death tax, like New Jersey and New York.

As of today–and with states desperate for revenue this could change–21 states and Washington, D.C., have state estate or inheritance taxes in place for 2011. Thirteen states and Washington, D.C., have estate taxes only. Typically, these taxes exempt $1 million or less per estate and carry a top rate of 16%. Six states levy only an inheritance tax, with the rate depending on the relationship of the heir to the deceased and the taxes kicking in, in some cases, on the first dollar of bequest. New Jersey and Maryland levy both estate and inheritance taxes.

New Jersey imposes an estate tax of up to 16% above a $675,000 exemption and an inheritance tax of up to 16% on every dollar left to a niece, nephew, friend or lover, but no inheritance tax on money left to children, grandchildren, parents or siblings. (Any estate tax owed is reduced by the inheritance tax paid.)

Maryland also imposes an estate tax of up to 16% above a $1 million exemption and a 10% inheritance tax on every dollar left to a niece, nephew, friend or lover, but no inheritance tax on money left to children, grandchildren, parents or siblings. (Any estate tax owed is reduced by the inheritance tax paid.)

Hawaii is the latest state to adopt its own estate tax. Its tax was effective May 1, 2010, with a $3.5 million per person exemption for 2010. That goes up to $5 million on Jan. 1. North Carolina’s estate tax, which lapsed along with the federal estate tax in 2010, comes back Jan. 1, with a $5 million exemption to match the federal exemption.

Watch for further estate tax action in state legislatures in 2011 as state politicians react to the new federal estate tax landscape. The federal estate tax deal for 2011 and 2012 has dashed states’ hopes that they would get a revenue windfall from the lapse of the Bush tax cuts at the end of 2010. Prior to the Bush tax cuts, states automatically collected revenue from the estate tax via something known as the state death tax credit. California, for example was counting on receiving $2.7 billion from the credit over the next two fiscal years.

Some of those states might copy Hawaii and bring back taxes on their own, at least on larger estates over $5 million.

New Jersey Estate – How It Works

The New Jersey estate tax was revised on July 1, 2002 and made to apply retroactively to decedents dying after December 31, 2001. Prior to its revision the New Jersey estate tax was a “sponge” or “pickup” tax whose sole purpose was to absorb any credit for state inheritance, estate, succession or legacy taxes available in the Federal estate tax proceeding. The revised New Jersey estate tax is decoupled from the Federal estate tax.

The New Jersey estate tax is now imposed upon the transfer of the estate of every resident decedent which would have been subject to a Federal estate tax under the provisions of the Internal Revenue Code in effect on December 31, 2001. The tax is either the maximum credit for state inheritance, estate, succession or legacy taxes allowable under the provisions of the Internal Revenue Code in effect on December 31, 2001 or an amount determined pursuant to the Simplified Tax System prescribed by the Director, Division of Taxation.

