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“Wills, Trusts, and Estates Prof Blog” Points Readers to McManus & Associates

Gerry W. Beyer

Gerry W. Beyer

A treasure chest of information on estate planning, “Wills, Trusts, and Estates Prof Blog” is a member of the Law Professor Blogs Network sponsored by Wolters Kluwer and written by Texas Tech School of Law Professor Gerry Beyer. Via the go-to outlet, Beyer recently highlighted McManus & Associates’ latest educational conference call, “Top 10 Signposts to Guide Planning for Estates under $10MM.” The discussion sheds light on estate planning strategies that should be considered now following recent changes in federal and state law.

In the post, Beyer shares with his readers the 10 questions that should be explored, which structure McManus & Associates’ free but very valuable guidance: money question mark

  1. Following the increased Federal exemption, why must equal emphasis now be given to capital gains tax planning?
  2. After planning is complete, what are the opportunities to achieve a step up in basis?
  3. Can heirs cover the gains tax due if gifted assets have greatly appreciated?
  4. What are the income tax benefits of planning testamentary trusts for the benefit of the surviving spouse as grantor trusts?
  5. Can you use Joint Exempt Step-up Trusts (JESTs) to ensure a full step up in basis for jointly owned property first?
  6. Will those under the federal exemption still owe estate tax to their state government?
  7. When gifting “gap-QTIP” interest income, how can unused exemption amounts be uniquely leveraged?
  8. Which non-tax factors should be considered when estate planning with trusts?
  9. How can someone fulfill the annual requirements for upkeep of their estate plan?
  10. Should digital assets be considered when estate planning?

“For answers to these pertinent questions,” as stated by Beyer, tap into the expertise of John O. McManus on our site here by listening to the conference call recording.

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Conference Call: “Top 10 Signposts to Guide Planning for Estates under $10MM”

The American Taxpayer Relief Act of 2012 (ATRA) delivered transfer tax certainty, large indexed transfer tax exemptions, and portability. Taking into account new norms, McManus & Associates, an estate planning law firm based in the Tri-State Area, today released a new installment in its free Educational Focus Series, “Top 10 Signposts to Guide Planning for Estates under $10MM.” During a conference call for clients, the firm’s Founding Principal and top AV-rated Attorney John O. McManus shed light on estate planning strategies that should be considered today following recent changes to federal and state laws.

LISTEN HERE: “Top 10 Signposts to Guide Planning for Estates under $10MM”

“Trusts may be significantly impacted by permanency and scheduled increases for inflation of the federal exemption amounts for gift tax, estate tax and generation skipping tax; income tax changes; and especially the new 3.8 percent surtax,” explained McManus. “A growing number of Americans with increasing net worths are discovering that their estates may be subject to unexpected taxation once they die.”

McManus added, “For couples that own highly appreciated assets, avoiding taxes can be a matter of paramount importance to be able to leave as much as possible to heirs. Couples that don’t have millions tied up in their home or finances should also be aware of these estate tax rules, because tax laws are subject to frequent changes, and couples could lose the tax shelter they enjoy under the current limit.”

Top 10 Signposts to Guide Planning for Estates under $10MM

1.         The increased Federal exemption has created a new paradigm in estate planning. Why must equal emphasis now be given to capital gains tax planning?

a.         Estate planning has become inextricably intertwined with income tax planning.

b.         Income tax planning can minimize current income taxes and maximize basis step up upon death.

c.         Step up in income tax basis in many instances will have a greater tax benefit than state estate tax savings.

d.         Many clients have greatly appreciated stock, and the gains tax if sold in the trust can be a significant amount. With the higher exemption amount, it might make sense to leave low basis assets in one’s estate to achieve step up.

2.         What are the opportunities to achieve a step up in basis after planning is complete?

a.         Swapping into the trust high basis assets or cash for low basis assets can help to achieve the desired step up in basis at the grantor’s death.

b.         The trust could also hold a note for assets moved back into the grantor’s estate to achieve the same step up in basis.

3.         If gifted assets have greatly appreciated, can heirs cover the gains tax due?

a.         Life insurance can be utilized as a strategy for those who have gifted assets that will not receive a step up in basis to help pay for the capital gains tax or as an alternative to gifting appreciating assets.

b.         Again, this may be time to consider swapping trust assets in order to achieve a step up.

c.         Vacation homes, family retreats, art or other items that will most likely stay in the family ownership for generations may be better assets to keep in trust, since there is less worry about paying any gains tax since a sale is unlikely.

