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Beware the New Jersey Inheritance Tax

Published on: February 13, 2019 | by Anne Marie Robbins

The New Jersey estate tax was repealed effective January 1, 2018. Coupled with the significant increase in the federal estate and gift tax exemption ($11.4 million in 2019), the repeal has reduced the need for transfer tax planning by many New Jersey residents. However, because the New Jersey inheritance tax remains in place, clients must still consider the effect of the inheritance tax upon their estate plans.

New Jersey is one of six states that have an inheritance tax, the others being Iowa, Kentucky, Maryland, Nebraska and Pennsylvania. New Jersey’s rates begin at 11% and rise to 16%. N.J.S.A. 54:34-2. The inheritance tax applies to gifts at death, or within 3 years of death, to beneficiaries who are separated into different classes based upon the relationship of the decedent to the beneficiary. N.J.S.A. 54:34-1 and 54:34-2. Class A beneficiaries (spouses, civil union partners, direct descendants, direct ancestors, and stepchildren) are exempt from the tax. Class B was eliminated as a category in 1963. Class C beneficiaries (siblings, sons- and daughters-in-law, and civil union partners of children) receive a $25,000 exemption and are taxed at rates ranging from 11% to 16%. Class D beneficiaries (everyone else) are taxed at 15% on bequests up to $700,000, with a rate of 16% for amounts above $700,000. Qualified charities are Class E beneficiaries and gifts to them are exempt from application of the tax.

There is no exemption from the New Jersey inheritance tax based upon the size of one’s estate. Even transfers from a very modest estate will incur the tax if the recipients are in a taxable category. The inheritance tax is assessed against the recipients unless the will directs otherwise. Executors are charged with deducting the tax from the bequests before distributing to the beneficiaries. N.J.S.A. 54:35-6.

The Potential Confusion Over Joint Accounts

Published on: February 13, 2019 | by James K. Estabrook

As our clients age they often tell us they do not feel comfortable with their ability to continue to manage their financial affairs. They also express the unfounded fear that upon their death all their bank accounts will be frozen for months on end with no ability for anyone to access their funds to satisfy their obligations after death for the care of their home or loved ones. The common step taken by many is to put a family member or trusted friend on their accounts as joint owner so that in the case of a disability or death, funds will be readily accessible to satisfy the client’s obligations without interference.

Unfortunately, this step, although well-intentioned, has sometimes resulted in significant confusion, litigation and costs to the client’s estate because the creation of the joint account and the transfer of those assets to the surviving joint owner at death were not clearly understood by the elderly client or were not properly explained to her by the custodian of the account.

This miscalculation was recently demonstrated in an Appellate Division case, In the Matter of the Estate of Jones, No. A-2557-16T2, 2018 WL 4471686 (N.J. Super. Ct. App. Div. Sept. 19, 2018). Subsequent to the death of her husband, Erna M. Jones visited her investment broker with her middle daughter, Barbara, to open a new account distinct from the one she held jointly with her husband. Mrs. Jones executed a new account application that identified her daughter Barbara as a second party, and the box was checked that the account was “Joint Tenants with Right of Survivorship.” Subsequent to this account opening, Mrs. Jones managed the account, paid her bills and handled her investments with the representative of the brokerage company. At her death in 2015, her daughter Barbara claimed the account as hers as the surviving joint tenant. Barbara’s older brother, David, objected and filed a Complaint under New Jersey’s Multi-Party Deposit Account Act (“MPDAA”) alleging that the account was not held with right of survivorship but was merely a “convenience account,” and that all money in the account was to be distributed equally amongst Mrs. Jones’ surviving three children. Mrs. Jones’ Last Will and Testament provided that her estate was to be divided equally amongst her children and throughout her life, David stated, she had always treated her three children equally. David further alleged that Barbara had utilized undue influence in getting her mother to name her as a joint owner on the account.

Agents Acting Under a Power of Attorney

Published on: October 19, 2018 | by David G. Hardin

One of the useful documents in the estate planner’s tool kit is the power of attorney. Briefly, a power of attorney allows a person (the “principal”) to name another individual (the “agent” or the “attorney-in-fact”) to act on the principal’s behalf, typically in financial and health matters. A power of attorney may be “general” or “limited,” meaning it can authorize the attorney-in-fact to act broadly on the principal’s behalf, or it may restrict the attorney-in-fact’s authority to certain enumerated types of conduct (i.e., a limited power of attorney may apply solely to acts involved in the sale of a principal’s real estate). In addition to being “general” or “limited,” a power of attorney may also be “durable,” meaning the power of attorney remains effective in the event of a future disability or incapacity of the principal. For purposes of this article, the power of attorney is to be considered a durable general power of attorney, meaning the power of attorney is effective immediately upon execution, it authorizes the attorney-in-fact to act broadly on the principal’s behalf, and it remains effective in the event of any subsequent disability or incapacity of the principal.