  • The person or corporation responsible for payment of the tax may choose the Form 706 method or the Simplified Tax System method of filing the New Jersey estate tax return.
  • A New Jersey estate tax return must be filed if the decedent’s gross estate plus adjusted taxable gifts as determined in accordance with the provisions of the Internal Revenue Code in effect on December 31, 2001 exceeds $675,000. It must be filed within nine months of the decedent’s death (nine months plus 30 days if the Form 706 method is used). Additionally, a copy of any Federal estate tax return filed or required to be filed with the Federal government must be submitted within 30 days of the date it is filed with the Internal Revenue Service and a copy of any communication received from the Federal government must be submitted within 30 days of its receipt from the Internal Revenue Service.
  • The New Jersey estate tax is due on the decedent’s date of death and must be paid within nine months in all cases. Any tax not paid within nine months generally bears interest at the rate of ten percent (10%) per annum from the expiration of nine months until paid. The Director may extend the time for the filing of the return but not for the payment of the tax. Payments are first credited in satisfaction of accrued interest.
  • The Form 706 method requires that the Form IT-Estate be prepared and filed along with a 2001 Form 706 completed in accordance with the provisions of the Internal Revenue Code in effect on December 31, 2001. The New Jersey estate tax is based upon the Federal credit for state inheritance, estate, succession or legacy taxes as it existed on December 31, 2001 and not as it existed on a decedent’s date of death.
  • If a Federal estate tax return has or will be filed or is required to be filed with the Internal Revenue Service, any election made by a taxpayer to treat an asset in a particular manner for Federal estate tax purposes must also be made for New Jersey estate tax purposes. A taxpayer may not make one election for Federal purposes and another for State purposes with the following exception. If the decedent was a partner in a civil union and died on or after February 19, 2007, survived by his/her partner, a marital deduction equal to that permitted a surviving spouse under the provisions of the Internal Code in effect on December 31, 2001, is permitted for New Jersey estate tax purposes. In these cases, the 2001 Form 706 should be completed as though the Internal Revenue Code treated a surviving civil union partner and a surviving spouse in the same manner.
  • The Director has prescribed a Simplified Tax System method pursuant to the provisions of the revised statute. This method may only be used in those situations where a Federal estate tax return has not and will not be filed nor is a tax return required to be filed with the Internal Revenue Service. The Simplified Tax System is not intended for use in all estates. Any attempt to develop a tax system which could be used in all situations and which would produce a tax liability similar to that produced using the Form 706 method would, of necessity, result in a tax system as complex as the Federal tax itself. The Simplified Tax System requires that a Form IT- Estate be prepared and filed along with a New Jersey inheritance tax return (Form IT-R) completed in accordance with the provisions of the inheritance tax statute in effect on December 31, 2001.The taxable value of the estate using the Simplified Tax System method is the net estate as determined and reflected on line 7 of the New Jersey inheritance tax return (Form IT-R) adjusted to reflect:
    • Real and tangible personal property located outside of New Jersey; plus
    • The proceeds of life insurance on the decedent’s life owned by the decedent (or transferred within three (3) years of his/her death) paid to any beneficiary other than the estate, executor or administrator; plus
    • All transfers made by the decedent within three years of death not included in the inheritance tax net estate ; plus
    • In the event that the decedent was a surviving spouse or a civil union partner and received qualified terminable interest property (QTIP) from the predeceased spouse or civil union partner for which a marital deduction was elected for Federal and/or New Jersey purposes, the full value of the QTIP property; plus
    • Any other property includable in the Federal gross estate under the provisions of the Federal Internal Revenue Code in effect on December 31, 2001; less
    • Property passing outright to the decedent’s surviving spouse or civil union partner who died on or after February 19, 2007 provided he/she was a U.S. citizen on the decedent’s date of death. This deduction does not include QTIP (Qualified Terminable Interest Property) or similar property. QTIP property is property that passes from the decedent and in which the surviving spouse or civil union partner has a qualifying income interest for life. The surviving spouse or civil union partner has a qualifying income interest for life if he/she is entitled to all or a specific portion of the income from the property payable annually or at more frequent intervals, or has a usufruct interest in the property (right to enjoy the property) for life, and during the surviving spouse’s or civil union partner’s lifetime no person has a power to appoint any part of the property to any person other than the surviving spouse or civil union partner. Additionally, the surviving spouse or civil union partner must be a citizen of the United States on the decedent’s date of death. If QTIP property or the surviving spouse’s or civil union partner’s citizenship is a significant factor, consideration should be given to the use of the Form 706 method of filing; less
    • Property passing for charitable purposes.
  • The New Jersey estate tax is reduced by the portion of the tax that is attributable to property located outside New Jersey. The amount of the reduction is calculated by multiplying the tax due on the entire gross estate wherever located by a fraction the numerator of which is the gross value of property located outside the state and the denominator of which is the New Jersey entire gross estate wherever located. In general, for purposes of the calculation, intangible personal property is considered to be located in New Jersey regardless of where it may actually be located.
    Gross Value of Property Located Outside New Jersey
    ______________________________ x Tax Due on Entire Gross Estate Wherever Located = Allowable Reduction
    New Jersey Entire Gross Estate Wherever Located
  • A decedent’s interest in a family limited partnership is valued in accordance with the provisions of N.J.A.C. 18:26-3A.2(b). A family limited partnership is a limited partnership in which more than 50% of the partners are related by blood or marriage and which does not have a true business purpose.
  • Unlike the prior New Jersey estate tax, the revised estate tax is a lien on all the property of a decedent. Additionally, the statute provides that the decedent’s property may not be transferred without the written consent of the Director. The tax waiver form releases both the inheritance and the estate tax liens and permits the transfer of the property listed thereon for both inheritance and the estate tax purposes. Waiver requirements for both the inheritance and the estate tax are set forth in N.J.A.C. 18:26-11.1 to N.J.A.C. 18:26-11.32.
  • Form L-8 may be used in many instances to secure the release of bank accounts, stocks, bonds and brokerage accounts without the necessity of obtaining a tax waiver from the Division. Form L-9 may be used in many instances to secure a tax waiver for realty without the necessity of filing a tax return with the Division. Form L-8 may not be used if the taxable estate plus adjusted taxable gifts as determined in accordance with the provisions of the Internal Revenue Code in effect on December 31, 2001 exceeds $675,000. Form L-9 may not be used if the gross estate plus adjusted taxable gifts as determined in accordance with the provisions of the Internal Revenue Code in effect on December 31, 2001 exceeds $675,000. In situations where these forms cannot be used Form L-4 may be used to request the issuance of waivers prior to the filing of a New Jersey estate tax return. When reviewing a request for the early issuance of tax waivers the Division will withhold waivers and/or require a payment on account or other security sufficient to insure the payment of the tax and interest for which the decedent’s estate is ultimately determined to be liable.

