New Jersey Estate Planning & Elder Law Blog : New Jersey Estate Planning Lawyer & Attorney : Deirdre Wheatley-Liss : Fein Such Kahn & Shepard Law Firm : Elder Law, Tax Planning

Depending on your passion, March Madness, Fashion Week or the Indianapolis 500 could be what you look forward to immersing yourself in every year. For estate planners, we look forward to the annual Heckerling Institute sponsored by the University of Miami School of Law.  For one week each January it is chance to go back to the classroom, and immerse yourself in what is working, what is not, a what is on the horizon for estate planning and tax law.

So next week I will be in Orlando as a student to refresh my knowledge, renew the creativity bank and reconnect with the theoretical of the law as opposed the practical day to day.  I will be tweeting updates to #heckerling and posting my thoughts about new and old techniques in the weeks to come.

This is a great opportunity to pick others minds, so comments about what you would like to know would be welcome.  I am sure lots of commentary will focus on what to do in our 365 days of estate tax repeal.

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I often have spouses or children expressing concern about a loved one driving.  This stems from a real fear that as a person gets older, suffers from dementia,  or is being treated for a medical condition, their reflexes and judgment may slow. While these conditions are difficult on their own, they can lead to tragedy if the person suffering from reduced abilities is behind the wheel of a car. They could damage property, or more importantly, injure or kill themselves or others.

What is a family to do?  In New Jersey a family member, physician, judge or police officer can request a Medical Review of the persons license and right to drive through the Medical Review Unit of the Motor Vehicle Commission (still the DMV in my mind).  

This is a serious step as it could lead to a person's loss of freedom of movement.  It cannot be done anonymously - the reported driver will be advised of who sent the letter.  However, it allows family members a means to partner with experts in determining if it is safe for a loved one to be driving.  

To request a Medical Review you must contact the Medical Review Unit in writing and provide them with the following information:

If you see these signs and want to request a medical review

• Write a letter to MVC (must come from a family member, physician, judge or police officer):
• Provide as much of the driver's information as possible: name, date of birth, address, driver license number and medical condition(s)
• Include your relationship to the driver
• Report the signs of impairment and safety concerns you have observed (see chart above)
• Anonymous reports cannot be considered. Upon request, drivers will be told who reported them
• If MVC's Medical Review Unit determines that a suspension or restriction is necessary, they will contact the driver by mail

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Randolph NJ, where I live and our son goes to school, is a typical suburban neighborhood in Morris County, NJ - the 5th wealthiest county in the country according to Wikipedia.  We moved there in large part because of the supposed quality of the public school education.  

Its school budget time of year again, and the news in New Jersey is not good.  We are facing a $9,000,000,000 (that $9 billion) deficit in the state, and a minimum $2,000,000 deficit in the Randolph School budget (out of a total budget of about $76 million).  All the news I have been hearing is how we need to do with less this year - but I was thinking that we have good, strong, solid school system, we just need some belt tightening.

Well, imagine my surprise to read a Daily Record article that we have a FAILING school system. That's right, Randolph High, Randolph Middle and one of our Elementary schools "received an "early warning" for a one-year lapse in reaching testing requirements."  Now, I am not here to debate No Child Left Behind and the testing it mandates (I am not a supporter).  However, it is the law of the land, and effects how our public schools are funded and operated.    

One of the more disturbing things about this is that I had to learn of my child's failing school district from the newspaper - nothing was sent to parents or township residents, and it is not on the school district news page.  

I am not an educator - I don't know what the issues are from their perspective.  I am not being critical of the test scores, they are what they are, and are good in the sense that they highlight  what are clearly issues in the Randolph NJ education system.  However, I am a parent and a taxpayer, and feel that it is reasonable to expect that a school district of Randolph's supposed quality and significant funding not only meet minimum standards, but leave them in the dust in terms of the quality of education being offered to our children.

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 Today former Arkansas Governor and Presidential Candidate Mike Huckabee spoke at the Morris County Chamber of Commerce Annual Meeting.  During a round-table session with Chamber's Board of Directors I had the opportunity to ask Governor Huckabee about his thoughts on our current tax system.   Now, I am a self-admitted tax junkie - I am totally fascinated by how the tax system influences the economy and behavior and how little critical thought politicians on both sides of the aisle seem to give to it.  So, I thought to myself, here is an opportunity to see what a former (?) politician would say about tax policy. 

To paraphrase my question:

Governor Huckabee, here in New Jersey we are in the most expensive state to live in and the most expensive state to do business in from a tax perspective.  How is it that the government's share in our work could be productive to our businesses instead of having a dampening effect?

