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.

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%;

It has been a routinely held belief among estate planners that a Revocable Living Trust is not necessary for New Jersey residents. The purpose of this article is to identify those situations in which a Revocable Living Trust can be beneficial for residents of New Jersey.

Most commonly, we hear that assets held in a Revocable Living Trust during one’s lifetime, will, at the time of death, avoid probate. Fortunately for New Jersey residents, probate is not an onerous, time-consuming, or expensive prospect. The probate process in New Jersey, which gives legal significance to the will and clothes the executor with court-approved authority, is a straightforward process often costing less than $300 and requiring little paperwork. It takes about two to three weeks to obtain Letters Testamentary, which formally authorize the executor to transact business on behalf of the estate. Other reasons often cited as benefits of a Revocable Living Trust (RLT) are privacy regarding one’s estate, and the elimination of death taxes. These reasons do not apply in New Jersey, because our probate process does not require an inventory disclosing estate assets, nor an accounting with the court listing estate income, expenses, and distributions to the beneficiaries. As for the assertion that RLTs save death taxes, this is simply not true, as all assets in an RLT are considered to be in the control of the grantor (the person who created the trust), and therefore includible in the grantor’s taxable estate.

There are, however, circumstances where an RLT is appropriate for a New Jersey resident. For example, an RLT can be a better way to:

A recent decision from the Morris County Chancery Division, Probate Part, serves as an important reminder to not only think about the final disposition of your remains, but to communicate those thoughts to the significant people in your life. In an unpublished opinion, In the Matter of the Estate of John E. Travers, Jr. (New Jersey Superior Court, Morris County, Docket No. P-2253-2017, 2/19/2019) (hereinafter “Travers”), the Court addressed the question of who may control the disposition of a decedent’s remains when the decedent has not expressed his intentions in this regard. The Travers case contained no significant legal principles, nor did it break new ground in the estate planning field. It did, however, highlight the importance of specifying the person who should be in charge of your final arrangements and the disposition of your remains.

In this case, Mr. Travers was 22, single and had no children. He had no will and had made no direction regarding his funeral or the disposition of his remains. He was survived by his mother and father, his closest blood relations. His parents were divorced. His father felt strongly that Mr. Travers should be buried, and his mother thought he should be cremated. This disagreement took them to the Superior Court of New Jersey, where the Chancery Judge was called upon to decide the question.

The Court began its inquiry with an examination of the New Jersey law that allows for the appointment of a funeral and disposition representative. New Jersey Statute 45:27-22 provides that a decedent may specify who is to be entrusted with funeral arrangements and the disposition of bodily remains. See N.J.S. 45:27-22.a. This direction must be in a will. Id. If the decedent has not left a will that includes such an appointment, the statute sets forth the order of priority of the persons entitled to control the funeral and the disposition of remains as follows: (1) the surviving spouse or civil union or domestic partner; (2) a majority of the surviving adult children; (3) the surviving parent or parents; (4) a majority of the brothers and sisters; (5) other next of kin according to the degree of relationship with the decedent; and (6) if no next of kin, any other person acting on a decedent’s behalf. Id.

Mary Pat Magee discusses the increased NJ estate tax exemption and impending elimination in the New Jersey Law Journal article “NJ Estate Tax Phaseout Hasn’t Haunted T&E Practices”.

Mary Pat says “We’ve always been faced with a planning environment full of tax uncertainty” as she recalls her early days when she began her practice in 1982 and the exemption was then $225,000 and T&E practitioners were anxious over business. “We are really lawyers that advise families as to the dispensation of their assets, and taxes are just one aspect of that” she says.

Click here to view Mary Pat’s comments on the issue.

In Clark v. Rameker, the United States Supreme Court held that an inherited IRA does not fall within the definition of retirement funds under Federal Bankruptcy law and is, therefore, not exempt from claims in a bankruptcy proceeding.  This decision had a considerable impact upon the estate planning world.

It has long been the law that IRA or other retirement accounts, as defined in 11 U.S.C. § 522(b)(3)(C) are exempt from the reach of a bankruptcy trustee.  In the Clark decision, the Court was called upon to decide whether funds contained an inherited Individual Retirement Account (“IRA”) qualify as retirement funds “within the meaning of the bankruptcy exemption”.  The Court found that an inherited IRA does not qualify for the bankruptcy exemption.  In making its decision, the Court identified three independent characteristics which differentiate an IRA from an inherited IRA.  Unlike traditional IRAs or Roth IRAs, where one can make an additional contribution to the IRA, the owner/beneficiary of an inherited IRA may never invest additional money in the account.  Secondly, an individual owner of an inherited IRA is required to make mandatory required distributions from the account annually beginning in the year after the deceased owner’s death, based upon the life expectancy of the individual who has inherited the IRA account.  This is in direct contrast to the owner of a traditional IRA who must withdraw funds without penalty only when he or she is close to retirement age, i.e. age 59 ½.  Thirdly, the Court noted that one who has inherited an IRA account may withdraw the entire balance at any time and for any purpose without penalty.  The owner of a traditional IRA or other retirement account will pay a ten percent (10%) penalty, subject to some very narrow exceptions, if he withdraws prior to age 59 ½.  For these reasons, the Court held that an inherited IRA may not benefit from the protection afforded to the owner or participant in a traditional retirement account.

Interestingly, in New Jersey, however, it has been determined that an inherited IRA constitutes a “qualifying trust” under N.J.S.A. 25:2-1(b) and as such will be excluded from a debtor’s bankruptcy estate.  In Re: Andolino, 525B.R.588.  The New Jersey Bankruptcy Court found that the language of the New Jersey Statutes exempts the inherited IRA from the bankrupt’s estate.  In that regard, N.J.S.A. § 25:2-1(b) provides that “any property held in a qualifying trust and any distributions from a qualifying trust, regardless of the distribution plan elected for the qualified trust, shall be exempt from all claims of creditors and shall be excluded from the estate in bankruptcy”. Id.  A “qualifying trust” refers to a trust “created or qualified and maintained pursuant to Federal law, including but not limited to § 408 of the Internal Revenue Code of 1986.  The Bankruptcy Court in New Jersey noted that the IRA’s “status as a qualifying trust remains unchanged, notwithstanding the debtor’s receipt of the IRA as a beneficiary”.  Andolino supra, at 591.