New Jersey’s Revised Durable Power of Attorney Act, as codified in N.J.S. 46:2B-8.1 et seq. (the “Act”), grants broad authority to an attorney-in-fact to act on a principal’s behalf. The Act provides: “All acts done by an attorney-in-fact pursuant to a durable power of attorney during any period when the power of attorney is effective in accordance with its terms, including any period when the principal is under a disability, have the same effect and inure to the benefit of and bind the principal and the principal’s successors in interest as if the principal were competent and not disabled.” N.J.S. 46:2B-8.3. This section purports to state that the acts of the attorney-in-fact are binding upon the principal and the principal’s successors in interest, suggesting that the acts of the attorney-in-fact have the same effect as if the principal had acted himself or herself. While this is true, the law in New Jersey requires more.

New Jersey law imposes a higher duty upon an attorney-in-fact acting on behalf of a principal under a power of attorney. An attorney-in-fact in New Jersey has a fiduciary obligation to the principal and must act “within the powers delegated by the power of attorney and solely for the benefit of the principal.” N.J.S. 46:2B-8.13.a [emphasis added]. A common situation in which a power of attorney may expressly authorize an attorney-in-fact to act, but where the act will be prohibited, involves lifetime gifts. While an individual generally has broad power to make lifetime gifts of his or her own property, unfettered by any restrictions or constraints, an attorney-in-fact operating under a power of attorney does not have that same authority. An attorney-in-fact may not use the principal’s resources unilaterally to favor himself or herself in ways that are contrary to the principal’s wishes.

Tax Updates from Washington (October 2018)

Published on: October 19, 2018 | by Elizabeth Candido Petite

State and local tax deduction workarounds rejected. The workarounds to the new federal cap on deductions for state and local taxes (“SALT”) are not likely to be effective, according to proposed regulations issued by the IRS in late August. The Tax Cuts and Jobs Act, signed into law by President Trump in December 2017, capped the SALT deduction at $10,000 for taxpayers who itemize their deductions. As a workaround, several states (including New Jersey and New York) have permitted municipalities to establish charitable foundations to collect property taxes, thus allowing residents to claim a charitable deduction for the property taxes paid, and the states have enacted state tax credits for such charitable donations. However, the IRS has indicated that these strategies will not work to the full extent envisioned by state and local leaders. The proposed regulations provide that taxpayers who itemize deductions shall be eligible for a federal deduction that equals only a small fraction of the state tax credits for such charitable donations. Local leaders have vowed to challenge these new regulations.

Income tax deductions for trusts and estates confirmed. The Treasury stated in Notice 2018-61 (issued on July 13, 2018) that trusts and estates are entitled to income tax deductions for administration expenses paid solely as a result of being an estate or trust. This guidance was necessary to explain the impact on trusts and estates of Internal Revenue Code Section 67(g), which was added as part of the Tax Cuts and Jobs Act. The new Code section suspends miscellaneous itemized deductions for individuals for tax years 2018 through 2025. Notice 2018-61 clarifies that trusts and estates may continue to deduct certain administration expenses, and states that Treasury intends to issue regulations confirming this position. Regulations will also be issued regarding the deductibility of such expenses for the individual beneficiaries of trusts and estates in the final year of administration, when deductions are typically passed through to the beneficiaries.

Repeal of New Jersey’s Estate Tax and Increased Federal Exemptions Creates Opportunity to Review Estate Plans

Published on: April 9, 2018 | by Anne Marie Robbins

In view of the repeal of the New Jersey estate tax as of January 1, 2018, as well as the recent significant increases in the federal estate, gift and generation-skipping transfer tax (“GST”) exemptions to $11,180,000 per person, also effective January 1, 2018, many clients should review their estate plans.

A. Formula Gifts in Wills and Trust Agreements. For example, if the estate plan bases the disposition of the estate on the available estate tax exemption and divides the estate into shares, with one share for the spouse and the other share for the family, that plan could now result in over-funding the amount passing to family members other than the spouse, thereby reducing or eliminating the spousal share. In short, if the estate plan is based on a formula gift, whether outright or in trust, or if the plan creates a marital trust and a “credit shelter trust” or “family trust” (sometimes called an “AB trust plan”), the estate plan and documents should be reviewed.

B. GST Exemption Gifts. Similarly, if an estate plan includes a gift based on the amount of the GST exemption, for example, a bequest of the GST exempt amount outright to grandchildren, or to a trust for the benefit of children for life and then for grandchildren, this too could significantly reduce the amount a client may wish to provide for his or her spouse or other beneficiaries.

Pay Attention to Red Flags in Estate Planning to Avoid Litigation After Death

Published on: April 9, 2018 | by James K. Estabrook and Elizabeth Candido Petite

Years of experience in administering estates have taught us that the best way to avoid litigation after death is to plan during life. We have come to identify several “red flags” that, when not addressed during estate planning, are more often than not resolved in a courtroom. Not only does this mean that a judge, rather than the client, is ultimately deciding how the client’s property is disposed of, but the process can be lengthy, emotional, and expensive. With the possibility that attorney’s fees will be paid before any property is distributed to the family members, the lawyers may become beneficiaries of the estate when it is contested.