Gov. Huckabee's first answer was to first invite me to move to Arkansas - apparently the tax environment is much friendlier.  But all joking aside, he made some very insightful comments, which I thought I would summarize here:

• Corporate Tax does not exist. He expressed amazement of the fundamental lack of understanding in the American populations that corporations do not pay tax, they collect tax.  Think about it - when there is a new tax on oil companies, gas prices go up; on food companies, food prices go up; on banks, bank fees go up.  Taxes are a cost of doing business that is passed along to the ultimate consumers of good and services - you and me.  
• A FAIR tax would jumpstart the economy.  Gov. Huckabee said that he used to advocate a flat tax, but now advocates a FAIR tax.  I have to say I am not a flat tax proponent (it is regressive - affects poorer people more as they must spend dollars on necessities - and anything to address the regressiveness takes away from from the simplicity of a flat tax) and I knew nothing about the FAIR tax until today.  Gov. Huckabee explained it as a tax on consumption - you buy gas, you pay tax; you buy oil to make gas, you pay tax.  It changes the tax from on productivity to one on consumption.  He inspired me to go out and learn more - so more posts will be had on this subject.  I will be visiting the FAIR Tax website today and reading The Fair Tax Book that Gov. Huckabee recommended.
• Eliminate tax penalties for bringing offshore dollars into the US as an immediate solution to our fiscal crisis.  Right now, if you make money outside the US, you are taxed when you bring it into the US and potentially subject to penalties of 50% or more if you haven't previously reported the dollars.  Gov. Huckabee estimated 130 billion in offshore dollars that US companies and taxpayers won't bring back into our economy because it costs too much.  Eliminate those taxes and billions will flow into the economy from sources other than the US taxpayers pocket.

Gov. Huckabee shared that when he discussed the fair tax with his accountant he thought the accountant would dismiss the idea because it would put him out of work.  The accountant replied that he would like the idea where he could spend his time helping companies build their businesses instead of figuring out what their fair share of tax is. I will read more on the subject and see if I agree.

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I received a call yesterday similar to many others I have received over the years.  Essentially, Dad died and the client just found out that shortly before his death he named one child beneficiary of lots of accounts, leaving essentially nothing passing under the Will, which had divided everything equally between 3 children.

Lou Ann Anderson, the Bell County Legal News Examiner has an article today about celebrity cases of undue influence.  The stories are similar - shortly before death a new Will is executed or other property transfers done that undo a lifetime of the decedent's intent. These cases include Brooke Astor (her son and attorney were sent to jail for trying to defraud hundreds of millions from charity), Melvin Simon of Simon Shopping Malls fame (his Will months before he died was changed to leave all to his wife, and take out $150 million in bequests to charities), John "Buck" Jones, owner of the Carolina Panthers (his Will was changed a month before his death to leave control of Company to his wife instead of 3 employees as had been his long standing plan).

While these celebrity cases are titillating because of the names and dollar amounts involved, the same situation involves New Jersey families all the time.

There are competing concerns.  First, a person is free to leave their money to whomever they please (other than 1/3 to a spouse) - children do not have a right of inheritance.  Second, a person is not required to leave money equally among a group - many times one child gets more in the Will than others because the parent perceives that child's need or reward to be greater.  

However, it is the person making the gift who is allowed to make these decisions - not the person getting the gift.  The problem of undue influence arises when somebody essentially takes advantage of a person's reduced physical or mental state, or a situation of fear or dependency, and influences them to make an action they would not have otherwise takes.

The issue for a person who is claiming undue influence cases is one of proof.  How do you prove a person was influenced to make a change to their estate plan and it was not an independent decision?  There need to be witnesses and documents.  Do you have to prove the undue influence, or does the person who got the money have to defend the gift?  Kenneth A. Vercammen, Esq. has an excellent summary of the issues in Undue Influence As Defense To Will Or Power Of Attorney (New Jersey).

Generally, the person claiming undue influence (ie, the person getting less) has the burden of proof to show a court there was undue influence.  See Conners v. Murphy, 134 A. 681, 682 (N.J.Err. & App. 1926); Pascale v. Pascale, 549 A.2d 782, 786 (N.J.1988). However, if the the person who benefited from a gift is in a confidential relationship with the person who made the gift (an attorney in fact under a POA, a person who the person who made the gift is dependent upon), then the burden of proof shifts to the person who got the gift to prove that the person making the gift had independent counsel in making the gift.  See Haynes v. First National State Bank of New Jersey, 432 A.2d 890 (N.J. 1981); Pascale v. Pascale.

The presumption of undue influence is easier to raise with lifetime transfer then with transfers in a Will.   Some lessons from this are that  if you think that you were harmed by undue influence, gathering facts and acting quickly is key.  If you plan to disproportionately benefit your heirs, you should seek legal counsel to act to protect that gift from a claim of undue influence.

