Wills, Trusts & Estates Insights — Lindabury, McCormick, Estabrook & Cooper, P.C. Firm News & Events

Trusts in New Jersey – Understanding the Duties and Responsibilities of New Jersey Trustees

Published on: October 15, 2024 | by Anne Marie Robbins

As a general rule, trusts are created in one of two ways. Inter vivos trusts are established by an agreement or declaration during the life of the creator (called the “grantor” or “settlor” of the trust). Testamentary trusts are created in the will of a testator and do not exist until the testator dies, the will is probated, and the executor of the will transfers assets to fund the trust. Testamentary trusts are irrevocable and cannot be changed except in limited circumstances, whereas inter vivos trusts may be revocable (i.e., may be amended or terminated) or irrevocable.

In New Jersey, a trustee is entrusted with significant responsibilities that require not only the proper management and distribution of assets but also the fulfillment of strict fiduciary obligations. Whether the trustee is an individual or a corporate entity, the role demands a high level of diligence, integrity, and accountability. For beneficiaries, understanding a trustee’s duties is essential to ensure that their rights are protected, while for trustees, knowing the full extent of their responsibilities is crucial for effective administration.

The trustee’s role lasts the length of the trust’s duration, or until the trustee sooner resigns, dies, or is removed.

CCA 202352018 – A Cautionary Tale

Published on: June 25, 2024 | by Mary Patricia Magee

Since passage of the Uniform Trust Code in New Jersey in 2016, planners now have an established procedure to modify or terminate an irrevocable trust, and it is undoubtedly a valuable tool. Clients frequently have trusts that could be made better if one or two changes were made. However, while attractive, the modification or termination of an irrevocable trust so that the trust will accommodate circumstances unforeseen when the trust was created, can have unintended gift tax consequences.

It was just such a situation that a recent Memorandum issued by the Chief Counsel for the IRS, CCA 202352018 (hereafter the CCA or Memorandum), addresses. In that Memorandum the grantor of the trust established an irrevocable trust for her child for the child’s life. The trustee had the power to distribute income and principal to the child, in the trustee’s discretion, and on the child’s death the trustee was directed to distribute the proceeds to the child’s descendants. The grantor had no right to income or principal from the trust and essentially had relinquished all control over the assets in the trust. As such, the grantor appeared to have successfully removed the assets in the trust from her taxable estate.

The trust included a provision that made the trust income taxable to the grantor under section 671 of the Internal Revenue Code. Using such a provision in a trust is actually very popular. Because the trust will not pay any income taxes, the trust can grow more quickly. In effect, it is as if the grantor is making a tax-free gift to the trust each year in the amount of the tax the trust would otherwise have paid. Sometime after the trust in the CCA was operational, however, the grantor no longer wished to pay those income taxes and instead sought to have the trust reimburse her for those tax payments.

Supreme Court Ruling Sparks Urgency in Reassessing Buy-Sell Agreements for Closely Held Companies

Published on: June 25, 2024 | by Anne Marie Robbins

Ensuring the seamless transition of ownership and safeguarding a company’s stability is of paramount importance to any closely held business. Buy-sell agreements play a crucial role in achieving these objectives. These agreements dictate the terms under which shares of the business can be bought or sold, typically triggered by events such as death, disability, retirement, or voluntary departure of an owner. A recent decision by the United States Supreme Court necessitates that owners of closely held businesses review their buy-sell agreements, particularly those that involve using life insurance proceeds to purchase a deceased shareholder’s interest in the company.

In a unanimous decision issued on June 6, 2024, the Supreme Court held that life insurance proceeds payable to a corporation are includible in the corporation’s value for Federal Estate Tax purposes, with no offset allowed for the obligation to purchase a deceased shareholder’s interest. Estate of Connelly v. United States, 602 U.S. ___ (2024) (No. 23-146, June 6, 2024).

Michael and Thomas Connelly were the owners of Crown C Supply, a building supply corporation (the “Company”). Michael was the CEO and owned almost 80% of the stock, with Thomas owning the rest. The brothers had entered into a buy-sell agreement that was to be effective in the event of their deaths. Under the agreement, the surviving brother was given the option to purchase the deceased brother’s shares. If he did not do so, the Company itself would be required to redeem the shares. The Company obtained life insurance policies of $3.5 million on each brother.

