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

I have been posting quite a bit this past year on gifting and the fact that transfer taxes are on sale for a limited time only - it's like a 2 year long Black Friday or Cyber Monday for families with taxable estates.  The sale gets even better in 2012 - the IRS just announced that the federal Gift Tax Exemption Amount is being increased to $5,120,000, from $5 million, due to adjustments for inflation.

First, and as an aside, I think that adjusting the estate, gift, and GST exemptions for inflation each year is eminently logical.  Of course, these logical increases have been created in a temporary tax law, so don't go thinking that Congress was so genius in putting all this together.

Second, the Estate Tax Exemption Amount and GST Exemption Amount are increasing as well. But since you have to die to take advantage of the Estate Tax Exemption Amount, that is not quite as headline worthy.

What does the increased Gift Tax Exemption Amount mean?  Well, for wealthy families, particularly those where they own closely held businesses or real estate, or other appreciating assets, there is a window of time through 2012 where large gifts can be made without paying gift tax.  This means that all the lovely appreciation on the asset following the gift will flow transfer tax free to the children.  Due to the Gift Tax Exemption increase, in 2012 you can give $120,000 more than in 2011.

I was just interviewed on this subject by NJBiz.  The theme - there may be a limited window of opportunity to take advantage of these tax laws. Analyzing the pro's and con's is time consuming and complex so families that think this might be good fit for their wealth planning goals should start examining their options now.

Image: Grant Cochrane / FreeDigitalPhotos.net

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"Plan for what we know, not for what we think might happen" Mitchell A. Drossman, national director of wealth planning strategies at U.S. Trust, advised in a recent New Your Times piece "Take Advantage of Tax Breaks Now, Experts Say". The reason?  That nasty little $1.3 trillion federal budget deficit, and competing proposals about how to address it.

Under legislation passed in December 2010, until the end of 2012, tax rates are predicted to be:

• 35% top marginal rate for individuals
• 15% on long-term capital gains and most dividends
• $5 Million exclusion gift, estate and generation skipping taxes

In 2013, the tax rates are supposed to change to:

• 39.6% top marginal rate for individuals (single taxpayers with income more than $200,000, and joint taxpayers with income more than $250,000)
• 20% on long-term capital gains
• dividends taxed at normal income tax rates
• 3.8% Medicare tax on investment income begins 
• $1 Million exclusion gift, estate and generation skipping taxes

While the current was scheduled to run through the end of 2012, it is conceivable that he could be changed to affect tax years beginning before 2013. As a result of this, thoughts by tax experts of actions to take now include:

Business Owners:

• Accelerate income in 2011, by arranging for payment in this tax year as opposed to 2012. Many times business owners don't actively collect receivables towards the end of the year in order to defer income, and thus the tax on that income, into the next year. However, it may be that pain tax in 2011 may give you a lower rate.
• Business owners may want pay dividends this year or give stock bonuses before year-end.
• If the business has accounts receivable that have become uncollectible, they can be written off as a bad debt deduction, which might balance out income accelerated into 2011 to take advantage of reduced income tax rates.
• Consider matching contributions to employees within a profit-sharing plan.
• Consider gifting a non-controlling interest in a family business to other family members to take advantage of the current $5 million gift tax and generation skipping tax exemption amounts.
• Review any life insurance policies used to fund buy-outs to determine their ongoing viability - due to changes in market conditions, the policies may need to be reduced, replaced or funded with additional dollars.

Induviduals:

• Investors may want to consider making trades before the end of the year to capture any gains at the 15% rate.
• Up to $3000 of capital losses can be deducted from ordinary income. 
• Individual taxpayers might want to take advantage of federal and state tax credits for making their homes more energy efficient.
• Consider large gifts to take advantage of the current $5 million gift tax exemption amount and generation skipping tax exemption amount.
• Actively review the cost basis reported on investment statements so that it will be correctly reported on any 1099 issued for any transactions during 2011. Beginning in 2011 the form 1099 must show the basis. Correcting any mistakes now can avoid significant headaches come April.
• Make gifts to grandchildren who have had summer or part time jobs (so that they have earned income) that they can put into a Roth IRA.
• Review life insurance policies to determine their ongoing viability.

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If you have ever been a fiduciary (executor, trustee, administrator, guardian, attorney-in-fact) you know that being a fiduciary becomes your new part time job.  There is a lot of work involved - finding assets, consolidating and investing assets, paying debts, maintaining property, distributing property, paying taxes.  On top of the actual work, you are dealing with attorneys, accountants, financial planners, the beneficiaries (who can easily be the most demanding of all) - oh, and your own grief and loss.

Unlike other things that you do for family, being a fiduciary is a job where you can get paid. New Jersey statutes provide pay scales for fiduciaries, all of which are subject to increase or decrease by court review.  Be aware however that any compensation you receive as a fiduciary must be included in your taxable income in the year that it is paid.  On the plus side, any commission paid to you is a tax deduction against any estate tax or income earned by the estate or trust..

I must give a shout out to my colleague, Don Vanerelli, Esq., who created an an excellent paper on "Computing Fiduciary Commissions / Compensation", which I just found and referred to in doing some trust commission research.  Don's paper is the inspiration and source of this post.

