What's In an Estate Plan - The Wealthy and Wise Episode 2

Check out the second episode of The Wealthy and Wise

In this episode we acknowledge that that estate plans can seem remote, mysterious, complicated and expensive when you don’t know “What makes up an estate plan” and don’t have an overview the information necessary to make informed decisions about your estate.We clear the air on the episode of The Wealthy and Wise as we talk to you about:

What makes up an estate plan?
What happens to your assets if you die without an estate plan?
Determining your net worth from an estate perspective
Sorting out powers of attorney, living wills, health care proxy and advanced directives
Your beneficiaries – who gets your assets, how and when?
Is the government your beneficiary?
How are trusts tools to protect money?
Probate v. Non-Probate assets
And much, much more

The goal of The Wealthy and Wise, as always, is to educate you about how you can take steps in your own life to protect and build your wealth. How’d we do? We’d love your questions and comments, either below or to questions@thewealthyandwise.com. You may find yourself featured in an upcoming episode or podcast!

Make Large Gifts Now, Pay More Tax Later?

If you make big gifts in 2011-2012, what happens when you die in 2013 and beyond?

Right now, and continuing through 2012, there is a gift tax/estate tax/GST exemption amount of $5,000,000 per person. We have discussed before what a fantastic opportunity this can be for wealthy families to do transfers at little or no transfer tax.

However, for every action, there is also a reaction. One thing that is not being talked about, and that families need to be aware of, is: What are the consequences of making a large gift utilizing the $5,000,000 exemption amount, in the event that the estate tax exemption amount upon your death is lower (such as $1,000,000) and what impact this might have on your New Jersey estate taxes.  This problem is sometime referred to as the "Clawback" (no, I did not make that up).

All of this stems from the little known or understood fact that “prior taxable gifts” are added to a person’s taxable estate to determine their federal estate tax liability. Since New Jersey relies on the Federal estate tax liability scheme as it existed in 2001 to determine its estate taxes, the Clawback issue is particularly dear to New Jersey residents.

When making a gift using your gift tax exemption, it is generally explained that you use it now or you use it later. For example, if you make a gift of $2,000,000 during your lifetime, and the estate tax exemption amount was $5,000,000 on your death, you would effectively have $3,000,000 of your exemption left. However, the way that is calculated is you have $6,000,000, you gave away $2,000,000 (leaving a $4,000,000 estate, which is less than the $5,000,000 exemption amount) and you die. Your prior $2,000,000 gift is added back to your taxable estate of $4,000,000, creating the same $6,000,000 taxable estate, the $5,000,000 is applied to the estate, and in my example, you have $1,000,000 upon which the estate tax may be levied.

The problem? What happens if the estate tax exemption amount is less upon your death. Going back to the example above, you had a $6,000,000, you gave away $2,000,000 so that you have a $4,000,000 estate upon your death. You add back in the $2,000,000 to create a $6,000,000 taxable estate, but you only have a $1,000,000 exemption amount. In this situation, your taxes are being levied on a $5,000,000 taxable estate ($6 million less $1 million exemption), but in reality, there are only $4,000,000 of assets actually in your estate, because you had added back this theoretical $2,000,000 that you had already given away.

For New Jersey purposes, this situation can be even worse. That is because New Jersey has such a low estate tax threshold of $675,000. Theoretically, you could have had $5,100,000, and given away $5,000,000. For New Jersey estate tax purposes, the $5,000,000 "prior taxable gift" is added back in to your taxable estate, and the New Jersey estate tax is calculated on the combined amount.  The New Jersey estate tax is somewhere in the vicinity of $350,000, but the only assets that you actually have are $100,000.

So when considering gifting to take advantage of the 2011/2012 transfer tax sale, thought must be given to what happens after the sale is over – will so much of your estate be potentially subject  to taxes if there is a lower estate tax rate (or if you are in New Jersey) that making a gift now precludes you from making other distributions upon your death?
 

Thanks to Steven A. Loeb, Esq. for his insights for this article.

Photo © Mark Rasmussen | Dreamstime.com

What happens to your Will when another beneficiary is born?

You Will usually says "I leave my estate to my children" or maybe "to my grandchildren" or "to my children, and if a child isn't living, then to their children".  You will notice that no names are being used.  Guest blogger Stacey C. Maiden, Esq., Of Counsel to our Tax, Trust, Estates and Elder Law Practice Area,  today looks at the question of what happens when new children or grandchildren are born after the Will is executed.