Image: Simon Howden / FreeDigitalPhotos.net

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 My two prior posts have been about the  federal tax impact for single individuals who die in 2010, and the federal tax impact for married individuals.  In summary the results for singles were not good, and for marrieds were worse – the "death" of the estate tax creates a capital gains "trap" for survivors.  While all this will be moot if Congress does as they have promised and create an estate tax retroactive to January 1, 2010, they haven’t acted yet, and as of January 1, this is the law.

What planning can be done in this environment?

Can you just say “whoo-hoo”; I’ll give everything to my children.  Hold on there – the federal estate tax is repealed in 2010, not the federal gift tax.  Each person still has a lifetime exemption of $1,000,000 – if you make gifts in excess of that in 2010, you will be subject to the federal gift tax at a rate of 35%.

However, the generation skipping tax (“GST tax”) is repealed in 2010.  The GST Tax essentially says that you can only leave up to $3.5 million to grandchildren without paying a separate tax of 55%.  The theory behind the GST Tax is that the government should share in the wealth at each generation.  If grandma leaves everything to granddaughter, the IRS might need to wait 75 years until tax can be collected again.  If assets go the children, the IRS might only have to wait 30 years to tax again.  So, in 2009 you could leave up to $3.5 million to grandchildren without GST tax. In 2010, you can leave everything to grandchildren without an additional tax.  For wealthy families, this could mean a huge amount passing to lineal descendants with the only tax cost(s) being capital gains (click here for an explanation of the 2010 capital gains tax trap for estates).

The estate plan you had in 2009 and will need again in 2011 won’t really make sense in 2010 unless they make the estate tax retroactive.  Do you need to go out and totally revise your plan? Not necessarily.  If you have a terminal situation however, it definitely bears looking at your current plan to make sure it addresses how to plan to minimize capital gains taxes instead of estate taxes.

Gifts to grandchildren may be a winning strategy in early 2010.  Also, for anyone who is terminally ill, a change of an estate plan to leave assets to grandchildren may be a winner as well (although if the estate plan isn’t changed, disclaimers may be able to be employed by the children to a similar effect).  And it will bear looking at the estate plan of anyone who is terminally ill.

Image: Danilo Rizzuti / FreeDigitalPhotos.net

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My prior post was about the federal tax impact for single individuals who die in 2010 (unless Congress does as they have promised and create an estate tax retroactive to January 1, 2010 – we will have to wait and see if that happens and how it is constructed).

The news for single folks was not good. Mom dying with a $3.5 million estate in 2009 could leave it to son tax free. Mom dying with that same $3.5 million dollar estate, assuming the basis of her assets is $350,000, now creates a  federal capital gains tax of $277,500 for son (or $416,250 if he is in NJ).

The news for married folks is worse. In 2009 mom could leave $100 million (or whatever amount) to dad with no taxes whatsoever – there is an unlimited marital deduction from estate taxes (so long as your spouse is a US citizen). In 2010 only $4,300,000 will pass tax free to the surviving spouse.

The "death" of the estate tax creates a capital gains "trap" - and the “trap" catches assets passing to a surviving spouse that were never subject to tax under the estate tax.

What??? you say. How is it possible that by eliminating the estate tax you are creating a tax for widows and widowers? As I noted, due to the magic of Internal Revenue Code Section 1014, capital gains taxes disappear at death under the 2009 law. Section 1014 creates a “step-up in basis” by stating that when an estate is subject to estate taxes, the cost basis of inherited assets is the date of death value.  For example, mom bought stock for $10, and when she dies it is worth $100.  Dad  inherits stock and sells for $100.  His capital gains is $0 ($100 of value - $100 of basis =0).

However, in 2010 there will be no estate tax, and therefore no “step-up in basis”.  Instead, per Section 1022, Dad can apply $1,300,000 million plus $3,000,000 to add basis to the assets that mom has. How might this work? Let’s say mom has a $6 million estate, made up mostly of the family business she and dad still work in and some real estate. Assume mom has a $500,000 basis in the assets – all that appreciation has been due to increases in value over the years. If mom died in 2009, dad would get $6 million tax free. If mom dies in 2010, and dad sells everything since he doesn’t want to work without his life partner, he only has a basis of $4,800,000  ($500,000 of mom’s basis + $4,300,000 of allocated basis). Since he sold for $6 million, he has $1,200,000 of capital gains. He will owe the federal government $180,000, and if he lives in New Jersey, he will also owe the Garden State $90,000, for a total of $270,000. Remember, had mom died in 2009 when there was an estate tax in place, dad would have owed $0.

It bears repeating that all other concerns aside, this new tax regime where you need to track cost basis over a life time is a nightmare. How do you prove mom’s basis before she died was $500,000? Was every improvement tracked? What documentation will the IRS accept as proof? Will you have that documentation 30, 40, 50 years later?