The Surrogate Court Process

Probate is the process whereby a Will is proved to be valid by a Surrogate, who has the authority to determine the authenticity of such a document. It also involves appointing an individual for an Estate when someone dies without a Will.

Probate is done when someone dies with assets in their name alone. The individual named in the Will as the Executor/rix (hereinafter referred to as the personal representative) would come to the office of the Surrogate with the original Will and a certified copy of the death certificate.

Application is made to the Surrogate of the County where the decedent resided at the time of death. If the Will is self- proving (language added to the will that allows the document to prove itself), no further proof or testimony will be necessary to probate the Will.

If the Will is not self-proving, a proof of one of the witnesses is necessary to complete the probate.

Certain qualification forms would need to be signed by the personal representative. No probate can be completed until the day following the tenth day after death. Fees will be charged as set forth by the New Jersey legislature. It is a relatively inexpensive process.

If someone dies without a Will, an individual can make application to be appointed as Administrator/rix (also hereinafter referred to as the personal representative) to represent the Estate.

After signing qualification papers, the Administrator/rix would need to post a bond that represents the full value of the Estate and file renunciations from any individual that has a prior or equal right to be appointed.

The Surrogate, as part of the process, will issue letters and certificates evidencing the appointment of the individual to the Estate which will allow them to access and transfer assets such as bank accounts, stocks, bonds, etc.

Once the probate is complete, the personal representative of the Estate has sixty days in which to notify the heirs at law, next of kin and beneficiaries that application was made for probate.

Probate: Frequently Asked Questions

Q: What is Probate?

A: Probate is designed to create a “final accounting” upon death. It is  the legal process of “proving up” a Will, or verifying that a Will is  valid, takes place in one of two instances. First, if a person dies  leaving behind a Will, or second, if the deceased has died intestate,  that is, has not left behind a Will or estate plan of any type or the  Will cannot be found.

Q: Does the Estate Administration process take a long time?

A: Depending on the complexity of the estate and the thoroughness with  which accounting has been carried out before death, Estate  Administration can either be a relatively simple task or a daunting  one. Be aware that no matter the situation, Estate Administration may  be a lengthy process often taking months or possibly years to play out,  and one which may take a considerable amount of an executor’s time.

To summarize the process, Estate Administration can be broken into six basic steps:

  1. Validation of the Will
  2. Appoint executor
  3. Inventory estate
  4. Pay claims against the estate
  5. Pay estate taxes
  6. Distribute remaining assets

Each of these steps involve legal documentation and validation, and more importantly, proper accounting each step of the way.

Q : What is Probate Court?

A: Probate begins and ends with the special Probate Court set up in  each state to handle estate issues. (Sometimes known as the Orphan’s or  Chancery Court in certain states.) All actions taken regarding the  estate are accountable to this court, and must be noted and reported  regularly. This court is staffed by special judges qualified to oversee  estate resolution issues.

Q: Does the Trust Administration process take a long time?