Crisis Management: Safeguards to Protect Against Financial Elder Fraud

Published on: April 15, 2024 | by Elizabeth Engert Manzo

In an era where digital transactions are becoming increasingly prevalent, the mechanisms by which financial institutions inform customers of potential fraudulent activities are under scrutiny. Recently proposed revisions seek not only to bolster security measures but also to ensure that customers are promptly and clearly notified, thus minimizing the risk of financial loss.

Possible Changes to Bank’s Notice of Suspected Fraud Under Review

On the first day of the 2024 New Jersey legislative session, Assembly Bill No. 1832 was introduced and referred to committee. If approved as enacted, A1832 would require financial institutions to release financial records to adult protective services if there is suspected fraud of a vulnerable adult or senior customer. It would also permit adult protective services to release these records to law enforcement, where necessary.

Impact of Artificial Intelligence on Estate Planning Attorneys

Published on: March 18, 2024 | by Anne Marie Robbins

Artificial intelligence (AI) is in the beginning stages of a revolution. For the better part of the last century, this technology saw little application outside of data analytics and computer algorithms.

Today, AI can replicate real communication with surprising ease. ChatGPT, for instance, is known for its ability to draft essays and summarize long passages from a book in mere seconds, a boon for many a student. Recently, ChatGPT even passed the uniform bar exam on its first attempt. Which begs the question, will this technology replace estate planning attorneys? If you ask ChatGPT yourself, you might be surprised. We typed “I have a legal question” in the search bar, and nearly instantaneously ChatGPT responded, “Sure, I can try to help. Please keep in mind that I’m not a lawyer, and my responses are not a substitute for professional legal advice.”

Still curious, we pressed on, and asked ChatGPT the following question:

Converting Excess 529 Plan Account Funds to a Roth IRA

Published on: March 18, 2024 | by Lindabury, McCormick, Estabrook & Cooper, P.C.

A 529 plan account is a tax-efficient way to save for a child’s or grandchild’s education costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code. 529 plan accounts have multiple tax advantages, including allowing an individual to contribute up to $18,000 per year, or $36,000 per married couple. These contributions are considered gifts to the beneficiary of the account but are not taxable because they qualify for the so-called “annual exclusion” from taxable gifts. The investments in the 529 plan grow tax-deferred, and withdrawals are not subject to income tax when used for qualified educational expenses.

Considering the high cost of education today, it may seem unlikely that any assets in a 529 plan account would go unused. However, if an account’s beneficiary decides not to attend college, attends a more affordable school, or receives a significant scholarship or financial aid, it is possible there would be funds remaining in the 529 account when the beneficiary’s education is concluded. Withdrawals from 529 accounts that are not used for qualified educational expenses are subject to income tax and excise tax of 10% on the earnings portion of the withdrawals. Certain exceptions to the 10% penalty apply. To avoid the income and excise taxes, account holders have the option to change the beneficiary of the 529 account to an eligible relative of the original beneficiary, such as a sibling, child, or other descendant. Beginning in January of 2024, another option that avoids the income and excise taxes is to roll over the amount remaining in the 529 account to a Roth IRA. Whereas amounts withdrawn from 529 accounts may only be used for qualified educational expenses, withdrawals from Roth IRAs do not have restrictions on their use.

In the Setting Every Community Up for Retirement Enhancement Act 2.0 (“SECURE 2.0”) enacted by Congress at the end of 2022, it is now possible to roll over 529 plan account assets to a Roth IRA in the name of the account beneficiary, free of income and excise taxes.

Increases In Transfer Tax Exemptions For 2024

Published on: November 15, 2023 | by Anne Marie Robbins

The Federal Tax Cuts and Jobs Act of 2017 (“TCJA”) amended section 2010(c)(3) of the Internal Revenue Code (the “Code”) to provide that, for decedents dying and gifts made after December 31, 2017 and before January 1, 2026, the basic exclusion amount (BEA) and Generation-Skipping Transfer Tax (“GST”) exemptions would increase to $10 million as adjusted for inflation. On January 1, 2026, these exemptions will revert to $5 million (the pre-TCJA figure), adjusted for inflation. The inflation adjustments over the years since 2018 have resulted in BEA and GST Exemptions of $12,920,000 in 2023.