My next post will address some planning opportunities (every cloud has a silver lining after all) that might exist in this new tax environment.

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Sigh ... I was really, really hoping I would not have to post about what happens to those who die in 2010 from a federal tax perspective.  However, since Congress couldn't seem to get its act together, here is the current 2010 landscape (with the caveat that Congress can act in 2010 and have a retroactive estate tax - but, we will have to see what happens when it happens).

Did you know that the "death" of the estate tax creates a capital gains "trap"?  And that "trap" catches the smaller estates, the ones that under current tax laws have no federal tax consequences on death. 

Assume you are single person with a $3.5 million estate (I will post separately about married couples).  Had you died in 2009, there would have been no federal tax consequences to your death.  If you die in 2010,  there will no federal estate taxes (same as 2009).  However, your heirs will have to pay capital gains taxes (see, there is always a catch).

What??? you say.  I thought death was tax free in 2010.  It is estate tax free, there won't be a federal estate tax.  There will, however, be federal and state capital gains taxes for deaths in 2010. Why??? you ask.  Well, there is a pesky little section of the Internal Revenue Code (1014) that says, essentially - when an estate is subject to estate taxes, the cost basis of inherited assets is the date of death value.  For example, mom bought stock for $10, when she dies it is worth $100.  Son inherits stock and sells for $100.  His capital gains is $0 ($100 of value - $100 of basis =0).  Section 1014 is a neat magic trick - it makes capital gains taxes disappear.  In tax parlance we call this a "step-up in basis".

However, in 2010 there will be no estate tax, and therefore no step-up in basis.  Let's take the same example where mom bought stock for $10, and when she dies it is worth $100.  Son inherits stock and sells for $100.  He now has a capital gain of $90 subject to tax ($100 of value - $10 of basis = $90).  He must pay federal capital gains tax on this amount (15%) and state capital gains tax (7.5% in New Jersey) for a total tax of $20.25 if he is in NJ - or $15 if he is in FL or another state without a state estate tax.  

Notice that when mom died in 2009 with an estate tax in place, son netted $100.  However, when mom dies in 2010 with no estate tax in place, son only nets $79.75. Lets add some zeros - son nets $1,000,000 if mom dies in 2009, but only $797,500 if she dies in 2010.  Now you see how no estate tax is not necessarily a good thing?!

The above is over-simplistic, but it makes the point that the "death" of the estate tax creates a capital gains trap.

One point of "relief" - your estate will be able to allocate $1.3 million to add basis to inherited assets (different rules apply for a surviving spouse) per code Section 1022.  To continue our example, mom's entire $3.5 million estate consists of stock she bought for $10 a share and is now valued at $100 a share.  Her cost basis in her estate is $350,000.  She dies, and the estate has an additional $1.3 million of basis - so the stock now has a total basis of $1,650,000.  Son sells the stock for $3.5 million, creating a capital gain of $1,850,000, which in return has son paying a federal capital gains tax of $277,500 (or $416,250 if he is in NJ).  Remember now, if mom had died in 2009 when there was a federal estate tax, son would have paid $0 in tax.

But the the so called "relief" is a trap too - how are you going to prove basis?  How do you know what mom paid for each stock share?  And if you do know, what about splits, mergers, stock dividends - what is her cost basis in all those?  Tracking basis for assets acquired over a person's lifetime, particularly when the person is now dead, is a nightmare.

Congress has "promised" to reinstate the estate tax to January 1, 2010 - and I think we all know what weight to give to Congresses promises.

My next post will address what happens if mom dies in 2010 survived by dad  (a spouse) - and the picture isn't rosy there either.

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Happy Holidays to you all!  

In this time of family, friends and thanks for good fortune, I like to recall a very famous letter written by 8 year old Virginia in 1897 to the to the New York Sun asking "Is There a Santa Claus?" for her father had told her that if it was printed in the New York Sun it must be true.

The editor,  Francis Pharcellus Church, created a response that 100 years later still embraces the magic of children, joy, and hope for the future.  My favorite part:

Yes, Virginia, there is a Santa Claus. He exists as certainly as love and generosity and devotion exist, and you know that they abound and give to your life its highest beauty and joy. Alas! how dreary would be the world if there were no Santa Claus! It would be as dreary as if there were no Virginias. There would be no childlike faith then, no poetry, no romance to make tolerable this existence. We should have no enjoyment, except in sense and sight. The external light with which childhood fills the world would be extinguished.

I wish you the joy of seeing all the Santa Clauses who abound in your life this holiday season.

- Deirdre

Image: Salvatore Vuono / FreeDigitalPhotos.net

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