A: To summarize the process, trust administration can be broken into five basic steps:

  1. Inventory assets
  2. Determine estate tax
  3. Division of trust assets
  4. File the 706 tax form
  5. Distributions to beneficiaries

Although the trust administration process seems relatively  straightforward, there are several reasons it can sometimes be drawn  out over several months or even years. The first step, the inventory of  assets, must be completed before the trust administration can begin,  and this can be difficult to complete depending upon the prior  organization and the size and complexity of the decedent’s assets.  Next, the 706 estate tax return must be filed within 9 months, or 15  months if an extension is filed. Often, it is prudent to wait until the  last minute to file this form. If the spouse of the decedent is in  failing health and may pass away before the deadline, then both 706  forms can be used to maximize tax advantages to the estate. The final  step, asset distribution, cannot take place until the 706 has been  filed, and even then should not take place until the “Closing Letter”  is received from the IRS certifying acceptance of the 706 return. This  closing letter will take a minimum of 6 to 8 months, and as long as 3  years, to arrive after the 706 is filed.

Q: I thought that a living trust avoids probate and attorney fees. Why do I have to pay more fees?

A: While having a living trust can significantly reduce costs, there is  still a considerable amount of work to be done in properly  administering even a simple living trust. The services of an attorney  are required, and that person or firm should be compensated fairly for  their services. It is important to remember that the fees allowed for  trust administration should be much lower than if an organized Estate  Plan is in place, and there is generally less work involved, as there  is less involvement of the courts and state bureaucracy.

Q: Can I pick and choose what assets go into the “B” trust?

A: The answer depends upon the language of the trust document. Certain  trusts include “pick and choose” language that allows trustees to  selectively place assets into the “B” trust.

Q: How do I transfer the car(s) into my name?

A: If you are a relative of the deceased, this is simple. To transfer  the title of vehicles owned by the deceased, simply take the death  certificate to the DMV, and perform the transfer, paying whatever fees  they require. If not a relative, bringing along the will and or any  trust documents indicating your status should be sufficient.

Q: What do I do about Social Security?

A: Social Security will continue to send out benefit checks until they  are notified of an individual’s death. The executor/spouse/trustee  should contact the local Social Security Administration  office and notify them of the death, or if a benefit check is received,  send it back with a letter notifying them. This is important. If checks  continue to be deposited, the recipient can incur liability later when  Social Security learns of the recipient’s death.

New Jersey Estate Administration: Things You Need To Do When a Loved One Passes

Upon the death of a loved one, great emotional sadness sets in as  family and friends support each other during this time of loss. After  finding a firm emotional foundation, it is time to address the task of  administering the estate set up by the deceased.

Included below is a brief list of the actions which you or your  Personal Representative and Trustee should take immediately upon death.  (Many of these actions may similarly be required in the event of  incapacity). This is not intended as an exhaustive or detailed  explanation of all actions which should be taken. Rather, it is for use  as a checklist to help the appointed representatives step in and handle  as expeditiously as possible those items which demand immediate  attention.

  1. Consider advising any surviving family member who is alone to  telephone a friend who can share the next few hours. Shock and trauma  due to the death of a relative can take unexpected forms.
  2. Notify a funeral director and clergy, and make an appointment to  discuss funeral arrangements. For our clients, consult the “Location  List” and the “Estate Planning Letter” sections in your Portfolio for  the names and phone numbers of the appropriate parties and any special  requests of the decedent. Request several copies of decedent’s death  certificate, which you’ll need for his or her employer, life insurance  companies, and/or decedent’s attorney for legal procedures.
  3. Contact by phone and notify the immediate family, close friends,  business colleagues and employer (for our clients, see “Location List”  section for persons to contact).
  4. Arrange for care for members of the immediate family, including  appropriate child care, having people at the decedent’s house, etc.
  5. Locate the decedent’s important papers. For our clients, consult  the “Location List” section in your Portfolio. Gather as many of the  decedent’s papers as possible, and continue to do so for the next few  weeks.
  6. Contact our office for your consultation or notify the attorney who  will be handling the decedent’s affairs. Make an appointment  immediately because a tax return may be due within nine (9) months of  death. This meeting is important to review decedent’s estate planning  documents and to discuss state and federal death taxes that may be  payable. The attorney will also determine the extent to which it is  necessary or advisable to open a probate estate. (In the event of  incapacity, the attorney may suggest additional steps which should be  taken for estate planning purposes, particularly if death is imminent.)
  7. Telephone decedent’s employee benefits office with the following information: name, Social Security number,  date of death (or incapacity); whether the death (or incapacity) was  due to accident or illness; and your name and address. The company can  begin to process benefits immediately.
  8. If decedent was eligible for Medicare, notify the local program office and provide the same information as in Step # 8.
  9. Notify life, accident or disability insurers of decedent’s death or  disability. Give the same information as in Step # 8, and ask what  further information is needed to begin processing your claim. Ask which  payment option decedent had elected, and select another option if you  would so prefer. If there is no payment option, you will be paid in a  lump sum.
  10. Notify the decedent’s Social Security office of the death. Claims  may be expedited if a surviving family member goes in person to the  nearest office to investigate making a claim for survivor’s benefits.  Look for the address under U.S. Government in the phone book.
  11. If you need emergency cash before insurance claims are paid, a cash advance may be available from life insurance benefits to which you are entitled.
  12. If decedent was ever in the military service, notify the Veterans’  Administration. Surviving relatives may be eligible for death or  disability benefits.
  13. Record in a small ledger all money you or the immediate family spends. These figures may be needed for tax returns.
  14. Remember that a surviving family member may be in a highly  emotional state. Therefore, they should avoid entering contracts for  anything, and avoid spending or lending large sums of money. For our  clients, consult the section of the Portfolio entitled “Other  Documents” before proceeding further.
  15. DO NOT CHANGE THE TITLE OF ANY ASSETS! This can create unnecessary  problems for you. Please contact our office for a consultation before  starting this process.

