FIVE ESTATE MISTAKES
Understanding key concepts can help you save you
from a bad estate plan
Every reader of this article has an estate plan, whether or not they know it. Some have taken a proactive approach and retained counsel to create a plan and draft appropriate documents that express their wishes. The rest — perhaps unknowingly — rely on the laws of the state in which they reside. The laws affecting seniors have become increasingly complex, and it is up to the client to seek appropriate advice at an early date.
Power of attorney
Some may be tempted to download a power of attorney form from the Internet. Anyone can search the Internet for the term “power of attorney” and find Web sites with standardized forms for sale or immediate download. This might sound like a simple solution, but don’t be misled.
The basic power of attorney documents found on the Internet often do not cover the very specific issues you may need addressed. Medical powers of attorney are not always included, nor are clauses about gifting, real estate transactions or the ability to make asset transfers to affect Medicaid eligibility. These are important parts of your estate plan that require case-by-case consideration.
Tax allocation clause
One of the most important provisions in a will is the tax allocation clause, which allocates a decedent’s estate or inheritance tax burden among the estate beneficiaries by specifying the source or fund from which the death taxes are to be paid. The allocation of taxes among beneficiaries of an estate is generally governed by the terms of a testator’s will, a nontestamentary instrument passing nonprobate property or the default rules under applicable state law.
Despite the importance of tax allocation clauses, which can dramatically alter the dispositive provisions of a client’s estate plan, many practitioners rely on general boilerplate tax clause provisions for all clients without fully examining the impact that such clauses have on the plan. Generally, a tax clause contained in a will charges the estate’s tax burden to the residuary estate or apportions the tax burden among the estate beneficiaries in proportion to their share of the estate tax liability. Often, a boilerplate tax allocation clause commonly found in wills charges the testator’s residuary estate under the will with the burden of all taxes imposed on both probate and nonprobate property. An example where a tax allocation clause resulted in a presumably unintended result involved the estate of Charles Kuralt. His 1994 will provided that all estate, inheritance and other death taxes imposed by reason of death would be paid, without apportionment, by his residuary estate. The residuary beneficiaries included his surviving spouse and two children. Shortly before his death, he prepared a handwritten codicil (which was ultimately admitted to probate) that devised his Montana ranch to his longtime companion. Since the terms of Kuralt’s will provided that the taxes were to be paid from the residuary estate, the residuary beneficiaries (his wife and kids) bore responsibility for payment of taxes attributable to the property that passed to the companion.
Special needs trust
Consider establishing a special needs trust if one of your potential beneficiaries is entitled to government benefits such as Supplemental Security Income or Medicaid. Direct receipt of funds will cause the individual to be disqualified, which means the funds will need to be spent down before requalifying for the benefits. This result is particularly harmful for those who incur substantial medical expenses each month.
Consider a situation in which Mom and Dad have three children, one who is disabled. The parents are killed together in an accident and don’t have wills. In most states, the children will be entitled to receive the inheritance in equal shares. Since the disabled child’s share is not diverted to a special needs trust, the result will be disqualification from the entitlement program that he or she may have been otherwise eligible until the funds are spent.
Another situation I handled involved a client in a nursing home, the costs of which are being covered by Medicaid. A family member dies, leaving the ill person an inheritance. Again, the ill person is disqualified from Medicaid. This means that he or she must pay the nursing home bill directly (at a rate of $5,000 to $9,000 per month, depending on the locale) until only $2,000 remains.
State estate tax
Since the state death tax credit was repealed at the federal level through the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), many states have imposed their own estate tax. (It’s important to know that an estate tax differs from an inheritance tax. Some states have both, and some states have neither.)
The planning focus is often on the federal estate tax, and many erroneously believe that tax planning is no longer necessary in light of the current federal estate tax exemption of $2 million. The state estate tax can be avoided in many cases; therefore, you need to take a proactive approach with respect to this issue. In New Jersey, the exemption is $675,000.
Updated documents
When important changes occur in our lives, we need to revisit our wills and beneficiary designations to make sure that our current intent is expressed. The following are major events that might motivate individuals to take a second look at their will:
• Marriage or new life partner
• Divorce
• Birth of a child
• Change of who will inherit your assets
• Change of who should handle your estate after your death
Many have failed to update their documents since the enactment of EGTRRA in 2001. This mistake has caused many surviving spouses to unnecessarily incur state estate tax liability at the death of the first spouse.
Don’t allow your estates to suffer unintended consequences. Become more familiar with the laws affecting you by seeking the advice of an attorney with expertise in this complex area of law.
Showing posts with label Minimizing New Jersey Death Taxes. Show all posts
Showing posts with label Minimizing New Jersey Death Taxes. Show all posts
Thursday, October 15, 2009
Thursday, May 28, 2009
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.
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.
Saturday, November 29, 2008
NEW JERSEY’S DEATH TAX: WHAT ARE MY OPTIONS?