4.         What are the consequences and income tax benefits of planning testamentary trusts for the benefit of the surviving spouse as grantor trusts?

a.         A trust jumps to the highest levels of taxation for gains and income tax at much lower thresholds than for individuals.

b.         A grantor trust can be set up to potentially pay lower rates of taxation with a trust established for a surviving spouse for which distributions are not mandatory.The income earned on the trust will be picked up on the surviving spouse’s personal filing.

5.         Can Joint Exempt Step-up Trusts (JESTs) be used to ensure a full step up in basis for jointly owned property first?

a.         This allows a full step up in basis of all assets in the trust (as opposed to the 50% in normal cases).

b.         A JEST is used in non-community property states. A husband, for example, could create the trust and reserve the power to amend, revoke, or terminate it. The wife could be the beneficiary of the trust, and all trust property is paid to her estate upon death.

c.         There have been two recent private letter rulings in favor of this strategy, but it is in its nascent stages.

6.         Will one under the federal exemption still owe estate tax to his or her state government?

a.         Although married couples are currently allowed a federal exemption of just over $10MM in estate taxes, the exemption amounts at the state level are much lower (e.g., $675,000 in New Jersey, $1MM in New York and $2MM in Connecticut).

b.         Although with the Federal exemption amount a married couple can elect portability to deploy both spouses’ exemption amounts on the passing of the second spouse, there is not such an option for that on the state level.

c.         A credit shelter trust preserves both spouses’ state exemption amounts by funding first the exemption trust with assets up to the limit.

7.         Gifting “gap-QTIP” (or Qualified Terminable Interest Property) interest income – how can unused exemption amounts be uniquely leveraged? Why sprinkle distributions among other beneficiaries?

a.         For the amount of the gap between the state exemption amount and the federal exemption amount, one should consider the gift of a gap-QTIP trust.

b.         Income interest for the QTIP should be given to the trust for the children. This will leverage the first spouse’s Deceased Spousal Unused Exclusion (DSUE) and avoid inclusion in the surviving spouse’s estate.

c.         The surviving spouse should not be named Trustee of the gap QTIP trust but can use the principal, since only the owner of the income interest is considered owner for IRS purposes.

d.         The exercise by the spouse of a general power of appointment will accomplish the same tax results.

8.         Which non-tax factors should be considered for estate planning with trusts?

a.         Be sure to consider trust-planning elements of asset protection, business succession, charitable giving, special needs, foreign property and citizenship when deciding if simple wills will suffice for your estate plan.

b.         If there may be adverse parties as beneficiaries of a trust, consider use of an institutional trustee.

c.         Name an advisor or trusted friend to have administrative power over the investment of assets in trust.

d.         If a family business shares are held in trust and all trust beneficiaries are not involved in running the business, consider life insurance to “square up” with children not involved in the business.

9.         How can one fulfill the annual requirements for upkeep of his or her estate plan and monitor issues regularly?

a.         Hold annual review meetings.

i.          Review subscription agreements for limited partners and consider adding new partners to a Family Limited Partnership.

ii.         For those on the cusp of federal taxation, monitor net worth growth.

iii.        Consider annual exclusion gifts, Grantor Retained Annuity Trusts (GRATs), and Lifetime Credit Shelter Trust (LCSTs), too.

iv.        Borrow (i.e. from a line of credit) in order to make gifts when there are few available high basis assets.

v.         Exercise powers of substitution to swap low basis for high basis assets (line of credit may be used in this approach, as well).

vi.        Discuss assets currently owned by the trust(s).

10.       Should one plan for digital assets?

a.         Digital assets have value, sometimes sentimental and sometimes commercial. Consider who will get the digital trading accounts, websites owned and/or registered to the deceased.

b.         Designate beneficiaries online. There are ways companies like Google have to alert them to online silence; they will scan for traces of one’s online footprint. If Google believes you to have passed away, the company can notify one’s beneficiaries named in their servers and provide links for them to can download the photographs, videos, documents or other data left to them.

c.         There are many online services offering safe deposit boxes for safeguarding the passwords to e-mail accounts and other data.

d.         Make a private list of all usernames and passwords for all the accounts in which one has a digital presence, and make sure to update the list if the log-in information changes. Perhaps mail them to one’s estate attorney in a sealed envelope.

