Published in the Robert Wood Johnson Foundation newsletter.
By Parag Patel Esq.
Your largest asset may be your retirement plan. But did you know that your retirement plan can be taxed TWICE at your death?
When you plan your estate, it may seem natural to automatically designate a child or other relative as the contingent beneficiary of the account after your death, then use other assets to make a charitable gift.
But there's a tax trap in such an arrangement: The IRS considers the balance left in your retirement account to be untaxed income. The income tax is in addition to estate tax on the retirement account balance. The result of this double taxation? For estates fully subject to the estate tax, up to 70 percent of the value of the retirement plan can be consumed in taxes before your child, relative or friend receives it.
There is a sensible charitable alternative:
Consider naming the RWJ Foundation as the beneficiary of your retirement plan, and use your other non-retirement plan assets, not subject to income tax, to make gifts to your heirs. Since the RWJ Foundation is a exempt organization, it will not pay income tax on the distribution (nor will the gift be subject to estate tax); meanwhile your heirs will receive other assets of your estate without the burden of extra taxes.
Distributions may be made to the RWJ Foundation outright or fund a charitable remainder trust or gift annuity that pays income to your heirs. Be sure to direct the gift to the RWJ Foundation through your plan's beneficiary designation form rather than through your will. If you fail to do so, the assets will be included in your taxable estate.
Talk to your financial advisor and an attorney expert in retirement planning and charitable gifts for more information.
Sunday, January 27, 2008
Supplemental Needs Trusts
Supplemental Needs Trusts, also called a special needs trust, is a trust in the United States that is designed to provide benefits to, and protect the assets of, physically disabled or mentally disabled persons and still allow such persons to be qualified for and receive governmental health care benefits, especially long-term nursing care benefits, under the Medicaid welfare program. Supplemental or Special Needs Trusts are frequently used to receive an inheritance or personal injury litigation proceeds on behalf of a disabled person in order to allow the person to qualify for Medicaid benefits.
Medicaid law Background
Medicaid is the Federal program administered by the states which provides health care for those that can't afford it. See 42 U.S.C. § 1396 et seq. Federal law establishes certain mandatory requirements which each state must adopt in its local Medicaid program, and the states are also given options to elect certain other components in the health care plan which they may decide to provide. Accordingly, Medicaid does vary from state to state in certain aspects, but there are also mandatory Federal law provisions.
One significant governmental benefit which is available only through Medicaid is long-term nursing care which includes care for the physically disabled and the mentally disabled. Long-term nursing care can be extremely expensive. Medicaid is a welfare program. To qualify for Medicaid and its long-term nursing care benefits, the applicant must be “poor” and there is a limit to the countable assets which he or she can own. To qualify for Medicaid, the applicant must meet the asset guidelines for Supplemental Security Income (“SSI”). SSI allows a single applicant to own no more than $2,000 in countable assets and a married applicant to own no more than $3,000 in countable assets. Certain assets are specifically exempted and are not countable.
Trusts as Medicaid countable assets
A trust is a legal arrangement in which legal title to assets is held by a trustee under certain defined restrictions of a governing instrument (usually a will or a written trust agreement) for the benefit of another party known as the beneficiary. Trusts can be used as a vehicle to make assets available to a beneficiary but still significantly restrict them. Recognizing the gray area which trusts can provide concerning the ownership of assets, Federal Medicaid law places significant restrictions on the types of trusts which can be used to preserve assets of a beneficiary and still qualify the beneficiary for governmental benefits.
Prior to the enactment of the Omnibus Budget Reconciliation Act of 1993 (O.B.R.A), P.L. 103-66, it was possible to create a self-settled, discretionary trust for the benefit of the settlor and still allow the settlor to qualify for Medicaid’s long-term nursing care benefits. These trusts were called “special needs trusts” or “supplemental needs trusts” because restrictive language in the trust agreement allowed the trustee to pay only for the support needs of the settlor-beneficiary which the government did not pay. The trust was not for the unrestricted, general support of the beneficiary which is typical in normal estate plans. Special needs trusts were perceived by the United States Congress to be abusive and were effectively abolished by O.B.R.A.
In general, with limited exceptions, regardless of the purposes, provisions, or discretion contained in the trust, a self-settled trust which is created after August 11, 1993 will be treated as an available asset which can disqualify the settlor-beneficiary from Medicaid. 42 U.S.C. § 1396p(d)(2)(C). This means that generally a person cannot create his or her own trust, transfer his or her own assets into the trust, and still be qualified for Medicaid.
Medicaid exempt trusts
Since the effective date of O.B.R.A., only a limited number of trusts can now be used and still preserve an applicant’s Medicaid eligibility. One major distinction should be made when analyzing Medicaid trusts. Trusts created by the disabled beneficiary (or a third party with legal authority over the disabled beneficiary) with the disabled person’s own assets for the disabled person’s own benefit are classified as first-party, self-settled trusts. These types of trusts must be distinguished from trusts created by a third party for the benefit of a disabled individual with the third party’s own assets (such as a grandparent creating a trust for a grandchild). Legal restrictions generally exist for first-party, self-settled trusts which do not exist for third-party trusts.
First-party, self-settled trusts
Most self-settled trusts holding the disabled beneficiary’s own assets created after August 11, 1993 are countable resources for Medicaid. The Medicaid statute, however, provides for three specific types of trusts which can be funded with the applicant’s own assets and which will not disqualify the applicant from Medicaid. These trusts are called “D-4A Trusts” after the subsection of the law which authorizes them. They are also called “Federalized Special Needs Trusts” because the Federal Medicaid statute makes them available in every state.
Because of the requirement that the State be reimbursed for medical assistance, D-4A Special Needs Trusts may have limited utility when the goal is to pass assets of the disabled individual to family members. The main benefit of the D-4A Trusts is to provide a quality of life for the Medicaid beneficiary. Assets can be held in the trust and used to pay for the beneficiary’s special and supplemental needs which the government does not provide, while Medicaid pays the significant medical bills. If the medical assistance provided during life does not turn out to be costly, then upon the death of the beneficiary, there is a chance that assets may be preserved in the trust and pass to loved ones.