A common question from our estate planning clients, who name children, grandchildren or great-grandchildren in their Wills, is “what happens if another child, grandchild or great-grandchild is born or adopted? Do I need to update my Will?” New Jersey has a statute which addresses the issue of the after-born or after-adopted child (N.J.S.A. 3B:5-16) and we can draft language to specifically include any after-born or after-adopted children, grandchildren or great-grandchildren in the Will. But what if the Will does not contain this sort of language and the beneficiaries are great-grandchildren?

The New Jersey Appellate Court recently considered these facts in the unpublished case, In the Matter of the Estate of Francis Marie Ackerson Yetter, Deceased, (A-0971-09, decided December 22, 2010). In her Will, Mrs. Yetter left certain shares of stock to two named great-grandchildren, who were her only great-grandchildren at the time. After Mrs. Yetter signed her Will, two more great-grandchildren joined the family. The after-born great-grandchildren argued that the devise should be treated as a class gift, entitling them to share equally with the great-grandchildren identified in the Will.

The Court considered the circumstances and overall testamentary scheme, and agreed, finding that Mrs. Yetter did not intend to omit her after-born great-grandchildren. The Court applied the doctrine of probable intent, which allows the Court, as far as possible, to ascribe to the testator “those impulses which are common to human nature,” finding that excluding two of her great-grandchildren from her Will would be against the “common human impulses” of a great-grandmother who otherwise always treated her family fairly and equally.

Why I love to blog

 I author this blog, quite simply, because I'm really passionate about what it is that I do.

I enjoy helping people find ways to pay their legally minimum required taxes. I think that the government's partnership in everything you earn shouldn't be a secret – everybody should know how tax law will affect their decisions.

I think that it's a shame that people who worked their entire lives, served in our military, and built the country that we know today are fearful of how they will be cared for or be able to stay in their own homes as they get older.  I feel good about showing families that there are steps that they can take today to be in a position of empowerment tomorrow.

I find other people's businesses fascinating – what's their growth strategy, what's their secret to success, what are their fears? I love working with business owners to find ways, through the legal arrangements that they enter into, to support those successes and minimize those fears.

I blog about these things because this platform is my soapbox, where I get to stand up and grab my virtual loudspeaker. So many of my clients have the same concerns, the same questions, are seeking the same information. This blog gives me an opportunity to educate a whole world of people that I haven't yet met about why they should be concerned about how the law impacts their daily lives, to answer questions that are commonly asked, and to give people information so that they have the ability take action in their own lives.

What was the inspiration for this soliloquy? I was recently interviewed by Lexblog (the company that hosts and supports this site) and it got me thinking about why this blog has been part of my life for the past five years. You can enjoy the interview here, or even listen to the podcast (a first for me).

Right now, all the ideas on the topics covered on this blog come from my head, out of conversations with my associates and partners, out of client meetings, or through what I'm reading in the news as I keep up with the ever-changing terrain of law. What I'd love to know is what kind of questions do you have that you'd like to see me addressing on my virtual soapbox?

 

Some States Provide a Fix for Deaths in 2010

Now that May of 2010 is upon us and there is still no federal estate tax finality, we can begin to look at the situations that families are facing where loved ones have passed since January 1.  A key issue is that their estate planning documents (wills or trusts) may not make sense in 2010 where there is no estate tax.

For example, a common provision in a Will if a person has a taxable estate is  "I leave my trust an amount equal to my applicable exclusion amount" - what does that mean?  Well, in 2009 "applicable exclusion amount" was loosely translated to $3.5 million. In 2011 "applicable exclusion amount" will loosely translate to $1 million.  In 2010 "applicable exclusion amount" has no meaning - it is a defined term under section 2010 of the Tax Code   which section does not exist this year (OK -  I am just now seeing the irony that a tax section that has no meaning in the year 2010 is section 2010).  The best was this was explained to me was "What if you had a Will that said it should be interpreted under the laws of the Soviet Union - there is no Soviet Union anymore, so what does that mean?"

Some states have come to the rescue and passed laws that say that where there is ambiguity in how to interpret a Will due to the 2010 repeal of the Federal Estate Tax, that the terms should be interpreted as if the person died on December 31, 2009 (when the estate tax was still in effect, so all the tax "terms of art" have meaning).    Julie Garber at About.com reports:

 

To date it appears that at least four states have actually passed laws designed to put the estate plans of people who die in 2010 in the same position as if they had died on December 31, 2009: Indiana, Maryland, Virginia, and Wisconsin. Note that all of these laws have been written to become void if Congress acts to bring the federal estate tax back in 2010.

For those of us in New Jersey where there is no legislative solution, a quick fix is to have an amendment done to your documents to address how they should be interpreted if there is a death in 2010.