“Just like a Rubik’s Cube, estate planning is a combination puzzle,” commented McManus. “McManus & Associates is committed to helping you solve your wealth management challenges that evolve with ever-changing laws at the federal and state levels.”

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McManus & Associates Founding Principal Highlighted by SmartCEO Awards

Fun way to end the week: the entry page for SmartCEO’s New York CPA & ESQ awards is emblazoned with a quote from McManus & Associates Founding Principal John O. McManus. Check out the screenshot below!

The New York CPA & ESQ awards recognize Greater New York’s top accountants and attorneys for privately held companies. We’re honored to be highlighted as part of the effort to recognize business advisors who go above and beyond.

Awards w. John quote

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McManus Makes Back-to-Back Appearances in Two-Day Tax Series from Forbes

Forbes

 

alexandra talty

Alexandra Talty

Alexandra Talty, contributor for Forbes who covers personal finance and travel, recently spoke with McManus & Associates Founding Principal John O. McManus for tax tips that she could pass along to her readers. McManus’ thoughts appeared back-to-back in Talty’s two-day series that highlights “some shocking employee deductions as well as hitting some basics for first-time tax filers.”

Talty’s first article, “Surprising Tax Reimbursements for Employees,” addresses the importance of crossing your T’s and dotting your I’s come tax season. As emphasized by McManus in the story:

“Document, document, document with details, details, details. The IRS is looking at it as a smell test,” says John O. McManus, founding principal of McManus & Associates. “The longer you take to respond back to them [if you are audited], the more they think you are contriving or making it up. You have to be very reactive when they are calling on things.  This demonstrates that you are always buttoned up.”

McManus advises, “Every year, presume you will be audited, so keep everything.”

Today’s article, Talty’s second day of tax coverage, focused on those “lucky enough to be self-employed or property owners.” Her piece, “Freelancing Tax Write-Offs You Might Be Missing,” offers interesting tips to bear in mind for tax day, such as how to write off cruises and conferences.

An educational vacation is a great way to kill two birds with one stone – but how can you be sure you’re covered if the IRS comes knocking? From McManus:

 “I do believe it is essential to keep a copy of the agenda,” advises John O. McManus, founding principal of McManus & Associates. “Then the IRS can connect that it makes sense for you to be on the cruise for that purpose or that you needed to attended the seminar.”

Tax write-offs that help you see the world? Just say, “bon voyage,” pack your bags and go!

To read more helpful hints for self-employed Americans, check out Talty’s story in full here. And for tax planning help that transcends April 15th, give McManus & Associates a call at 908-898-0100.

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Insure.com Calls on McManus to Find Out if Scheming Relatives Can Steal Life Insurance Money

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Have you ever wondered if scheming relatives can steal your life insurance money? Insure.com recently sought out the answer to this very question for readers.

scheming relativeTo understand what is often at the heart of inheritance wars – the “mysterious life insurance policy” – Reporter Ed Leefeldt turned to John O. McManus, McManus & Associates’ founding principal and top AV-rated attorney, for help. As recognized by McManus:

“Life insurance is an area where you can get cute, coy and clandestine,” warns John McManus, head of McManus & Associates, a New York City-based firm specializing in trusts and estates.

Leefeldt explains that assets such as homes, cars and furniture may be listed in a will, but others may not. Says McManus, “Life insurance, IRAs and joint bank accounts don’t show up as part of the estate because they’ve already been distributed,” says McManus. From the story:

Money from the life insurance policy is paid directly to the beneficiary, so other family members may not even be aware of a payout. The deceased also could have tucked away a life insurance policy in a trust that no one else knows about, McManus warns.

When it comes to contesting a life insurance beneficiary, the article notes that “it’s tough to prove that mom was bonkers when she signed the policy, especially if an insurance agent was present.” According to McManus:

“Even if the deceased walked around in pajamas talking to Elvis, they may still have had the capacity to understand what they signed,” says McManus. Hiring a psychiatrist could also prove futile, unless the doctor actually knew the patient.

The piece goes on to discuss the lengths to which insurers will go in order to find beneficiaries and why you don’t need to worry about the wrong person being paid. To read expert tips on how to avert family fights over intentions for the payout, check out the full story here.