Caution: New Jersey Inheritance Tax

One of our clients recently (and unfortunately) paid $30,000 New Jersey inheritance tax on a $200,000 inheritance received from her aunt. This could have been avoided with some planning.

If you live in New Jersey, then you’re lucky enough to live in one of the two states that collect both a separate state inheritance tax and an estate tax (the other is Maryland). Only eleven states still collect an inheritance tax.

Currently the following rules apply with regard to the New Jersey inheritance tax:

•Charitable organizations are exempt from the tax.
•All other beneficiaries are broken down into three classes with regards to the tax:
•Class A beneficiaries. No tax is imposed on the following beneficiaries – spouses, civil union partners, domestic partners, parents, grandparents, and descendants (including those legally adopted).
•Class C beneficiaries. For the following beneficiaries: siblings, spouse or widow(er) of a child of the decedent, and civil union partner – the first $25,000 is exempt and transfers above this amount are taxed at 11%–16%.
•Class D beneficiaries. For all other beneficiaries (i.e., niece, nephew, cousin, etc.), the first $500 is exempt and transfers above this amount are taxed at 15%–16%.

Life insurance paid to a named beneficiary is exempt from the tax. An NJ inheritance tax return, Form IT-R, must be filed and the tax paid within eight months after the decedent’s death. While no inheritance tax return is required to be filed for Class A beneficiaries, a tax waiver may be required to access bank accounts, stocks, bonds and brokerage accounts.

The bottom line: if you’re a New Jersey resident and your estate is passing to someone other than your immediate family, then your beneficiaries may owe New Jersey inheritance tax. Our office can plan your estate to avoid or minimize the New Jersey inheritance tax.
If you manage to avoid the inheritance tax, you must still watch out for New Jersey estate tax.

A New Jersey Estate Tax Return is required when the gross estate plus prior taxable gifts are in excess of $675,000. Even though a spouse can pass an unlimited amount to his or her spouse during life or at death, the assets left to a spouse at death do count as part of the gross estate and can thereby necessitate the filing of a New Jersey estate tax return even when all assets are left to a surviving spouse. The New Jersey estate tax rate is a progressive rate that maxes out at 16%. The New Jersey Estate Tax Return and any tax due must be paid within 9 months of the date of death.

The bottom line – if you’re a New Jersey resident and your estate is passing to someone other than your spouse and the value is more than $675,000, or if you’re a nonresident who owns real estate and/or tangible personal property located in New Jersey and your estate is valued at more than $675,000, then your estate may owe a New Jersey estate tax.

Our firm has helped hundreds of clients minimize and sometimes entirely avoid the New Jersey estate tax.

The new law: The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010

Congress finally acted to provide some certainty for taxpayers and their advisors on the gift tax, estate tax and generation skipping transfer tax. The new law, The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, sets up the following scheme for tax years 2010 – 2012:

2010 Estate Tax
Exclusion amount: $5,000,000
Maximum tax rate: 35%
Option to elect carryover basis instead of Estate Tax
2010 Gift Tax
Exclusion amount: $1,000,000
Maximum tax rate: 35%

2011 Estate Tax / 2012 Estate Tax
Exclusion amount: $5,000,000 (indexed by CPI 2012+)
Maximum tax rate: 35%

2011 Gift Tax / 2012 Gift Tax
Exclusion amount: $5,000,000
Maximum tax rate: 35%

2013 Estate Tax

Unless Congress acts in 2012, this new law will sunset and 2013 will revert to the old rates ($1M exclusion and 55% top rate)

The other important change is the portability of the exclusion amounts between spouses. Under prior law, smart tax planning often required the creation of a Credit Shelter or Bypass Trust to receive the exclusion amount of the first spouse to die. The new law doesn’t require such techniques. Even a couple with a so called “sweetheart will” that leaves their entire estate to each other with no other tax provisions will still benefit from a combined estate tax exclusion of $10,000,000.