Disabled Individual’s Special Needs Trust
Under the provisions of 42 U.S.C. § 1396p(d)(4)(A), a Disabled Individual’s Trust will not be counted as a Medicaid asset even when it is funded with the applicant’s own assets. The requirements for the trust are that the individual must be under age 65 at the time the trust is created (and funded), and disabled under the Social Security definition. Further, the trust must be for the "sole benefit" of the disabled individual. The trust must be created by a parent, grandparent, guardian, or court. Upon the death of the individual, the State Medicaid agency must be reimbursed for the costs of the medical assistance which was provided by Medicaid during the disabled individual's lifetime. This is often called the “payback” provision.
It is important to note that the Disabled Individual’s Trust must be created by a parent, grandparent, guardian, or court. The statute does not allow the disabled individual to create his or her own trust, even if he or she is otherwise legally competent. Action by a third party is required in creating the trust. In this regard, these types of special needs trusts are often established by a court on behalf of a disabled person as a part of or ancillary to a serious personal injury lawsuit.
"Miller" Trust
A "Miller" Trust can be used to qualify a Medicaid applicant with income in excess of the eligibility limit (not imposed in all states) for long-term care assistance from Medicaid. Such a trust is not really a "special needs" trust at all, and is not funded with the beneficiary's assets. The Miller trust can be named as recipient of the individual's income, from a pension plan, Social Security, or other source. The Miller trust takes its name from the Colorado case of Miller v. Ibarra, 746 F. Supp. 19 (D. Colo. 1990), and is specifically sanctioned by 42 U.S.C. § 1396p(d)(4)(B). As with a self-settled special needs trust (referred to above as a "Disabled Individual’s Trust"), upon the death of the beneficiary, the State Medicaid agency must be paid back for its medical assistance from any remaining assets in the Miller trust. An older name for the Miller trust, still occasionally used, is “Utah Gap" trusts, reportedly coined by a Colorado advocate describing the gap between the income cap for eligibility and the actual cost of nursing home care as similar to the yawning chasm between mesas dotting the Southern Utah landscape. The Miller trust is only significant in those states which impose an income cap on Medicaid long-term care eligibility; ironically, Utah is not one of those states. Income caps are in place in about half of the states.
Charitable Pooled Income Special Needs Trust
A Charitable Pooled Income Special Needs Trust is authorized by 42 U.S.C. § 1396p(d)(4)(C). Again, the individual must be disabled under the Social Security definition. Unlike the other exempt trusts which can be administered by a private trustee who is an individual (such as a family member), the Pooled Income Trust is run by a nonprofit association, and a separate account is maintained for each individual beneficiary. All accounts are pooled for investment and management purposes. The trust (or more accurately, an account in the pooled trust) may be created by a parent, grandparent, guardian, or court, and it can also be created by the disabled individual himself. Upon the death of the disabled individual, the balance is either retained in the trust for the nonprofit association or paid back to the State Medicaid agency for its medical assistance.
In some states, a disabled individual over age 65 is entitled to transfer assets to a pooled trust and then be immediately eligible for Medicaid. In other states, the transfer must be made before the disabled individual attains the age of 66.
Third-party trusts
Medicaid law governing trusts is designed to prevent disabled individuals qualifying for benefits while still retaining full control over their assets. A third party, however, is still free to plan with his own assets and either give them outright to a disabled individual or tie them up and restrict them in trust as he sees fit. Accordingly, trusts which are created by a third party with the third party’s own assets to benefit a beneficiary who is on Medicaid have their own separate rules and treatment.
Generally, a properly drafted third-party, discretionary trust is not countable as an asset available to the beneficiary receiving Supplemental Security Income (SSI) and/or Medicaid benefits. Such a trust must be created by a party other than the SSI/Medicaid beneficiary, must not receive any assets belonging to the beneficiary, and must be restricted (not accessible or available) to the beneficiary. The operative principle is whether the trust assets or income are available to the beneficiary. If appropriate trust language is used (and the appropriate language varies from state to state), Medicaid will not treat the resources in the trust as a countable resource. Typically, a third-party trust provides that the trustee is given unfettered discretion to distribute (or not to distribute) principal or income for the benefit of the disabled beneficiary. Often, the trustee is directed only to make distributions for the “supplemental” or “special” needs of the beneficiary or as long as the distributions do not disqualify the beneficiary from governmental benefits. Frequently the trustee will be specifically prohibited from making distributions which provide the beneficiary with food or shelter (the two disqualifying categories under SSI and Medicaid regulations). There is no requirement that the trustee be so restricted, however; it may be preferable in most cases to permit the trustee to make the decision to make distributions which reduce or even eliminate public benefits in cases where the availability of trust resources is more important than continued eligibility for SSI and Medicaid.
A third-party special needs trust should not be drafted as a general support trust or mandate distribution of current income to the beneficiary. In such a case, the trust can be deemed to be “available” and can disqualify the beneficiary from Medicaid. The Medicaid beneficiary should not be given any power to revoke the trust or direct the trustee to make distributions to the beneficiary. The trust can be revocable by the third-party settlor. This means that a parent can fund a trust for a disabled child with the parent’s assets and give it a test run, revoking it later and re-acquiring the assets if the parent decides that it is not serving its purpose. Finally, the third-party trust does not need to include a D-4 “payback” provision reimbursing the State for the medical assistance of the beneficiary upon the beneficiary’s death.
References
http://www.seniorlaw.com/snt.htm
http://www.nsnn.com/frequently.htm
http://www.elderlawanswers.com/elder_info/elder_article.asp?id=2742#6
http://www.wid.org/programs/access-to-assets/fact-sheets/special-needs-or-supplemental-needs-trusts
Medicaid law Background
Medicaid is the Federal program administered by the states which provides health care for those that can't afford it. See 42 U.S.C. § 1396 et seq. Federal law establishes certain mandatory requirements which each state must adopt in its local Medicaid program, and the states are also given options to elect certain other components in the health care plan which they may decide to provide. Accordingly, Medicaid does vary from state to state in certain aspects, but there are also mandatory Federal law provisions.
