Articles Posted by Anne Marie Robbins

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.

The COVID-19 crisis, and its attendant rules of social distancing, face masks, etc. have presented new challenges to estate planning attorneys in the realm of document executions.  How are we advising clients who wish to sign their estate planning documents during this pandemic?  The usual participants when we meet with clients to execute wills and other documents include the client(s), the attorney who serves as one witness, a staff member who serves as the second witness, and a notary public.  Like many other law firms in New Jersey, we have not been meeting with clients in our offices since mid-March.  Many of our attorneys, and most of our staff, are working remotely.  Hence we cannot easily assemble the normal cast of characters to participate in the execution of client documents.    Further, wills and other estate planning documents may not be signed by electronic signature; such documents must be signed in person with a so-called “wet” signature.

Here are some of the ways we have been helping our clients sign their documents in these challenging times.

1.  The signing may be handled by the client at home or elsewhere, with execution instructions provided by the attorney:

Federal Law.  On April 9, 2020, the IRS issued Notice 2020-23, amplifying earlier Notices 2020-18 and 2020-20.  Notice 2020-23 indicates that because of the COVID-19 emergency, the due dates for filing federal tax returns and payment of taxes due on or after April 1, 2020 and before July 15, 2020 have been postponed to July 15, 2020.  The postponements are automatic; taxpayers are not required to take any action, such as filing an extension request, in order to qualify for the relief.

The Notice confirms the grant of additional time to file individual, corporate, partnership, and estate and trust income tax returns to July 15, 2020.  Estate, gift, and generation-skipping tax returns and payment due dates have been similarly postponed.

The Notice also clarifies that not only first quarter estimated income tax payments due April 15, but also second quarter estimates due June 15, have a new due date of July 15.

On December 20, 2019, President Trump signed into law the SECURE (Setting Every Community Up for Retirement Enhancement) Act (the “Act”), which significantly affects the law regarding taxable retirement accounts such as traditional IRAs and 401(k) plans.[1]

Benefits of the Act.  The following are among the pertinent beneficial provisions of the Act effective for calendar year 2020 and beyond:

• The age at which a plan participant[2] must take annual required minimum distributions (RMDs) has been raised to age 72 from 70 ½, in recognition of longer life expectancies.  Note that the new rule applies only to persons who are over age 70 ½ in 2020 and following.

When a person signs a will (or a will coupled with a revocable trust) in order to set forth a plan for the distribution of his or her estate following death, he or she often believes the estate plan is complete. But if the person has failed to carefully consider the beneficiary designations on life insurance policies, retirement accounts, and other assets, and coordinate those designations with the estate plan, the result following death may be quite different from what was intended.

Wills do not override beneficiary designations; rather, beneficiary designations ordinarily take precedence over wills. For example, if a will leaves everything a testator owns at the time of death to the spouse, and testator has a $1 million life insurance policy on which the couple’s three children have been designated as equal beneficiaries, the life insurance passes to the children at testator’s death, not to the spouse. This result arises because the language of the will works only to distribute the assets that are part of the testator’s “probate estate,” meaning those assets in testator’s sole name without beneficiary designations.

Examples of assets not part of the probate estate are assets with beneficiary designations (usually life insurance and retirement accounts, and sometimes bank and brokerage accounts), any assets with a “POD” (pay on death) or “TOD” (transfer on death) designation, and any assets titled in the names of two or more people as “joint tenants with right of survivorship” or “tenants by the entireties.”

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.

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.

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.

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.