On November 9, 2023 the IRS issued Revenue Procedure 2023-34 setting forth the inflation adjusted transfer tax exemptions for 2024. The BEA will be $13,610,000—an increase of $690,000. The increase means that in 2024, an individual may make gifts during life or at death totaling $13,610,000 without incurring gift or estate tax; a married couple will be able to transfer $27,220,000 of assets free of transfer taxes. The GST Exemption under section 2631 of the Code will also increase to $13,610,000.

The annual gift tax exclusion provided by Code section 2503 will increase in 2024 to $18,000 per donee (or $36,000 if spouses elect gift-splitting).

Strict Compliance Required In Order To Secure Charitable Deduction

Published on: November 14, 2023 | by Anne Marie Robbins

When a taxpayer contributes $250 or more to a charitable organization, in order for the taxpayer to claim an income tax charitable deduction the organization must provide the taxpayer with a contemporaneous written acknowledgment of the gift. I.R.C. § 170(f)(8)(A). The acknowledgment must include (i) the amount of cash and a description (but not the value) of any property other than cash contributed, (ii) an explicit statement of whether the donee organization provided any goods or services in consideration for part or all of the gift, and (iii) a description and good faith estimate of the value of the goods or services referred to in clause (ii), or if such goods and services consist solely of intangible religious benefits, a statement to that effect. I.R.C. § 170(f)(8)(B).

The following recent cases have confirmed the need for strict compliance with the Internal Revenue Code (the “Code”) in connection with securing the charitable deduction.

Izen v. Commissioner, 38 F.4^th 459 (5^th Cir. 2022). Taxpayer contributed a 50% interest in a private jet to the Houston Aeronautical Heritage Society and claimed a deduction of $338,080, which was disallowed. Taxpayer’s income tax return did not include a contemporaneous written acknowledgment of the gift. Taxpayer subsequently obtained and filed an acknowledgment of the gift, but the Fifth Circuit found it was not contemporaneous and lacked a statement about whether donee provided goods or services in consideration for the gift. The taxpayer argued substantial compliance. The court said that while substantial compliance may suffice to meet the requirements imposed by the Treasury, it does not satisfy requirements imposed by the Code.

Benefits to Making a Section 645 Election for Trusts

Published on: June 15, 2023 | by Lindabury, McCormick, Estabrook & Cooper, P.C.

Internal Revenue Code Section 645 was enacted in 1997 because of the increasing use of revocable trusts as will substitutes to avoid probate in many states. While in some states like New Jersey and Texas, probate isn’t terribly expensive or difficult, an increasing number of individuals are designing their estate plans with revocable trusts for non-probate purposes. During the grantor’s life, they may be used for streamlined asset management and a less expensive alternative to guardianships in the event of incapacity. After death, trusts provide increased privacy as well as ease of administration when it comes to out-of-state property and possible inheritance tax freezes that can delay the availability of cash to administer an estate. By making an IRC Section 645 election, clients can treat certain trusts as part of their estate. Here are some of the benefits of doing that.

Statutory Requirements

Section 645 sets forth the statutory requirements for making the election to treat certain trusts as part of an estate. The Internal Revenue Service issued final regulations on Dec. 4, 2002.

Securing A Strong Retirement Act of 2022

Published on: June 5, 2023 | by Mary Patricia Magee

The goal of this article is to highlight some of the changes to the rules governing retirement account distributions under the Securing a Strong Retirement Act of 2022 (aka SECURE 2.0). The positive changes include the following:

The age at which one must withdraw required Minimum Distributions (RMDs) has increased to age 73 effective January 1, 2023; it increases again to age 75 effective January 1, 2033;
The penalty (excise tax) for failure to make a timely withdrawal is reduced to 25% from 50% and, in some cases, to 10%;