One significant governmental benefit which is available only through Medicaid is long-term nursing care which includes care for the physically disabled and the mentally disabled. Long-term nursing care can be extremely expensive. Medicaid is a welfare program. To qualify for Medicaid and its long-term nursing care benefits, the applicant must be “poor” and there is a limit to the countable assets which he or she can own. To qualify for Medicaid, the applicant must meet the asset guidelines for Supplemental Security Income (“SSI”). SSI allows a single applicant to own no more than $2,000 in countable assets and a married applicant to own no more than $3,000 in countable assets. Certain assets are specifically exempted and are not countable.
Trusts as Medicaid countable assets
A trust is a legal arrangement in which legal title to assets is held by a trustee under certain defined restrictions of a governing instrument (usually a will or a written trust agreement) for the benefit of another party known as the beneficiary. Trusts can be used as a vehicle to make assets available to a beneficiary but still significantly restrict them. Recognizing the gray area which trusts can provide concerning the ownership of assets, Federal Medicaid law places significant restrictions on the types of trusts which can be used to preserve assets of a beneficiary and still qualify the beneficiary for governmental benefits.
Prior to the enactment of the Omnibus Budget Reconciliation Act of 1993 (O.B.R.A), P.L. 103-66, it was possible to create a self-settled, discretionary trust for the benefit of the settlor and still allow the settlor to qualify for Medicaid’s long-term nursing care benefits. These trusts were called “special needs trusts” or “supplemental needs trusts” because restrictive language in the trust agreement allowed the trustee to pay only for the support needs of the settlor-beneficiary which the government did not pay. The trust was not for the unrestricted, general support of the beneficiary which is typical in normal estate plans. Special needs trusts were perceived by the United States Congress to be abusive and were effectively abolished by O.B.R.A.
In general, with limited exceptions, regardless of the purposes, provisions, or discretion contained in the trust, a self-settled trust which is created after August 11, 1993 will be treated as an available asset which can disqualify the settlor-beneficiary from Medicaid. 42 U.S.C. § 1396p(d)(2)(C). This means that generally a person cannot create his or her own trust, transfer his or her own assets into the trust, and still be qualified for Medicaid.
Medicaid exempt trusts
Since the effective date of O.B.R.A., only a limited number of trusts can now be used and still preserve an applicant’s Medicaid eligibility. One major distinction should be made when analyzing Medicaid trusts. Trusts created by the disabled beneficiary (or a third party with legal authority over the disabled beneficiary) with the disabled person’s own assets for the disabled person’s own benefit are classified as first-party, self-settled trusts. These types of trusts must be distinguished from trusts created by a third party for the benefit of a disabled individual with the third party’s own assets (such as a grandparent creating a trust for a grandchild). Legal restrictions generally exist for first-party, self-settled trusts which do not exist for third-party trusts.
First-party, self-settled trusts
Most self-settled trusts holding the disabled beneficiary’s own assets created after August 11, 1993 are countable resources for Medicaid. The Medicaid statute, however, provides for three specific types of trusts which can be funded with the applicant’s own assets and which will not disqualify the applicant from Medicaid. These trusts are called “D-4A Trusts” after the subsection of the law which authorizes them. They are also called “Federalized Special Needs Trusts” because the Federal Medicaid statute makes them available in every state.
Because of the requirement that the State be reimbursed for medical assistance, D-4A Special Needs Trusts may have limited utility when the goal is to pass assets of the disabled individual to family members. The main benefit of the D-4A Trusts is to provide a quality of life for the Medicaid beneficiary. Assets can be held in the trust and used to pay for the beneficiary’s special and supplemental needs which the government does not provide, while Medicaid pays the significant medical bills. If the medical assistance provided during life does not turn out to be costly, then upon the death of the beneficiary, there is a chance that assets may be preserved in the trust and pass to loved ones.
Disabled Individual’s Special Needs Trust
Under the provisions of 42 U.S.C. § 1396p(d)(4)(A), a Disabled Individual’s Trust will not be counted as a Medicaid asset even when it is funded with the applicant’s own assets. The requirements for the trust are that the individual must be under age 65 at the time the trust is created (and funded), and disabled under the Social Security definition. Further, the trust must be for the "sole benefit" of the disabled individual. The trust must be created by a parent, grandparent, guardian, or court. Upon the death of the individual, the State Medicaid agency must be reimbursed for the costs of the medical assistance which was provided by Medicaid during the disabled individual's lifetime. This is often called the “payback” provision.
It is important to note that the Disabled Individual’s Trust must be created by a parent, grandparent, guardian, or court. The statute does not allow the disabled individual to create his or her own trust, even if he or she is otherwise legally competent. Action by a third party is required in creating the trust. In this regard, these types of special needs trusts are often established by a court on behalf of a disabled person as a part of or ancillary to a serious personal injury lawsuit.
"Miller" Trust
A "Miller" Trust can be used to qualify a Medicaid applicant with income in excess of the eligibility limit (not imposed in all states) for long-term care assistance from Medicaid. Such a trust is not really a "special needs" trust at all, and is not funded with the beneficiary's assets. The Miller trust can be named as recipient of the individual's income, from a pension plan, Social Security, or other source. The Miller trust takes its name from the Colorado case of Miller v. Ibarra, 746 F. Supp. 19 (D. Colo. 1990), and is specifically sanctioned by 42 U.S.C. § 1396p(d)(4)(B). As with a self-settled special needs trust (referred to above as a "Disabled Individual’s Trust"), upon the death of the beneficiary, the State Medicaid agency must be paid back for its medical assistance from any remaining assets in the Miller trust. An older name for the Miller trust, still occasionally used, is “Utah Gap" trusts, reportedly coined by a Colorado advocate describing the gap between the income cap for eligibility and the actual cost of nursing home care as similar to the yawning chasm between mesas dotting the Southern Utah landscape. The Miller trust is only significant in those states which impose an income cap on Medicaid long-term care eligibility; ironically, Utah is not one of those states. Income caps are in place in about half of the states.