Executors and Administrators (NJSA 3B:18-12 through 3B:18-17):

Income (each year):

6% of income earned by the estate each year

Principal/Corpus (one time):

5% on the first $200,000;
3.5% on amounts between $200,000 and $1,000,000; and
2% on excess over $1,000,000.

If there are Co-Executors or Co-Administrators, an additional 1% of the Principal/Corpus may be taken as an additional commission.

If the estate is lengthy, an additional annual Principal/Corpus commission of 1/5 of 1% of the value of the Principal/Corpus may be taken.

Trustees, Guardians and Conservators (NJSA 3B:18-23 through 3B:18-27 ):

Income:

6% of income earned by the trust or assets under guardianship/conservatorship each year.

Principal/Corpus (each year):

$5.00 per thousand dollars of corpus on the first $400,000; and
$3.00 per thousand dollars of corpus in excess of $400,000.

There is an annual minimum of $100, and banks are entitled to "what is reasonable".

If there are Co-Trustees or Co-Guardians, an additional 1/5 commission is granted for the additional fiduciaries.

Termination of the Trust or Guardianship:

On the termination of the trust or guardianship or conservatorship, additional commissions may be taken:

If the corpus distribution occurs within 5 years of its receipt by the fiduciary, an amount equal to the annual corpus commission allowable but not actually taken, plus 2% of the corpus distributed;

If the corpus distribution occurs between 5 and 10 years of its receipt by the fiduciary, an amount equal to the annual corpus commission allowable but not actually taken, plus 1 1/2% of the corpus distributed;

If the corpus distribution occurs more than 10 years of its receipt by the fiduciary, an amount equal to the annual corpus commission allowable but not actually taken, plus 1% of the corpus distributed.

If there are Co-Trustees or Co-Guardians, an additional 1/5 termination commission is granted for the additional fiduciaries.

Agents under a Power of Attorney (NJSA 46:2B-8.12):

You need to apply to the court for compensation.

Image: David Castillo Dominici / FreeDigitalPhotos.net

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The fact is some people just have a taxable estate - particularly here in New Jersey where a married couple with assets in excess of $1,350,000 ($675,000 estate tax exemption x 2) will pay a New Jersey estate tax before the assets go to their children.  One way to "replace" these lost dollars is through life insurance - specifically "survivorship" or "second-to-die" life insurance that pays dollars when the second spouse dies - normally the time the estate taxes are due.  The theory is that if you have an anticipated $500,000 estate tax bill, and you purchase $500,000 of second-to-die insurance, then you have only paid pennies on the dollar because the total premiums paid are less than the total death benefit / estate taxes due.  

Many families are familiar with this concept as their financial planner, insurance agent, accountant or attorney might have brought it to their attention.  Some common concerns of clients are the cost of the second-to-die insurance, and the fact that they don't know what the future may bring and they may not need the insurance (if you are getting insurance purely to replace estate tax dollars, and the estate tax is eliminated, then the reason for the insurance is no longer there).

One possible "bridge the gap" solution that was recently brought to my attention is survivorship or second-to-die term insurance, as opposed to permanent insurance.  Term insurance expires at some point in the future, so there may be a lower premium at the beginning.  Apparently these polices also allow you to "convert" to permanent insurance in the future. In an uncertain estate tax world this type of product may allow you to take a "wait and see" approach to estate tax planning and may be worthwhile to discuss with your professional advisers.

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I think that history will compare Steve Jobs with Thomas Edison in the effect that his visionary influence had on the world, and the speed with which it spread. You can thank Steve Jobs for revolutionary inventions from the mouse to the iPad.  He changed the way we communicate forever.

Much has been said about what an intensely private person Steve Jobs was - he put his business and ideas in the spotlight, not himself.  It is likely his estate plan will also be that private - which I think is a good thing.  Remember how Jacqueline Kennedy Onassis valued her privacy - and then her Will became available for all to see when she died?  Why should I have a right to know who she benefited and how?  Why should you?  It seems so rude that in death the public has a right to know that which they would never have learned during the person's life.

I am sure that Steve Jobs had excellent estate advice.  It is likely that his estate plan consisted of trusts that were designed to keep his ultimate distribution of assets private.  His Will is going to be a "Pour-Over Will" where the sole provision is "I give anything I own to my trust."  While the Will would be a public record document, the trust will not be.

While you might not have a net worth of $6.7 billion, you may very well have an estate plan that you consider to be nobody else's business.  In that case, you too can use a Revocable Trust as a Will substitute. You still have a Will, which will be filed as a public record upon your death, but that Will merely directs all your asses to the Revocable Trust.  You testamentary wishes and distribution scheme will be set out in the Revocable Trust, which is not a public document.  Thus, the only people who know who got what and how are your heirs and beneficiaries. 

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Everyone knows that times are tough right now - but what you may not know are NJ state resources that might be able to help a friend or family member who is struggling at this time.  Jim Shepard, Esq. kindly brought to my attention that the New Jersey State Library has created a website to assist New Jersey residents and businesses with resources to help them if they find themselves in need of assistance.

The site has links and references to the following areas:

• New Jersey Works Tools
• New Jersey Financial Tools
• New Jersey Housing Tools
• New Jersey Health Tools
• New Jersey Parental Tools
• Tools for Seniors

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