For questions about how best to utilize life insurance to transfer wealth to loved ones, call us at 908-898-0100 or drop us an email at communications@mcmanuslegal.com.

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ICYMI: Bloomberg BNA Publishes Item in Weekly Round-Up Highlighting McManus Guest Article

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In case you missed it, Bloomberg BNA in its Weekly Round-Up has a recap of John McManus’ recent article for the publication’s Weekly State Tax Report  that provides an in-depth look at several of the estate and gift tax regimes cropping up across states. The story, “Weekly Round-Up: Will More States Climb Aboard the Gift Tax Bandwagon?” conveys that states are exploring strategies to create new revenue by expanding the footprint of taxation. Pointing to advice from McManus, the importance of staying informed about wealth transfer taxes is emphasized.

Previewing McManus’ 2,500-word expert article, the piece briefly outlines the trend with states’ enactment of gift taxes, including Connecticut and Minnesota. Connecticut was the first state to impose a state gift tax on lifetime gifts made to others in 2005 and, in 2011, the state’s governor signed into law a new budget that “dramatically curtailed the ability to make tax-free gifts by reducing the state’s lifetime gift exemption to $2 million and taxing up to 12 percent on aggregate lifetime gifts exceeding that amount.” Effective as of July 1, 2013, Minnesota passed a law that established its own state gift tax with a gifting exemption that is limited to $1 million, in addition to adopting rules subjecting certain nonresidents to estate taxation.

What should be of concern to readers? From the story:

It is a significant concern that other cash-strapped states may follow the lead of Connecticut and Minnesota, McManus says. Those states that do charge an estate or inheritance tax experience diminishing returns when the property and assets that their residents gift during their lifetimes are not a part of the estate upon death. Many politicians view the imposition of a gift tax as a safer revenue-generating innovation, because most of their constituents would be unaffected by such a levy, McManus said.

To read BNA’s Weekly Round Up item, click here. And dig into McManus’ full guest article for the Weekly State Tax Report here.

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Insure.com calls on McManus for advice on life insurance trusts for child beneficiaries

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Navigating the terrain with life insurance trusts for child beneficiaries can be difficult, particularly when dealing with a special needs trusts for children that will likely never be on their own. Insure.com recently called upon McManus & Associates Founding Principal John O. McManus for guidance on trusts, “inherently complicated instruments” according to the story’s reporter Ed Leefeldt.

childThe article, straightforwardly titled “Life insurance trusts for child beneficiaries,” explains that life insurance companies often won’t pay the death benefit of a life insurance policy to a minor until he or she turns 18 unless a trustee or guardian has been named. Additionally, children may even face “estate taxes after a death, while the assets could be tied up in probate court” – trusts, however, ensure that life insurance money is “distributed according to your wishes, without delay.”

Trusts are also a useful tool for another reason. According to McManus:

A trust can also “protect children from themselves,” says John McManus, founder of an estate-planning law firm based in New York City. “If, at 18, a child gets it all, that could be a massively destructive injection of money,” he warns. Instead, the money can be earmarked for health, education or — with the help of a trustee — a lifetime trust.

The article suggests a revocable trust for those of average wealth, “which can be changed and/or revoked if necessary.” Of note: Sometimes you can simply write the name of the trustee on the beneficiary line of your life insurance policy, but always check with your life insurance company to make sure. For the wealthy, an irrevocable trust may be the best choice.

From the article:

This type of trust takes a bunch of assets, often including a life insurance policy, and “tosses them over the compound wall,” says attorney McManus. In effect, you create a separate corporation to manage them.

As explained by Leefeldt, an irrevocable trust needs a lawyer’s support; assets put in this trust can’t be taken out, regardless of how much one’s situation changes.

To learn how you can allow for changes in status when you create the original trust document (e.g., more kids, divorce, or a special needs child), check out the article in full. And to get help with the ins and outs of life insurance trusts for children and other loved ones, call 908-898-0100 to talk to the McManus & Associates team. Answers are a phone call away.