Charitable Pooled Income Special Needs Trust
A Charitable Pooled Income Special Needs Trust is authorized by 42 U.S.C. § 1396p(d)(4)(C). Again, the individual must be disabled under the Social Security definition. Unlike the other exempt trusts which can be administered by a private trustee who is an individual (such as a family member), the Pooled Income Trust is run by a nonprofit association, and a separate account is maintained for each individual beneficiary. All accounts are pooled for investment and management purposes. The trust (or more accurately, an account in the pooled trust) may be created by a parent, grandparent, guardian, or court, and it can also be created by the disabled individual himself. Upon the death of the disabled individual, the balance is either retained in the trust for the nonprofit association or paid back to the State Medicaid agency for its medical assistance.
In some states, a disabled individual over age 65 is entitled to transfer assets to a pooled trust and then be immediately eligible for Medicaid. In other states, the transfer must be made before the disabled individual attains the age of 66.
Third-party trusts
Medicaid law governing trusts is designed to prevent disabled individuals qualifying for benefits while still retaining full control over their assets. A third party, however, is still free to plan with his own assets and either give them outright to a disabled individual or tie them up and restrict them in trust as he sees fit. Accordingly, trusts which are created by a third party with the third party’s own assets to benefit a beneficiary who is on Medicaid have their own separate rules and treatment.
Generally, a properly drafted third-party, discretionary trust is not countable as an asset available to the beneficiary receiving Supplemental Security Income (SSI) and/or Medicaid benefits. Such a trust must be created by a party other than the SSI/Medicaid beneficiary, must not receive any assets belonging to the beneficiary, and must be restricted (not accessible or available) to the beneficiary. The operative principle is whether the trust assets or income are available to the beneficiary. If appropriate trust language is used (and the appropriate language varies from state to state), Medicaid will not treat the resources in the trust as a countable resource. Typically, a third-party trust provides that the trustee is given unfettered discretion to distribute (or not to distribute) principal or income for the benefit of the disabled beneficiary. Often, the trustee is directed only to make distributions for the “supplemental” or “special” needs of the beneficiary or as long as the distributions do not disqualify the beneficiary from governmental benefits. Frequently the trustee will be specifically prohibited from making distributions which provide the beneficiary with food or shelter (the two disqualifying categories under SSI and Medicaid regulations). There is no requirement that the trustee be so restricted, however; it may be preferable in most cases to permit the trustee to make the decision to make distributions which reduce or even eliminate public benefits in cases where the availability of trust resources is more important than continued eligibility for SSI and Medicaid.
A third-party special needs trust should not be drafted as a general support trust or mandate distribution of current income to the beneficiary. In such a case, the trust can be deemed to be “available” and can disqualify the beneficiary from Medicaid. The Medicaid beneficiary should not be given any power to revoke the trust or direct the trustee to make distributions to the beneficiary. The trust can be revocable by the third-party settlor. This means that a parent can fund a trust for a disabled child with the parent’s assets and give it a test run, revoking it later and re-acquiring the assets if the parent decides that it is not serving its purpose. Finally, the third-party trust does not need to include a D-4 “payback” provision reimbursing the State for the medical assistance of the beneficiary upon the beneficiary’s death.
References
http://www.seniorlaw.com/snt.htm
http://www.nsnn.com/frequently.htm
http://www.elderlawanswers.com/elder_info/elder_article.asp?id=2742#6
http://www.wid.org/programs/access-to-assets/fact-sheets/special-needs-or-supplemental-needs-trusts
Friday, January 25, 2008
Problems with Joint Tenancy Property
Could joint tenancy, one of the most common forms of holding title to assets, lead to an estate planning disaster for your heirs? Joint tenancy, often called “joint tenants with right of survivorship,” is a form of holding equal interests in an asset by two or more persons. If one joint tenant dies, his or her share generally passes automatically to the other joint tenant(s) by right of survivorship.
Advantages Of Joint Tenancy
Probate avoidance: Title to assets held in joint tenancy passes automatically at the death of one joint tenant to the others. There is no need for a formal probate (unless all the joint tenants die).
Convenience: Bank accounts held in joint tenancy can be withdrawn by any joint tenant. This may be an advantage if one party becomes incompetent due to an accident, a stroke, advanced age, etc.
Potential Disadvantages Of Joint Tenancy
Loss of control: Your will (or trust) will have no effect on joint tenancy assets, even if you change your mind as to the persons you would like to receive your share when you die. Also, the entire asset may be available to the creditors of either joint tenant.
Assets may not reach your children: Quite often assets passing to a surviving joint tenant spouse end up in joint tenancy with a new spouse. The new spouse may ultimately receive all of the assets rather than your children. Also, if the first joint tenant to die had children of a prior marriage, they can be easily cut out of any inheritance by the surviving joint tenant.
Potential tax penalties:
Gift tax penalty: The creation of a joint tenancy in some assets may be subject to gift taxation if the value exceeds the $12,000 annual gift tax exclusion. Gifts to one's spouse are generally not taxable.
Estate tax penalty: A “credit shelter” or “bypass” trust is often used to reduce or eliminate estate taxes for the children or other beneficiaries of a married couple with assets in excess of $2 million. Holding assets in joint tenancy can prevent this type of trust from being effective by passing assets outside the trust.
Income tax penalty: When appreciated assets are sold, capital gains tax is generally paid on the difference between the cost basis and the sales price. Assets included in one's estate receive a new, stepped-up cost basis at the time of death - the value at which the assets are included in the decedent's estate. If these assets are then sold at this higher value, there is no gain, and thus no income tax due. However, assets held in joint tenancy title receive only a partial step-up in basis, on the decedent's share. If the decedent owns the asset alone, the basis of the entire asset will be stepped-up.
