Estate Tax Considerations

Trusts to avoid probate and sometimes reduce NJ Estate Tax         Compiled by Kenneth Vercammen         Probate is defined as the procedure by which an Executor proceeds to admit a Will to the jurisdiction of the Surrogate Court, which is proved to be valid or invalid. The term generally includes all matters relating to the administration of estates.  There are instances where Surrogate Court monitoring of the estate is desirable.  Much has been written about the disadvantages of probate.  Following are just a few of the problems associated with probate and why certain people set up Trusts in addition to Wills. Lack Of Privacy         Documents filed with the Surrogate Court are public information.  They are available for inspection to anyone who asks. In large estates, which require an accounting, your probate file will contain a complete list of all assets devised by your Will including business assets.  This lack of privacy may lead to problems among family members who now know the plan of distribution and may then contest any provisions with which they disagree.  Disinherited relatives and creditors are notified and given time by the Court to contest the Will distribution.   Time Consuming         The probate of an estate may take several months to several years to complete.  During that time family members may have to apply to the Surrogate Court for an allowance. Fragmentation - Real Estate         If you own real property in more than one state, probate rules must be  followed in each state in which real property is located. The  cost and time may be increased.         Revocable Living Trust & Irrevocable Trusts                  A Revocable Living Trust is a legal device that allows you to maintain complete control over your assets and avoids Probate.  However, a Revocable Trust does not reduce Estate Tax and does not protect your assets from nursing home fees.         Because there is no probate of a Revocable Living Trust, your private financial matters remain private, there are no probate costs, no long delays and loss of control, and no fragmentation of the estate. However, since you still control the trust, it cannot shield assets from Nursing Home, Medicaid or Estate Taxes. To do that, you will need to hire an attorney to prepare an Irrevocable Trust. Fees are minimum $3,000- $5,000 for trusts.         A Revocable Living Trust can easily be structured to automatically create separate Trusts upon the death of either your spouse.  Here's how it works.  If the wife dies first, the husband has total control of his Trust. Also, for the remainder of his life, he receives all income from her Trust and has the use of the assets whenever needed for living expenses.  When he dies, each Trust will claim its tax exemption, and some will go tax-free to their children, or any other beneficiary they designate, without having to go through probate.    http://www.njlaws.com/trust_v__wills.htm Irrevocable Trust:         A Trust, which cannot be changed or canceled once, it is set up without the consent of the beneficiary. contributions cannot be taken out of the trust by the grantor. Irrevocable trusts offer tax advantages that revocable trusts don't, for example by enabling a person to give money and assets away even before he/she dies. Opposite of revocable trust. You Maintain Complete Control Over Your Property In a Revocable Living Trust          The principle behind a Revocable Living Trust is simple.  When you establish a Living Trust, you transfer all your property into the Trust, and then name yourself as trustee, or you can name you and your spouse as co-trustees of the Trust.  The trustees maintain complete control over the property, the same control you had before your property was placed in trust  You can buy, sell, borrow, pledge, or collateralize the trust property.  You can even discontinue the Trust if you choose.  That is why it is called a Revocable Living Trust. We  will explain the Irrevocable Trust at the end of the  article. Transferring Property Into the Trust         The transfer of title to property into the Trust is a relatively simple matter when you hire an attorney. Anywhere you have assets, you will get help in transferring your property into the Trust.  Your attorney, securities investor, etc., will provide you with assistance needed to transfer your property into your Revocable Living Trust.  Your attorney will provide the information and assistance you need to properly fund your Trust. Complete Privacy           Probate records are public, your Trust documents are private.  A Trust will safeguard the privacy of your family and your private financial matters. Naming A Trustee         Most people name themselves and their spouse as the initial Trustees of a Revocable Trust. This is usually true unless one spouse is incapacitated to the point that he or she is not able to manage your assets in the same way you do now. However, for an Irrevocable or Medicaid trust, the spouse cannot be the trustee. Gifts To Religious And Charitable Organizations         Many people wish to give a portion or sometimes all of their assets to a religious or charitable organization in order to carry on the work of those organizations that have given them comfort or peace of mind during their lifetimes.  This is easily accomplished with a Revocable Living Trust. NJ Estate Tax                 A New Jersey estate tax return must be filed if the decedent's gross estate plus adjusted taxable gifts 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).         Current Federal tax laws allow you to leave an unlimited amount to a spouse, tax-free. When your spouse dies, the estate is entitled to a $5,250,000 tax exemption. The first $5,250,000 goes to your beneficiaries free of estate tax. However, the NJ Estate Tax starts at $675,000.      The NJ Estate Tax is in addition to any NJ Inheritance Tax. Who Must File         A New Jersey estate tax return must be filed if the decedent’s Gross Estate exceeds $675,000. There is a substantial tax that must be paid after the 2nd spouse dies on amounts over $675,000.  You can hire an attorney to set up Trusts to try to reduce taxes due. A separate stand alone Trust has a minimum fee for $2,000. We charge a minimum fee of $600 for each Trust within a Will.                Even if your net worth is well below the Federal threshold where the federal estate tax becomes an issue, the New Jersey Estate Tax may still be a problem. The New Jersey Estate Tax affects any person or married couple with net worth over $675,000. There is no exemption for assets you leave to your children; those assets are fully taxed. There is also no exemption for the value of your home and life insurance, so it is easy to hit the $675,000 threshold very quickly.         