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“Wills, Trusts, and Estates Prof Blog” Highlights Latest Advice from McManus & Associates

Gerry W. Beyer

Gerry W. Beyer

Gerry Beyer, Professor of Law at Texas Tech Univ. School of Law, recently shared on his blog financial tactics and maintenance items related to estate planning to apply before 2014. “Wills, Trusts, and Estates Prof Blog” is a member of the Law Professor Blogs Network sponsored by Wolters Kluwer, and the list of tactics and maintenance items originally came from McManus & Associates. Here are the 10 estate planning questions to ask yourself before 2013:

  1. Should I change my estate plan before laws change in 2014?Jigsawquestion
  2. Is your partnership validly maintained?
  3. If making gifts to loved ones, are you exceeding your exemption amount?
  4. Are you employing the most current estate planning strategies?
  5. Are you making the most of income tax deductions?
  6. Do the fiduciaries named in your estate planning documents still reflect your wishes?
  7. Are you using the best strategies when making year-end charitable gifts?
  8. Are your cash donations from an IRA to charity being properly made?
  9. Should you consider using a GRAT or a QPRT?
  10. How should you harvest capital gains and time long-term losses?

Don’t miss our next free educational conference call, which will be held this month! Contact us for details at 908-898-0100.

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MarketWatch Draws on Advice from McManus for “5 Estate-Plan Strategies for Boomers”

marketwatch logo

Andrea Coombes, Ways and Means columnist for Dow Jones, last week published an interesting piece for MarketWatch sharing estate planning strategies for baby boomers. To bring readers closer to achieving their goal of putting together an estate plan, Coombes boils down advice, with the help of McManus & Associates Founding Principal John O. McManus, to offer “5 estate-plan strategies for boomers.”

Here are Coombes’ must-do estate-plan tasks:

1. Create a will or trust

2. Create a power of attorney

3. Create a health-care power of attorney and living will

4. Check the titling of your assets

5. Start with your family

In tackling the first tip “Create a will or trust”, a testamentary trust that goes into action when someone dies is given as an example to prevent unexpected consequences with regard to where your money ends up. Coombes draws from McManus’ comments to illustrate:

“The trust is actually built into the will,” said John McManus, founder of law firm McManus & Associates in New Providence, N.J.

He offered an example of what can happen without such a trust: “Say I die and leave my wife a couple of million bucks. Now it’s her in name. She then remarries, and then she dies two weeks later. Her new spouse will get one-third of those assets — even if we intended that money to go to our kids.”

The precise fraction promised to the surviving spouse will vary by state, but McManus said one-third is common.

Some boomers also may want to create a revocable living trust. There are a variety of reasons for considering such a trust.

Here’s one: If you have property or assets in more than one state — say, you live in New Jersey and own a condo in Florida — this document allows your estate to avoid the costly and time-consuming probate process in each state — with one document. A revocable living trust is portable. It will follow you across state lines, McManus said.

For the fifth tip “Start with your family”, Coombes turns again to McManus, who points out that estate planning isn’t only about you. From the piece:

McManus said boomers’ first estate-planning task is to ensure their elderly parents’ estate-plan documents are in order, and their second task is to focus on the estate-plan documents of their adult and minor children.

Coombes goes on to shed light on a potential pitfall:

Here’s one example of what can go wrong: Often people intend to divide their estate equally among all of their children. Their will may state as much, but if one child is named on a joint account, say, to help with bill-paying, that account will pass to that one child “by operation of law,” McManus said.

“Even though the parents intended that it be divided equally, the assets in joint names with their one child will result in that child being disproportionately favored,” he said. In his experience, he said, adult children in that situation “almost never” square up with the other family members.

To avoid the problem, your parents could adjust the will such that larger portions of other assets are given to the siblings or, rather than making that child a joint account-holder, give him or her power of attorney over the account, McManus said.

To get the full story with more expert advice from McManus, click here. And to discuss what your must-do estate plan items are based on your unique circumstances, give us a call at 908-898-0100. We can help.

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Bloomberg Guest Article from McManus: “State Informed: Staying on Top of Estate and Gift Taxes To Ensure Wealth Transfer Plans Operate as Intended”