Dissolving An Unwanted Joint Tenancy
Because of the many disadvantages of joint property, it is often advisable to terminate such ownership in favor of sole ownership or tenant in common ownership. For bank and brokerage accounts, this involves changing the title of the account and signing new signature cards or similar documents. Dissolving a joint tenancy in real property is generally done by creating a new deed by which the joint tenants transfer their interests to themselves as tenants in common.
However, changing of title to assets can have very serious tax and legal consequences and should be undertaken only after seeking professional advice.
Advantages Of Joint Tenancy
Probate avoidance: Title to assets held in joint tenancy passes automatically at the death of one joint tenant to the others. There is no need for a formal probate (unless all the joint tenants die).
Convenience: Bank accounts held in joint tenancy can be withdrawn by any joint tenant. This may be an advantage if one party becomes incompetent due to an accident, a stroke, advanced age, etc.
Potential Disadvantages Of Joint Tenancy
Loss of control: Your will (or trust) will have no effect on joint tenancy assets, even if you change your mind as to the persons you would like to receive your share when you die. Also, the entire asset may be available to the creditors of either joint tenant.
Assets may not reach your children: Quite often assets passing to a surviving joint tenant spouse end up in joint tenancy with a new spouse. The new spouse may ultimately receive all of the assets rather than your children. Also, if the first joint tenant to die had children of a prior marriage, they can be easily cut out of any inheritance by the surviving joint tenant.
Potential tax penalties:
Gift tax penalty: The creation of a joint tenancy in some assets may be subject to gift taxation if the value exceeds the $12,000 annual gift tax exclusion. Gifts to one's spouse are generally not taxable.
Estate tax penalty: A “credit shelter” or “bypass” trust is often used to reduce or eliminate estate taxes for the children or other beneficiaries of a married couple with assets in excess of $2 million. Holding assets in joint tenancy can prevent this type of trust from being effective by passing assets outside the trust.
Income tax penalty: When appreciated assets are sold, capital gains tax is generally paid on the difference between the cost basis and the sales price. Assets included in one's estate receive a new, stepped-up cost basis at the time of death - the value at which the assets are included in the decedent's estate. If these assets are then sold at this higher value, there is no gain, and thus no income tax due. However, assets held in joint tenancy title receive only a partial step-up in basis, on the decedent's share. If the decedent owns the asset alone, the basis of the entire asset will be stepped-up.
Dissolving An Unwanted Joint Tenancy
Because of the many disadvantages of joint property, it is often advisable to terminate such ownership in favor of sole ownership or tenant in common ownership. For bank and brokerage accounts, this involves changing the title of the account and signing new signature cards or similar documents. Dissolving a joint tenancy in real property is generally done by creating a new deed by which the joint tenants transfer their interests to themselves as tenants in common.
However, changing of title to assets can have very serious tax and legal consequences and should be undertaken only after seeking professional advice.
Tuesday, January 15, 2008
The Expensive NJ Inheritance and Estate Tax
Inheritance and Estate Tax
New Jersey imposes a transfer Inheritance Tax, at graduated rates, on property having a total value of $500 or more which passes from a decedent to a beneficiary.
If a decedent's death occurs on or after January 1, 1985, property passing to a surviving spouse is entirely exempt from the tax. If a decedent's death occurs on or after July 1, 1988, property passing to a decedent's surviving parents, grandparents, children, stepchildren or grandchildren is entirely exempt from the tax. If a decedent’s death occurs on or after July 10, 2004, property passing to a surviving domestic partner (Domestic Partnership Act) is entirely exempt from tax. If a decedent’s death occurs on or after February 19, 2007, property passing to a surviving civil union partner is entirely exempt from tax.
In many instances, if all of a decedent's property passes to a surviving spouse, domestic partner, civil union partner, children, stepchildren, parents, grandparents or grandchildren, it will not be necessary to file an Inheritance Tax return with the Division of Taxation. In such cases, Form L-8 may be used to secure the release of bank accounts, stocks, bonds and brokerage accounts and Form L-9 may be used to secure the release of the State's lien on real property owned by the decedent.
When filing an Inheritance Tax return, Form IT-R should be used for resident decedents, and Form IT-NR should be used for nonresident decedents.
In addition to the inheritance tax, New Jersey imposes a separate Estate Tax. An estate may be subject to the New Jersey Estate Tax even though there is no New Jersey Inheritance Tax payable..
For decedents with a date of death prior to January 1, 2002 the New Jersey Estate Tax was designed to absorb the maximum credit for state inheritance, estate, succession or legacy taxes allowable in the Federal estate tax proceeding. It did not increase the estate's total estate tax obligation.
For decedents with a date of death on or after January 1, 2002 the New Jersey Estate Tax was decoupled from the Federal estate tax proceeding. For more information see New Jersey Estate Tax: Important Provisions and Filing Requirements.
The New Jersey Estate tax is based upon the Federal Estate tax credit for state death taxes which was allowable under the provisions of the Internal Revenue Code in effect on December 31, 2001. The Federal Estate tax does not have a provision providing a deduction for property passing to a domestic partner. However, if the decedent was a partner in a civil union and died on or after February 19, 2007, survived by his/her partner, a marital deduction equal to that permitted a surviving spouse under the provisions of the Internal Code in effect on December 31, 2001, is permitted for New Jersey estate tax purposes. In these cases, the 2006 Form 706 should be completed as though the Internal Revenue Code treated a surviving civil union partner and a surviving spouse in the same manner.
New Jersey imposes a transfer Inheritance Tax, at graduated rates, on property having a total value of $500 or more which passes from a decedent to a beneficiary.
If a decedent's death occurs on or after January 1, 1985, property passing to a surviving spouse is entirely exempt from the tax. If a decedent's death occurs on or after July 1, 1988, property passing to a decedent's surviving parents, grandparents, children, stepchildren or grandchildren is entirely exempt from the tax. If a decedent’s death occurs on or after July 10, 2004, property passing to a surviving domestic partner (Domestic Partnership Act) is entirely exempt from tax. If a decedent’s death occurs on or after February 19, 2007, property passing to a surviving civil union partner is entirely exempt from tax.
