Six Estate Planning Myths

The most time-consuming aspect of estate planning is educating clients and dispelling common misconceptions that most people have regarding Wills, Trusts, Estate Taxes and Probate. Over the years, we have identified six recurring misconceptions which many of our clients carry with them into our first conference:


MYTH #1 - "I DON'T HAVE A WILL"

New Jersey law provides a Will for people who die without one. "New Jersey's Will" provides for the following:

The manner in which your property will be distributed among your surviving relatives.


The designation of an administrator who will be responsible for settling the estate.


Guardians for minor children.



MYTH #2 - "I DON'T NEED A WILL"

See Myth #1; do you want the state to dictate:

The manner in which your property is distributed?


Who will be responsible for administering your estate?


Who will be guardians for your minor children?

A Will may also be necessary to minimize Death Taxes. (See Myth #3.)



MYTH #3 - "I HAVE NO FEDERAL ESTATE & GIFT EXPOSURE"

Federal Estate & Gift Tax is generally a concern only where assets (including the face value of life insurance) exceed the "Applicable Exclusion Amount". The Applicable Exclusion Amount is $1,500,000 for 2004 and 2005; $2,000,000 for 2006-2008; and $3,500,000 in 2009. The Federal Estate Tax is repealed in 2010 under current law, but scheduled to be reinstated in 2011 absent further Congressional Action. The Applicable Exclusion Amount in 2011 would only be $1,000,000.


For married couples, there is no Federal Estate Tax exposure at the first death, regardless of the amount of their assets, as long as everything passes to the surrvivor. However, Estate Tax will be due at the second death to the extent assets exceed the survivor's Applicable Exclusion Amount (discussed above). For Example, if Ricky and Lucy have assets valued at $3,000,000, the Federal Estate Tax and New Jersey Estate Tax (discussed below) due when neither is surviving could exceed $840,000. This is the case even though Ricky and Lucy each have a $1,500,000 Applicable Exclusion Amount ($3,000,000 combined).


Married couples need Wills to implement a "Bypass Trust" for the benefit of the survivor in order to preserve the decedent's (i.e., the first person to die) Applicable Exclusion Amount. A Bypass Trust is a trust established under the decedent's Will for the benefit of the survivor. Notwithstanding the survivor's enjoyment of the Bypass Trust assets, none of those assets are exposed to Estate Tax in the survivor's estate. In Ricky and Lucy's case, a Bypass Trust would have eliminated all Federal Estate Taxes, saving the family almost $660,000. However, as a result of recent changes to the New Jersey Estate Tax, fully funding the Bypass Trust would generate a New Jersey Estate tax upon Ricky's Passing.


Effective January 1, 2002, the State of New Jersey will impose an Estate Tax on assets which exceed the New Jersey "Applicable Exclusion Amount". Under old law, the New Jersey Applicable Exclusion Amount was the same as under Federal Law. However, the New Jersey Exclusion is now fixed at $675,000. Accordingly, New Jersey Estate Tax can be due even where no Federal Estate Tax is due. For example, if an individual dies in 2004 with a taxable estate of $1,500,000, there would be no Federal Estate Tax due, but the New Jersey Estate Tax would be $64,400. Moreover, the extent to which Bypass Trusts (discussed above) are funded when one spouse dies must be reassessed in light of the new law. In the example set forth above relating to Ricky and Lucy, setting aside $1,500,000 in a Bypass Trust for Lucy's benefit would be the most advantageous planning technique for Federal Estate Tax purposes, but could potentially generate a New Jersey Estate Tax of $64,400 upon Ricky's passing. Accordingly, the new law greatly affects both estate planning documents and decisions made during the estate administration process.



MYTH #4 - "I HAVE NO NEW JERSEY INHERITANCE TAX EXPOSURE"



Even if there is no Federal Estate & Gift Tax exposure or New Jersey Estate Tax exposure, there may be New Jersey Inheritance Tax exposure. This tax applies to property transferred at death to the following individuals: brothers, sisters, nephews, nieces, cousins and friends. It does not apply to property transferred to children, grandchildren, step-children and parents.

Example: Ricky dies with assets valued at $1,000,000. His Will provides that all of his property will pass to his friend, Ethel. Federal Estate Tax - $0; New Jersey Inheritance Tax - $153,000.



The New Jersey Estate Tax would be $33,200, but Ricky's estate would only be liable for the higher of the Inheritance Tax or Estate Tax. The two taxes are not combined.



MYTH #5 - "I MUST AVOID PROBATE"

In New Jersey, Probate is neither an expensive, nor a time consuming process.


"Probate" is simply the legal process by which an individual's Will is proven as a valid legal document to dispose of that individual's property. This "process" usually consists of a thirty minute meeting at the County Surrogate's office.


Once the Will is "probated", or proven as valid, the decedent's (the person that has died) property can be distributed in accordance with the directions set forth in the Will.



MYTH #6 - "TRUSTS ARE JUST FOR THE WEALTHY"

A Trust is simply a vehicle for separating the legal title and beneficial ownership of property.


A "Trustee" is designated as the person or entity who has legal title to the property placed in that person or entity's "trust".


The "Trustee" must manage the trust property in accordance with the directions set forth in the trust document, for the benefit of the trust's "beneficiary".


Even the simplest Will should contain provisions for a trust to be established to hold property for the benefit of minors.