bloomberg article teaser - McManusBy John O. McManus

For decades, an array of ‘‘death taxes’’ has become
part of the cost of living and dying in the United
States. With demands to balance budgets, minimize
debt, and support public programs, states are exploring
strategies to create new revenue by expanding
the footprint of taxation. To foster an increased flow of
cash to their governments, even states with generally
conservative fiscal policies have recently taken steps
that may indicate a new trend in the taxation of wealth
transfers, both during their taxpayers’ lifetimes and after
their deaths.
Connecticut Takes the Lead
In 2005, Connecticut was the first state to impose a
state gift tax on lifetime gifts made to others. In the
years following the adoption of this statute, the gift tax
exemption (or the amount that a Connecticut resident
could gift during his or her lifetime without paying gift
tax) gradually increased and rose as high as $3.5 million.
However, beginning in 2011, Connecticut’s governor
signed into law a new budget that dramatically curtailed
the ability to make tax-free gifts by reducing the
state’s lifetime gift exemption to $2 million and taxing up to 12 percent on aggregate lifetime gifts exceeding
that amount.
Furthermore, effective as of July 1, 2013, in addition
to adopting rules subjecting certain non-residents to estate
taxation, Minnesota passed a law that established
its own state gift tax with a gifting exemption that is
limited to $1 million.
It is a significant concern that other cash-strapped
states may follow the lead of Connecticut and Minnesota.
Those states that do charge an estate or inheritance
tax experience diminishing returns when the
property and assets that their residents gift during their
lifetimes are not a part of the estate upon death. Furthermore,
many politicians view the imposition of a gift
tax as a safer revenue-generating innovation, because
most of their constituents would be unaffected by such
a levy.
More than ever, these developments highlight the existing
challenges, including estate tax, inheritance tax,
generation-skipping tax, and other traps, in transferring
an estate to loved ones, while also signaling the
alarm that, in the near future, it may become even more
difficult to make such a transfer in a tax-efficient manner.
New Gift Tax: Minnesota, a Case Study
Earlier this year, the Minnesota legislature passed a
bill that imposes a 10 percent state gift tax on lifetime
transfers of wealth exceeding $1 million, the state exclusion
amount.
The tax is applied to the value of all assets transferred
by a Minnesota resident (and, for a non-resident, gifted real property located in Minnesota), and the donor
would be required to pay the gift tax due. The Minnesota
Department of Revenue has yet to release the
Minnesota gift tax form, but timely filing of this document
will be necessary, together with the gift tax return
at the Federal level (Form 709).
Additionally, Minnesota has placed further constraints
on gifting by rendering all ‘‘deathbed gifts’’
made within three years prior to the donor’s passing
null and void. This would have the effect of clawing assets
gifted within that period of time back into the donor’s
estate and subjecting them to estate tax.
Finally, in this new law, the State of Minnesota
makes an effort to swell its tax base by requiring that
non-residents owning real property in Minnesota pay
estate tax on the value of such property after they pass
away. This tax even applies to real property owned in
a Limited Liability Company or Revocable Living Trust,
which would otherwise be common approaches to
avoiding this exposure.
Non-residents owning real property
in Minnesota pay estate tax.
Relatively speaking, knowing that Minnesota’s legislature
acted on the heels of Connecticut’s reduction in
its own gift exemption, it is not unreasonable to believe
that other states may follow suit in the coming months
and years. As such, it will be important to monitor similar
developments in the governments of other states to
determine whether the climate will ultimately become
less hospitable for gifting and more confiscatory in
terms of estate taxes. Those who reside in a state with
an estate tax on the books may also benefit from acting
sooner rather than later by making gifts and other
wealth transfers to take advantage of the lack of current
restrictions and limitations and before any new law is
implemented.
Death Taxes: New Jersey, a Case Study
Gift tax, state inheritance and estate tax, Federal estate
tax, and generation-skipping tax complete a group
commonly referred to as ‘‘death taxes.’’ To a lesser extent,
income tax is also considered when planning for a
transfer of wealth.
New Jersey and Maryland are the only two states
that maintain a dual, sometimes overlapping death tax
for residents and non-residents at the time of death. In
New Jersey, estate tax is imposed when gross estate assets
are greater than the exemption amount—currently
$675,000—and assets transfer to ‘‘Class A’’ beneficiaries,
which include parents, grandparents, spouses, civil
union partners, children, step-children, or more remote
descendants of the deceased. The New Jersey estate
tax, which is paid from estate assets before transfer to
estate beneficiaries, is a graduated tax with a rate as
high as 37 percent and as low as 4.8 percent. The rate is highest for the first $50,000 over the exemption amount
and generally averages 10 percent thereafter.