In many instances, if all of a decedent's property passes to a surviving spouse, domestic partner, civil union partner, children, stepchildren, parents, grandparents or grandchildren, it will not be necessary to file an Inheritance Tax return with the Division of Taxation. In such cases, Form L-8 may be used to secure the release of bank accounts, stocks, bonds and brokerage accounts and Form L-9 may be used to secure the release of the State's lien on real property owned by the decedent.
When filing an Inheritance Tax return, Form IT-R should be used for resident decedents, and Form IT-NR should be used for nonresident decedents.
In addition to the inheritance tax, New Jersey imposes a separate Estate Tax. An estate may be subject to the New Jersey Estate Tax even though there is no New Jersey Inheritance Tax payable..
For decedents with a date of death prior to January 1, 2002 the New Jersey Estate Tax was designed to absorb the maximum credit for state inheritance, estate, succession or legacy taxes allowable in the Federal estate tax proceeding. It did not increase the estate's total estate tax obligation.
For decedents with a date of death on or after January 1, 2002 the New Jersey Estate Tax was decoupled from the Federal estate tax proceeding. For more information see New Jersey Estate Tax: Important Provisions and Filing Requirements.
The New Jersey Estate tax is based upon the Federal Estate tax credit for state death taxes which was allowable under the provisions of the Internal Revenue Code in effect on December 31, 2001. The Federal Estate tax does not have a provision providing a deduction for property passing to a domestic partner. However, if the decedent was a partner in a civil union and died on or after February 19, 2007, survived by his/her partner, a marital deduction equal to that permitted a surviving spouse under the provisions of the Internal Code in effect on December 31, 2001, is permitted for New Jersey estate tax purposes. In these cases, the 2006 Form 706 should be completed as though the Internal Revenue Code treated a surviving civil union partner and a surviving spouse in the same manner.
Friday, January 11, 2008
New Jersey Inheritance Tax
The State of New Jersey imposes a transfer inheritance tax on property with a total value of $500 or more that passes from a decedent to a beneficiary. This is a tax that applies on the beneficiaries of an estate. It is different from the federal and New Jersey estate taxes that apply on the value of the estate. The estate tax is paid from the assets in the estate before property is distributed to the beneficiaries. The inheritance tax falls on the beneficiaries.
Exemptions and Tax Rates
The New Jersey transfer inheritance tax is levied at graduated rates of from 11% to 16% based on different groups, or classes of beneficiaries. Each class of beneficiaries has its own exemption amount and tax rate.
There are various persons related to the decedent who are entirely exempt from this transfer inheritance tax. They include the surviving spouse or domestic partner, the decedent's parents, grandparents, children, adopted children, stepchildren, and grandchildren. When the decedent's death occurs on or after February 19, 2007, property passing to a surviving civil union partner is also entirely exempt from the tax.
Another class of beneficiaries includes other family members, such as the decedent's brothers, sisters, half brothers and sisters, son-in-law, and daughter-in-law. According to the Bergen County Surrogates Court, these beneficiaries are allowed an exemption of $25,000. The balance of their inheritance is taxed at 11% for the next $1,075,000 and thereafter at rates of from 13% to 16%.
All other beneficiaries who are not included in the groups described above are taxed at 15% for the first $700,000 and then at 16% for proper transfers with a value over that amount.
Transfers of the decedent's property that have a value of less than $500 are exempt. In addition, no New Jersey transfer inheritance tax is due on money or the value of property that a decedent leaves to a charity, an educational institution, church, hospital, library or the State of New Jersey or its political subdivisions.
Exempt and Taxable Property
When the decedent was a resident of New Jersey, taxable property transfers include all real or tangible personal property located in New Jersey or intangible personal property wherever located. If the decedent was not a resident of New Jersey, taxable transfers include real or tangible personal property located in New Jersey. Real and personal property located in another state would not be taxable, and intangible personal property of a nonresident, wherever located, is not taxable.
There are certain types of transfers that are specifically exempt from the New Jersey inheritance tax. As indicated on the website of Kenneth Vercammen & Associates, attorneys in New Jersey, the transfer of real and personal property held in New Jersey by a husband and wife as tenants by the entirety to the surviving spouse is not subject to New Jersey inheritance tax. Intangible personal property such as stocks, bonds, securities, and bank deposits are subject to the inheritance tax if the decedent was a resident of New Jersey, but not when he or she was a nonresident.
The proceeds of a life insurance contract on the decedent, whether a resident or nonresident of New Jersey, that are payable directly to named beneficiaries, and not to the decedent's estate, are exempt from the New Jersey inheritance tax. Life insurance proceeds would also be exempt if they are payable to a trust set up by the decedent during life for the beneficiaries.
Payments from the New Jersey Public Employees' Retirement System, the New Jersey Teachers' Pension and Annuity Fund and the New Jersey Police and Fireman's Retirement System; federal civil service retirement benefits payable to a beneficiary other than the estate; and annuities payable to survivors of military retirees are exempt.
Death benefits paid by the Social Security Administration or Railroad Retirement Board to the surviving spouse are exempt from the New Jersey inheritance tax. An exemption is also provided for payments to a surviving spouse from a pension, annuity or retirement plan the decedent had with his or her employer, that are considered qualified plans under the Internal Revenue Code.
Filing and Payment of Tax
According to the New Jersey Treasury, many times when all of a decedent's property passes to the beneficiaries who are exempt from the inheritance tax (surviving spouse, domestic partner, civil union partner, children, stepchildren, parents, grandparents, or grandchildren), it is not necessary to file an inheritance tax return.
In these cases, Form L-8 can be used to release bank accounts, stocks, bonds, and brokerage accounts. Form L-8 is a Self-Executing Waiver and is filed with the bank, financial institution, or broker. Form L-9 can be used to release the State's lien on real property. Form L-9 is a Real Property Tax Waiver that is filed with the Individual Tax Audit Branch - Inheritance and Estate Tax office in Trenton, New Jersey. These forms can be downloaded from the State of New Jersey Treasury website at www.state.nj.us/treasury/taxation.