Unequal distribution of assets amongst children.

Clients who want to distribute their property to their children unequally are almost always asking for a fight. They may want to do this because they are estranged from a child or because they believe that one child “needs” more than another. The slighted child, however, may not agree with mom or dad’s decision. When this comes as a surprise to a child after the client’s death – and the parent is no longer here to explain the thought process and to act as mediator amongst the children – the slighted child feels like his or her only recourse is to hire an attorney.

POLST vs. Advance Directive – What’s the Difference?

Published on: April 8, 2018 | by Anne Marie Robbins

An advance directive for health care (“Advance Directive”) is a legal document that expresses an individual’s wishes regarding end of life medical treatment, and can include a designation of another person as his or her health care representative.

In contrast, a POLST, Practitioner Orders for Life-Sustaining Treatment, is a health care document that sets forth medical treatment orders. A POLST allows individuals to work with their medical teams regarding treatment decisions in connection with serious illness. The POLST form is completed jointly by an individual and a physician or advance practice nurse, expressing the individual’s goals of care and medical preferences.

Unlike an Advance Directive, a completed POLST form is an actual medical order that becomes a part of the individual’s medical record.

Thinking About Getting Re-Married? You Might Want To Roll Over What’s In Your 401(k)

Published on: March 5, 2018 | by Lindabury, McCormick, Estabrook & Cooper, P.C.

Nearly all 401(k) plans are governed by the Employment Retirement Act of 1979 (“ERISA”). ERISA regulates pension, health & welfare, and other employee benefits including 401(k) programs.

Under ERISA, if owner of an ERISA-governed 401(k) plan dies, their surviving spouse is automatically entitled to 401(k) benefits at the time death, regardless of who has been named beneficiary. Under § 1055 of ERISA, if the owner of a retirement account is married when he or she dies, his or her spouse is automatically entitled to receive at least fifty percent (50%) of the money, regardless of what the beneficiary designation says. The Supreme Court has explained that § 1055 reflects Congress’s intent to “ensure a stream of income to surviving spouses.”

This right of the surviving spouse is triggered regardless of when the assets were accrued or how long the pair has been married. There is an exception to the general rule. Plans are permitted to include a 1-year marriage rule whereby a surviving spouse must have been married to the plan participant for at least 1 year before they may claim a right to 401(k) assets, but, not all plans have adopted this exception.

Practical Considerations for Attorneys and Trustees: Trust Decanting After Matter of Kroll

Published on: January 31, 2018 | by Elizabeth Candido Petite

The New York “trust decanting statute” (EPTL 10-6.6) was significantly revised in August 2011. Although commentary and analysis of the new statute appeared almost immediately from practitioners, it was not until late 2013 that the judiciary joined the conversation. In Matter of Kroll,¹ the Surrogate’s Court of Nassau County was faced with a challenge to a trustee’s exercise of appointing trust assets from a lifetime trust to a supplemental needs trust (SNT). The decision is noteworthy not only because it is the first to analyze the revised statute, but also because it serves as an important reminder for all trustees and attorneys to draft flexible trust instruments, to stay current with the needs of beneficiaries, and not to delay when changed circumstances necessitate a change to the trust.

A. Statutory Background

In 1992, New York was at the forefront of trust law when it enacted EPTL 10-6.6, which allowed trustees with unlimited discretion over distributions of principal to appoint trust assets to another trust. The statute was essentially unchanged for almost 20 years, during which time it became evident that the statute had limited applicability. The revised statute now permits all trustees, regardless of their scope of authority, to decant, but they must maintain certain provisions of the original trust in the new trust and cannot eliminate or reduce the interests of current beneficiaries.

2017 Tax Cuts and Jobs Act

Published on: January 25, 2018 | by Anne Marie Robbins

President Trump signed the Tax Cuts and Jobs Act (the “Act”) on December 22, 2017. The Act makes significant changes to the Internal Revenue Code, covering a broad range of income, corporate, and estate taxes. Most of the changes to the Code are effective as of January 1, 2018. Because of Senate rules requiring limits on legislation that increases the federal deficit, many provisions of the Act, including the estate, gift, and generation-skipping transfer (GST) tax provisions, will expire after December 31, 2025.

From an estate-planning perspective, some key takeaways are:

The federal estate, gift, and GST taxes have not been eliminated, as some had hoped. Instead, the exemptions have increased making it less likely that such taxes will be imposed on all but the wealthiest individuals. The base federal estate and gift tax exemption has been doubled to $10 million, indexed for inflation, for tax years 2018 through 2025. The effect is that a single person may now transfer, during life or at death, a total of approximately $11.2 million (the inflation-adjusted figure), or $22.4 million for a married couple. The GST tax exemption has also increased to a like amount.