When assets having a cumulative value greater than
$25,000 pass to ‘‘Class C’’ beneficiaries, including siblings
and children-in-law, a New Jersey inheritance tax
is imposed. The ceiling plummets to $500 for all others,
known as ‘‘Class D’’ beneficiaries (for example,
nieces and nephews, cousins, or friends of the deceased
who receive assets after death). The New Jersey inheritance
tax, which is paid by each beneficiary who
falls in either of these classes, carries with it a rate that
ranges from 11 percent to 16 percent.
The interplay of these two New Jersey taxing regimes
can be illustrated by way of example using an estate
with gross assets of $ 1 million. Assume 90 percent
of the estate ($ 900,000) has been bequeathed to a Class
A beneficiary—decedent’s son, and 10 percent
($100,000) has been bequeathed to the decedent’s
brother, a Class C beneficiary. The inheritance tax is determined
first, and is imposed on the $100,000 bequeathed
to the Class C beneficiary, after subtracting
the $25,000 exemption amount. The remaining $75,000
is subject to an 11 percent inheritance tax of $8,250,
which is paid by the Class C beneficiary.
With gross assets of the estate equalling $1 million,
estate tax is imposed on that part of the $ 1 million estate
that exceeds the $675,000 exemption amount. The
exemption amount is in effect taken into account as
part of the allowable unified credit linked to the estate’s
federal estate tax return. The New Jersey estate tax imposed
on the remaining amount computes to $24,950,
after a dollar-for-dollar credit is given for the inheritance
tax. In this example, the estate tax accounts for
2.5 percent of the entire estate.
For New Jersey residents, all real property in state,
as well as tangible and intangible assets located in or
out of state, are included in the calculation of taxable
estate assets. Like in Minnesota, non-residents are
taxed on real property located in New Jersey, but with
the distinction that if such real property is owned by a
Limited Liability Company prior to death, it is recharacterized
as intangible personal property and tax is
avoided.
The nuance and variation in the taxation structure
also carries through to permissible exemptions and deductions.
For example, annuities and life insurance proceeds
with a designated beneficiary are not taxable for
inheritance tax purposes, but are included in the estate
for the purpose of calculating estate tax. Funeral expenses,
administration expenses, and debts of a decedent
may be used as deductions to reduce both estate
and inheritance tax, but real estate and property maintenance
costs may not be used as deductions in most instances. It is important to note that New Jersey estate tax is
due within nine months of the decedent’s date of death
and must be accompanied by a Federal Form 706 Estate
Tax Return (unless an alternate New Jersey form is submitted),
while inheritance tax is due within eight
months of the decedent’s date of death. For each structure
of taxation, a six-month extension to file the return
is available, but there is no extension with respect to the
payment of the tax, and penalties and interest are accrued
on any late or underpayment of taxes.
The decedent’s lifetime gifts also receive different
treatment for New Jersey estate and inheritance tax
purposes. The full amount of lifetime gifts made within
three years of death are considered in contemplation of
death and are pulled back into gross estate assets for
the purpose of calculating inheritance tax. Conversely,
all lifetime gifts are included on the estate tax return
submitted to New Jersey, no matter when they were
made and for whatever purpose.
The complex nature of death taxation in the Garden
State is exemplary of the estate planning difficulties
confronting taxpayers throughout the New York Metropolitan
area and elsewhere in the United States. New
York and Connecticut both impose estate taxes, and
they limit their estate tax exemptions to $1 million and
$2 million, respectively. Pennsylvania requires an inheritance
tax on assets received by any person other
than a spouse. Unfavorable statutes of this nature in the
tri-state area have very much contributed to the flight of
residents to the 30 states, such as Florida, that lack a
death tax regime.
The Importance of Domicile
Proving domicile in a state to which one has moved
is oftentimes a difficult process in and of itself, particularly
for those who wish to maintain a foothold in the
state from which they are transferring their residences.
Meticulous records must be kept to demonstrate that
the requisite number of days is spent in the new jurisdiction
to claim residency there. This is particularly vital
because New York, New Jersey, and Connecticut are
increasingly auditing the files of ‘‘snowbirds’’ who
change their residency. The argument is that those
people really never left by virtue of the fact that they
continue to spend a substantial amount of time in their
former home states. As such, there is a laundry list of
items that expatriates are advised to complete, such as
changing their voter registration, driver’s license, and
address of record to their new state; maintaining landline
telephone records, receipts, and other statements
that prove their physical location in their new state; and
purchasing and owning a home, rather than renting, in
their new state of domicile.
Probate and estate tax issues linger when taxpayers