When a husband and wife own real estate as tenants by the entirety, the surviving spouse does not have to file a Form L-9, and the property can be transferred at any time. The same applies if the decedent and surviving spouse hold a membership certificate or stock in a cooperative housing corporation as joint tenants with right of survivorship.
If there are beneficiaries subject to the inheritance tax and an inheritance tax return has to be filed, Form IT-R should be used for decedents who were residents of New Jersey and Form IT-NR for nonresident decedents. The inheritance tax return must be filed and the tax paid within eight months of the decedent's death. Any balance of tax due after that period is subject to interest.
Some assets, such as real estate, stocks, and bank accounts, require written consent from the Director of the New Jersey Division of Taxation before they can be transferred. This consent, known as a waiver, applies when Forms L-8 and L-9 described above do not apply. These waivers will not be granted until the inheritance tax has been paid. Normally waivers are not required to transfer automobiles, household goods, personal effects and most employee benefits.
Banks and financial institutions can release up to 50% of any bank account, certificate of deposit, or other account to the survivor, if it is a joint account, or to the executor or administrator of the estate, under a blanket waiver. The blanket waiver does not apply to brokerage accounts with stocks and bonds.
According to the Bergen County Surrogate's Court, once the assets of the estate have been distributed the executor will have the beneficiaries sign a refunding bond and a release. By signing the refunding bond, the beneficiary agrees to return part or all the assets in the unlikely event they are subsequently needed to pay debts of the estate. The release absolves the executor from any liability and allows the estate to be closed.
Exemptions and Tax Rates
The New Jersey transfer inheritance tax is levied at graduated rates of from 11% to 16% based on different groups, or classes of beneficiaries. Each class of beneficiaries has its own exemption amount and tax rate.
There are various persons related to the decedent who are entirely exempt from this transfer inheritance tax. They include the surviving spouse or domestic partner, the decedent's parents, grandparents, children, adopted children, stepchildren, and grandchildren. When the decedent's death occurs on or after February 19, 2007, property passing to a surviving civil union partner is also entirely exempt from the tax.
Another class of beneficiaries includes other family members, such as the decedent's brothers, sisters, half brothers and sisters, son-in-law, and daughter-in-law. According to the Bergen County Surrogates Court, these beneficiaries are allowed an exemption of $25,000. The balance of their inheritance is taxed at 11% for the next $1,075,000 and thereafter at rates of from 13% to 16%.
All other beneficiaries who are not included in the groups described above are taxed at 15% for the first $700,000 and then at 16% for proper transfers with a value over that amount.
Transfers of the decedent's property that have a value of less than $500 are exempt. In addition, no New Jersey transfer inheritance tax is due on money or the value of property that a decedent leaves to a charity, an educational institution, church, hospital, library or the State of New Jersey or its political subdivisions.
Exempt and Taxable Property
When the decedent was a resident of New Jersey, taxable property transfers include all real or tangible personal property located in New Jersey or intangible personal property wherever located. If the decedent was not a resident of New Jersey, taxable transfers include real or tangible personal property located in New Jersey. Real and personal property located in another state would not be taxable, and intangible personal property of a nonresident, wherever located, is not taxable.
There are certain types of transfers that are specifically exempt from the New Jersey inheritance tax. As indicated on the website of Kenneth Vercammen & Associates, attorneys in New Jersey, the transfer of real and personal property held in New Jersey by a husband and wife as tenants by the entirety to the surviving spouse is not subject to New Jersey inheritance tax. Intangible personal property such as stocks, bonds, securities, and bank deposits are subject to the inheritance tax if the decedent was a resident of New Jersey, but not when he or she was a nonresident.
The proceeds of a life insurance contract on the decedent, whether a resident or nonresident of New Jersey, that are payable directly to named beneficiaries, and not to the decedent's estate, are exempt from the New Jersey inheritance tax. Life insurance proceeds would also be exempt if they are payable to a trust set up by the decedent during life for the beneficiaries.
Payments from the New Jersey Public Employees' Retirement System, the New Jersey Teachers' Pension and Annuity Fund and the New Jersey Police and Fireman's Retirement System; federal civil service retirement benefits payable to a beneficiary other than the estate; and annuities payable to survivors of military retirees are exempt.
Death benefits paid by the Social Security Administration or Railroad Retirement Board to the surviving spouse are exempt from the New Jersey inheritance tax. An exemption is also provided for payments to a surviving spouse from a pension, annuity or retirement plan the decedent had with his or her employer, that are considered qualified plans under the Internal Revenue Code.
Filing and Payment of Tax
According to the New Jersey Treasury, many times when all of a decedent's property passes to the beneficiaries who are exempt from the inheritance tax (surviving spouse, domestic partner, civil union partner, children, stepchildren, parents, grandparents, or grandchildren), it is not necessary to file an inheritance tax return.
In these cases, Form L-8 can be used to release bank accounts, stocks, bonds, and brokerage accounts. Form L-8 is a Self-Executing Waiver and is filed with the bank, financial institution, or broker. Form L-9 can be used to release the State's lien on real property. Form L-9 is a Real Property Tax Waiver that is filed with the Individual Tax Audit Branch - Inheritance and Estate Tax office in Trenton, New Jersey. These forms can be downloaded from the State of New Jersey Treasury website at www.state.nj.us/treasury/taxation.
When a husband and wife own real estate as tenants by the entirety, the surviving spouse does not have to file a Form L-9, and the property can be transferred at any time. The same applies if the decedent and surviving spouse hold a membership certificate or stock in a cooperative housing corporation as joint tenants with right of survivorship.
If there are beneficiaries subject to the inheritance tax and an inheritance tax return has to be filed, Form IT-R should be used for decedents who were residents of New Jersey and Form IT-NR for nonresident decedents. The inheritance tax return must be filed and the tax paid within eight months of the decedent's death. Any balance of tax due after that period is subject to interest.
