Wills, Trusts & Estates Articles 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.

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.

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:

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).

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.

Grantor trusts can provide substantial estate and income tax savings to those who establish them.  The grantor of a “grantor trust” is treated as the owner of the trust assets for federal income tax purposes. The grantor continues to pay the income tax generated by the assets contributed to the trust and receives the benefit of all deductions and credits. Whether the grantor trust property is excluded from the estate of the grantor, and thus escapes estate tax, is dependent on the drafting of the trust. The rules regarding grantor trusts can be found in Sections 671 through 679 of the Internal Revenue Code. [1]

It is beneficial for the grantor to be treated as the income tax owner of a trust because trusts have more compressed tax brackets than do individuals. For example, in 2022, individuals were taxed at the highest marginal rate of 37% on income over $539,900, or $647,850 for married taxpayers.[2] Trusts, however, reached the top marginal rate of 37% at income above $13,450.[3]

In general, the following provisions  in a trust will create a “grantor trust.”

The federal estate and gift tax exemption (known as the “basic exclusion amount”) has increased to $12.06 million per taxpayer in 2022. The exemption in 2021 had been $11.7 million. The increase means that in 2022, an individual can make gifts during life or at death totaling $12,060,000 without incurring gift or estate tax; a married couple can transfer $24,120,000 of assets. The annual gift tax exclusion has also increased, to $16,000 per donee (or $32,000 if spouses elect gift-splitting).

The gift tax annual exclusion for gifts to non-citizen spouses has also increased in 2022, to $164,000.

Note that the estate and gift tax exemption is slated to be reduced to $5 million, indexed for inflation, as of January 1, 2026. With this known reduction in the exemption approaching, we recommend consulting with your estate planning attorney to discuss possible strategies to take advantage of the large exemption presently available.

Every state has an unclaimed property program holding forgotten property belonging to its residents such as uncashed checks, security deposits, abandoned accounts, and more. “Unclaimed property” generally refers to tangible (items in safe deposit boxes) and intangible (bank accounts, stocks, and checks) personal property. Eventually, the state takes over the unclaimed property in a process known as “escheatment.”

In New Jersey, the Unclaimed Property Administration is a section of the Department of the Treasury. The Mission Statement of the Unclaimed Property Administration is set forth on its website and reads as follows:

“The Unclaimed Property Administration (UPA) recovers and records abandoned or lost intangible and tangible property. The UPA’s goal is to return this property to the rightful owner and/or heirs. The New Jersey Unclaimed Property Statute ensures that property owners never relinquish the right to this property and the UPA only acts as a custodian until the property is returned.”

The federal estate and gift tax exemption (known as the “basic exclusion amount”) has increased to $11.7 million per taxpayer in 2021. The exemption in 2020 had been $11.58 million. The increase means that in 2021, an individual can make gifts during life or at death totaling $11.7 million without incurring gift or estate tax; a married couple can transfer $23.4 million of assets. The annual gift tax exclusion remains at $15,000 per donee (or $30,000 if spouses elect gift-splitting).

Note that it seems likely the Biden administration will attempt to pass a reduction in the exemption as well as other changes to the estate and gift tax law during the next two years when there are Democratic majorities in the House and Senate. It is unknown whether any such changes will be made retroactive to January 1, 2021.

We recommend consulting with your estate planning attorney early in 2021 to discuss whether large gifts now may be advisable.