If you have assets such as bank accounts in joint names, or bank accounts payable upon death, these go directly to the beneficiary. Your Will cannot change who the beneficiary is on a joint account, payable upon death accounts, or other assets such as Life Insurance policies. You would have to directly contact the bank or company where the assets are held and either direct that they change the beneficiary or not list any beneficiary at all other than your Estate.  Therefore, if you have $1,200,000 in assets, you can change the ownership and beneficiary of assets so the husband owns $600,000 and the wife owns the other $600,000. Examples of NJ Estate Tax due if no estate planning Estate of  $800,000 Your Estimated Federal Estate Tax:  0.00 Your State Taxable Estate Value:  $740,000.00 Your Estimated State Estate Tax:  $22,799.60 If Estate Value:  $900,000.00   Your Estimated Federal Estate Tax:  $0.00 Your State Taxable Estate Value:  $840,000.00 Your Estimated State Estate Tax:  $27,600.00 WHAT IS CREDIT SHELTER TRUST IN A WILL?        The Credit Shelter Trust (sometimes referred to as a “Bypass Trust” or an “A/B Trust”) is a popular estate planning technique used by married couples with combined assets in excess of $675,000. The purpose of the Credit Shelter Trust is to avoid the wasting of federal and state exemptions on the death of the first spouse. Instead of leaving all assets to the surviving spouse and thereby exposing the surviving spouse’s estate to more tax, both spouse’s Wills are drafted to establish a Credit Shelter Trust to come into existence and be funded on the first spouse’s death.            In a typical Credit Shelter Trust, the surviving spouse is entitled to receive all of the income from the Trust for his or her lifetime, and has the right to demand principal distributions for his or her health, education, support and maintenance in his or her accustomed manner of living. Distributions in excess of that standard require the cooperation of a Co-Trustee – often an adult child of the surviving spouse or a trust department of a bank.          The amount, which funds a typical Credit Shelter Trust, varies according to a particular Client’s financial and family circumstances. For Federal Estate Tax purposes, a Credit Shelter Trust can be funded with the Decedent’s remaining federal estate tax exemption ($5.2 million as of 2014 if no prior gifts have been made). However, in New Jersey, since the state estate tax exemption is only $675,000, if the Credit Shelter Trust is funded with more than $675,000, this will cause some New Jersey Estate Tax to be paid. For example, if the $2 million is funded, the tax to the State of New Jersey is $99,600. Because of this, many Clients choose to fund the Credit Shelter Trust with only $675,000.         If the Credit Shelter Trust technique is implemented as part of a Client’s Estate Plan, you can hire the attorneys for a separate fee  to assist the Client in re-titling his or her assets so that assets are available to fund the Credit Shelter Trust. Re-titling is necessary because most Clients tend to hold assets jointly with right of survivorship and assets must be titled individually in a person’s name in order to be eligible to fund a Credit Shelter Trust. We work with a tax attorney to help our clients.         Irrevocable Trust Accounts: Irrevocable trust accounts are deposits held by a trust established by statute or a written trust agreement in which the grantor (the creator of the trust - also referred to as a trustor or settlor) contributes deposits or other property and gives up all power to cancel or change the trust.         An irrevocable trust also may come into existence upon the death of an owner of a revocable trust. The reason is that the owner no longer can revoke or change the terms of the trust. If a trust has multiple owners and one owner passes away, the trust agreement may call for the trust to split into an irrevocable trust and a revocable trust owned by the survivor. Because these two trusts are held under different ownership types, the insurance coverage may be very different, even if the beneficiaries have not changed. WHAT IS MEDICAID..........         Medicaid is a Federal medical bills assistance program that pays medical bills for eligible, needy persons. It is administered by each state. All payments are made directly to the providers of medical and other health care services. The Medicaid-eligible person does not pay the health care provider for services. The only exception is a patient in a Medicaid-approved nursing facility who may be required to contribute part of his/her income toward the cost of care.         It is important to note Medicaid typically has a lien on assets you own.         Someone can avoid Medicaid and nursing home liens by settling up an Irrevocable Trust and waiting 60 months to apply for Medicaid.  Kenneth A. Vercammen is an Edison, Middlesex County, NJ trial attorney who has published 125 articles in national and New Jersey publications on business and litigation topics. He often lectures to trial lawyers of the American Bar Association, New Jersey State Bar Association and Middlesex County Bar Association.           He is a highly regarded lecturer on litigation issues for the American Bar Association, ICLE, New Jersey State Bar Association and Middlesex County Bar Association. His articles have been published by New Jersey Law Journal, ABA Law Practice Management Magazine, and New Jersey Lawyer.  He is co-chair of the ABA Probate & Estate Planning Committee.         He has served as a Special Acting Prosecutor in nine different cities and towns in New Jersey and also successfully handled over One thousand Municipal Court and Superior Court matters in the past 28 years.          In his private practice, he has devoted a substantial portion of his professional time to the preparation and trial of litigated matters. He has appeared in Courts throughout New Jersey several times each week on Criminal and Litigation matters, Municipal Court trials, and contested Probate hearings.  He serves as the Editor of the popular legal website www.njlaws.com KENNETH  VERCAMMEN & ASSOCIATES, PC ATTORNEY AT LAW 2053 Woodbridge Ave. Edison, NJ 08817 (Phone) 732-572-0500 (Fax)    732-572-0030 website: www.njlaws.com  www.CentralJerseyElderLaw.com