continue to own property in their previous state of residency.
Moving to a new state will not necessarily completely
eradicate estate exposure from the previous
state if an individual continues to own real property
there. Additionally, direct ownership of real property in a state other than the state of domicile will necessitate
an ancillary probate proceeding in that jurisdiction.
Probate is one of the initial stages during the administration
of the estate, and going through probate in multiple
states dramatically increases the time, expense,
and frustration of this process. Typically, the best approach
to remedy these issues is to transfer the real
property to a Revocable Living Trust, which avoids probate
proceedings, or a Limited Liability Company,
which is treated as intangible personal property and,
therefore, avoids both probate and estate tax in the
state where the property is located.
With respect to other forms of intangible personal
property, such as securities or bank accounts, the general
rule established by case law is that these types of
assets follow the person and that—for the purposes of
estate taxation—the domicile of the owner has jurisdiction
via a provision with a fancy name: ‘‘Mobila sequunter
personam.’’ That said, it is also well-settled that
a state legislature may impose local tax on items of personal
property that are significantly distant from that of
the owner’s permanent residence. In rare cases when a
physical stock certificate is owned, the physical location
of the document determines the jurisdiction that governs
for tax purposes. Such securities can be owned by
a revocable living trust, and the situs of the trust will be
the tax regime that rules taxation of the portfolio. The consequences of failing to comprehensively prepare
for the threat of death taxes underscore the value
of consulting with expert advisors to ensure awareness
of prospective taxation and other post-mortem pitfalls,
and to ensure success in implementing strategies that
will importantly aid in reducing or eliminating these
problems.
Generation-Skipping Transfer (GST) Tax
While 20 states and the District of Columbia subject
residents to estate and inheritance taxes (and while
there is also a federal estate tax), GST tax at the Federal
level is an issue that gets much less attention because
its provisions are considered to be among the
most complicated in the Internal Revenue Code. GST
tax is generally levied on the value of property received
by descendants more than one generation down the line
(such as grandchildren), which exceed the GST tax exemption
(currently $5.25 million and rising to $5.34 million in 2014). For individuals and families who have undertaken
material estate planning with trusts in the past
(and for those who will do so in the future), this becomes
a thorny matter as a result of the automatic allocation
rules that went into effect in 2001 that apply to
any trust that is deemed to be a ‘‘skip trust’’.
For example, a popular estate planning technique is
an Irrevocable Life Insurance Trust (ILIT) to which a
life insurance policy is transferred in order to avoid estate
tax on the proceeds of the policy at death. Generally,
these types of trusts are appealing because no gifting
exemption is used and no filing with the IRS is required.
The risk, however, is that depending upon the
provisions of the ILIT, the IRS may classify it as a skip
trust, which would then create unintended consequences
that impact other aspects of the estate plan.
Any amounts contributed to the ILIT would automatically
exhaust a portion of the donor’s GST tax exemption
that the donor may have otherwise wanted to preserve
for future lifetime or death wealth transfers to
grandchildren and more remote descendants.
The result is that the unnecessary GST taxes, which
could have been minimized or eliminated entirely, may
be imposed at the time that the grandchildren inherit
their share. The best practice, therefore, is to file gift tax
returns whenever an ILIT or irrevocable trust is funded
in order to clarify whether the automatic allocation
rules apply depending on the structure, provisions, and
long-term planning goals for the trust.
The GST tax and the proper deployment of the GST
tax exemption are no longer issues that can be brushed
aside or ignored. In 2011 and 2012 following the dramatic
escalation of the federal lifetime gifting exemption,
the affluent made an unprecedented number of
gifts to irrevocable trusts – tens of thousands of individuals
and married couples made gifts ranging in value
from hundreds of thousands of dollars to $10 million,
with the expectation that such trusts would carry forward
through several generations. This significant issue
is not only relevant to gifts made into trusts in the past
two years, but it also warrants further examination of
any trust established after 2001 to best ensure that the
wealth transfer plan operates as intended.
Stay State Informed
Choosing where to live is about more than good food
and the weather. It can have a huge impact on the
money on hand today and the amount of wealth that
can be transferred to heirs tomorrow. Different states
have significantly different tax regimes, so moving
across the country or just across the state line could
also mean that one’s estate planning approach needs to
be revised. All in all, the best strategy for preserving the
greatest amount of assets is to stay informed.

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