Some assets, such as real estate, stocks, and bank accounts, require written consent from the Director of the New Jersey Division of Taxation before they can be transferred. This consent, known as a waiver, applies when Forms L-8 and L-9 described above do not apply. These waivers will not be granted until the inheritance tax has been paid. Normally waivers are not required to transfer automobiles, household goods, personal effects and most employee benefits.
Banks and financial institutions can release up to 50% of any bank account, certificate of deposit, or other account to the survivor, if it is a joint account, or to the executor or administrator of the estate, under a blanket waiver. The blanket waiver does not apply to brokerage accounts with stocks and bonds.
According to the Bergen County Surrogate's Court, once the assets of the estate have been distributed the executor will have the beneficiaries sign a refunding bond and a release. By signing the refunding bond, the beneficiary agrees to return part or all the assets in the unlikely event they are subsequently needed to pay debts of the estate. The release absolves the executor from any liability and allows the estate to be closed.
Tuesday, January 1, 2008
2008 New Year's Resolutions: Keep your estate planning on the right track
Here are 10 things you can do in 2008 to keep your estate planning on the right track.
1) Last Will and Testament Make sure you have an up-to-date, professionally-prepared Will and/or Living Trust. Keep the original in a safe place and tell other people where that is.
2) Title to Assets and Beneficiary Designations Check your property ownership and beneficiary designations for life insurance, retirement accounts and other assets to ensure that they are coordinated with your will or trust provisions.
3) Durable Power of Attorney Prepare (or have an attorney prepare for you) a comprehensive Durable Power of Attorney. Register it if necessary.
4) Health Care Power of Attorney Even if you don’t currently have a medical condition, prepare (or have an attorney prepare for you) a current Health Care Power of Attorney, valid in your state of residence. Make sure your primary care doctor has a copy and make sure that others know where they can find a copy.
5) Think About What Advanced Directives You Want and Document Them Prepare (or have an attorney prepare for you) a current Living Will or Medical Directive that clearly and accurately states your wishes. Make sure your primary care doctor has a copy and make sure that other know where they can find a copy.
6) Touch Base with your Fiduciaries Make sure you have spoken to your Executors, Trustees, Agents (under a power of attorney), and Guardians named in your estate planning documents to ensure they agree to serve and are aware of your wishes and other necessary information, including the location of the documents and contact information for your attorney.
7) Insurance Review all of your policies, such as life/medical/disability/home/auto, to see if you have adequate coverage. Consider upping the liability limits on your auto insurance and purchasing umbrella liability insurance. Those of you with young children, make sure you have enough life insurance to cover expenses through college (and beyond if they have such graduate-level aspirations). If you are reaching your senior years, take a look at long-term care insurance.
8) Asset Protection Here are few tips lines under one heading (don’t say I never give you anything….):
If you own rental real estate, place it in an LLC.
Avoid large joint accounts.
If you are getting married, talk to an attorney about the advisability of a prenuptial agreement.
Protection your children’s inheritances by keeping the assets in trust for them.
9) Taxes Though you may normally be a do-it-yourselfer, have a CPA or tax attorney review your return to ensure that you are making the most of your deductions and any tax breaks. If your assets exceed $675,000 (including face value of life insurance), make sure you have addressed estate taxes in your estate plan. Do not give over $12,000 a year to anyone without seeking advice as to the gift tax consequences of the gift.
10) Attorney
It doesn’t have to be our firm, but establish a relationship with an attorney whom you can trust and easily communicate. In addition to making sure that they are competent to handle your matter, make sure that you enjoy working with them and move on if they don’t return your phone calls promptly or act annoyed to explain the details to you.
That’s it….get started and sleep better at night.
1) Last Will and Testament Make sure you have an up-to-date, professionally-prepared Will and/or Living Trust. Keep the original in a safe place and tell other people where that is.
2) Title to Assets and Beneficiary Designations Check your property ownership and beneficiary designations for life insurance, retirement accounts and other assets to ensure that they are coordinated with your will or trust provisions.
3) Durable Power of Attorney Prepare (or have an attorney prepare for you) a comprehensive Durable Power of Attorney. Register it if necessary.
4) Health Care Power of Attorney Even if you don’t currently have a medical condition, prepare (or have an attorney prepare for you) a current Health Care Power of Attorney, valid in your state of residence. Make sure your primary care doctor has a copy and make sure that others know where they can find a copy.
5) Think About What Advanced Directives You Want and Document Them Prepare (or have an attorney prepare for you) a current Living Will or Medical Directive that clearly and accurately states your wishes. Make sure your primary care doctor has a copy and make sure that other know where they can find a copy.
6) Touch Base with your Fiduciaries Make sure you have spoken to your Executors, Trustees, Agents (under a power of attorney), and Guardians named in your estate planning documents to ensure they agree to serve and are aware of your wishes and other necessary information, including the location of the documents and contact information for your attorney.
7) Insurance Review all of your policies, such as life/medical/disability/home/auto, to see if you have adequate coverage. Consider upping the liability limits on your auto insurance and purchasing umbrella liability insurance. Those of you with young children, make sure you have enough life insurance to cover expenses through college (and beyond if they have such graduate-level aspirations). If you are reaching your senior years, take a look at long-term care insurance.
8) Asset Protection Here are few tips lines under one heading (don’t say I never give you anything….):
If you own rental real estate, place it in an LLC.
Avoid large joint accounts.
If you are getting married, talk to an attorney about the advisability of a prenuptial agreement.
Protection your children’s inheritances by keeping the assets in trust for them.
9) Taxes Though you may normally be a do-it-yourselfer, have a CPA or tax attorney review your return to ensure that you are making the most of your deductions and any tax breaks. If your assets exceed $675,000 (including face value of life insurance), make sure you have addressed estate taxes in your estate plan. Do not give over $12,000 a year to anyone without seeking advice as to the gift tax consequences of the gift.
10) Attorney
It doesn’t have to be our firm, but establish a relationship with an attorney whom you can trust and easily communicate. In addition to making sure that they are competent to handle your matter, make sure that you enjoy working with them and move on if they don’t return your phone calls promptly or act annoyed to explain the details to you.
That’s it….get started and sleep better at night.
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