Unfortunately, while this provision seems to simplify things for clients and their advisors, “exclusion portability” could actually be a trap for the unwary for numerous reasons, including:

1) The deceased spouse’s exclusion is not indexed to inflation so the deceased spouse’s assets are likely to continue to grow and thereby suffer unnecessary tax at the second spouse’s death. Placing those assets in a Credit Shelter Trust would have avoided this major issue.

2) Asset held directly in the surviving spouse’s name are subject to subsequent lawsuits, marriages/divorces, mismanagement, creditor attacks, etc. Assets in a Credit Shelter are insulated from all of this.

3) Credit Shelter Trusts ensure the funds eventually wind up benefiting the children, grandchildren, friends or charities the deceased spouse wanted to help. Funds left directly to the surviving spouse are subject to his/her whims and planning (or lack thereof). Those funds could wind up going to the survivor’s new spouse or children in the event of remarriage.

4) The current law will automatically disappear in two years without Congressional action. Relying on any unusual provision of this new law (like portable exclusions – something unheard of until now) might be asking for trouble given the uncertain future and unstable political and financial situation of the country.

The new law certainly creates a tremendous opportunity for smart planning. Unfortunately, there is a real danger that it will lead to complacency amongst clients and advisors who focus solely on the larger exclusion amounts and assume estate planning is unnecessary. This could be disastrous.

All clients should seek out qualified legal counsel to plan their estate, regardless of age or wealth. Estate taxes are but one reason for smart estate planning. Don’t forget about:
* guardianship for minor children
* asset protection planning
* family business succession
* liability protection
* legacy management
* special needs planning
* planning for second marriages or troubled family situations, etc.

In addition, the New Jersey State Estate Tax has NOT changed, and it applies to estates of $675,000+.

Estate Plan New Year’s Resolutions

Review and Revise Your Estate Plan

If you have already established a will, you should be aware that the laws that govern estate planning (such as power of attorney rules, Medicaid regulations, and estate and gift tax laws) change frequently.  Additionally, it is very possible that your personal and financial circumstances have changed since your estate plan was created.  All of these changes could have a serious effect on the outcome of your estate plan.  To account for these changes (especially the impending change in federal estate tax law), you should have your will reviewed and revised by an attorney familiar with estate planning.

Plan for the Distribution of Tangible Personal Property

While most people creating an estate plan do a good job of accounting for and distributing financial assets, a plan for the distribution of tangible personal property (jewelry, collections, furnishings, etc.) is often neglected.  Tangible personal property is often viewed as less valuable, but this belief does not account for the sentimental value of these objects to the family members of the deceased.  Because of this, estate planners frequently see disputes among siblings about the division of these assets after death.  Providing clear and detailed instructions for the distribution of such personal property can help avoid conflict between your loved ones in the future.

Review and Consider Power of Attorney

When considering estate planning it is important to plan for all possibilities, including the possibility of incapacitation.  There are several different types of powers of attorney, and not each one may be right for you.  Consult with an attorney about your options in designating power of attorney, writing a living will, and establishing a healthcare proxy.

Transfer your Life Insurance Policy to a Trust

If you own your life insurance policy, it may be subject to the estate tax upon your death.  However, if you use an irrevocable trust to purchase your life insurance policy, it will be shielded from both estate and income taxes.  If you have already purchased life insurance, it is possible to transfer ownership to a trust and achieve the same benefits.

Invest in a 529 Plan

College is very expensive, but Internal Revenue Code section 529 provides an excellent way to invest in a fund designated to pay for higher education expenses.  Establishing a 529 education savings plan allows the investor to “frontload” up to five years worth of annual exclusion gifts to one person, or $65,000 in 2010.  Though funding higher education is always an exemption to the gift tax, using this plan will allow interest to accrue free from income tax, making investments in 529 plans very effective.