If you die with an estate greater in value than $675,000, your estate will pay New Jersey Estate Tax. In the past, the State’s estate tax was based on and equal to the credit that the federal government would give to an estate for estate tax paid to a state. Wow! That sounds complicated, right?
Well, not really. What that means in English is this, if an estate had to pay $10,000 to New Jersey for estate tax, the federal government would give the estate a $10,000 credit against the federal estate tax that the estate owed to the feds; accordingly, if the total federal estate tax would have been $100,000 without the credit, then the estate would owe New Jersey $10,000 and the feds $90,000. The state estate tax did not increase the overall tax liability of the estate.
On July 1, 2002, that all changed. Since a new federal tax law—passed in June 2001—increased the credit that the federal government gives an estate against federal estate tax and eventually eliminates the federal estate tax and since that same law reduces the credit that the federal government will give to an estate for estate tax paid to a state and eventually eliminates the credit, New Jersey’s estate tax would have disappeared, along with hundreds of million dollars revenue. So, on July 1, 2002, New Jersey passed a new law that freezes the State’s estate tax at the rate that existed on December 31, 2001.
Now, even though the federal government provides a reduced—and eventually no—credit for state estate tax paid, New Jersey will continue to receive its revenue. For some estates, this new law could actually increase the overall tax liability, notwithstanding the federal governments sweeping tax law, which was sold as the death to death taxes.
So, now that you know about New Jersey’s new tax law, how do you plan for it? New Jersey’s elder law attorneys have been discussing the planning options for several months now. Here are some of the options:
Relocate. One suggestion is that you move to another state where the estate tax isn’t so onerous or where there is no state estate tax. I don’t view this option as viable for two reasons. One, I think it’s unlikely that anyone—or at least very few people—would relocate in the twilight years of their life after having lived in a state for most, if not all, of their life just to avoid a death tax. Secondly, the state to which the person moves may—and probably will—change its estate tax law in a manner similar to the manner in which New Jersey modified its law.
Gifts. If you give assets away, the reasoning goes, those assets won’t be included in your estate for purposes of calculating the estate tax. The catch is, the gift must have been made three years prior to the date of death. If the gift was made within three years of death, then the gift is brought back into the estate for purposes of calculating the New Jersey Estate Tax. So, not only would the decedent have lost the benefit of the asset gifted during his/her life if he failed to live for three years after making the gift, the gift still would not escape the estate tax. Gifting is an option, but not a great option.
Credit Shelter Trust. Briefly, a married couple can draft trusts into their Wills that protect each spouse’s applicable exemption against the federal estate tax. In English, if the federal government gives a credit equal to $2,000,000 against federal estate tax, then the credit shelter trust will receive $2,000,000 of assets on the death of the first spouse. If the federal credit were $3,500,000, the trust will receive $3,500,000 on the spouse’s death, and so on.
If the credit against the State death tax is now frozen at $675,000, a trust could be drafted into the couple’s Wills that will be funded with $675,000, and the remainder of the estate of the deceased spouse can pass to the surviving spouse. This type of trust preserves each spouse’s credit against New Jersey Estate Tax and $675,000 of the federal credit.
What I think everyone can agree on is, the new law requires an estate plan to be reviewed if the estate is greater in value than $675,000.
Well, not really. What that means in English is this, if an estate had to pay $10,000 to New Jersey for estate tax, the federal government would give the estate a $10,000 credit against the federal estate tax that the estate owed to the feds; accordingly, if the total federal estate tax would have been $100,000 without the credit, then the estate would owe New Jersey $10,000 and the feds $90,000. The state estate tax did not increase the overall tax liability of the estate.
On July 1, 2002, that all changed. Since a new federal tax law—passed in June 2001—increased the credit that the federal government gives an estate against federal estate tax and eventually eliminates the federal estate tax and since that same law reduces the credit that the federal government will give to an estate for estate tax paid to a state and eventually eliminates the credit, New Jersey’s estate tax would have disappeared, along with hundreds of million dollars revenue. So, on July 1, 2002, New Jersey passed a new law that freezes the State’s estate tax at the rate that existed on December 31, 2001.
Now, even though the federal government provides a reduced—and eventually no—credit for state estate tax paid, New Jersey will continue to receive its revenue. For some estates, this new law could actually increase the overall tax liability, notwithstanding the federal governments sweeping tax law, which was sold as the death to death taxes.
So, now that you know about New Jersey’s new tax law, how do you plan for it? New Jersey’s elder law attorneys have been discussing the planning options for several months now. Here are some of the options:
Relocate. One suggestion is that you move to another state where the estate tax isn’t so onerous or where there is no state estate tax. I don’t view this option as viable for two reasons. One, I think it’s unlikely that anyone—or at least very few people—would relocate in the twilight years of their life after having lived in a state for most, if not all, of their life just to avoid a death tax. Secondly, the state to which the person moves may—and probably will—change its estate tax law in a manner similar to the manner in which New Jersey modified its law.
Gifts. If you give assets away, the reasoning goes, those assets won’t be included in your estate for purposes of calculating the estate tax. The catch is, the gift must have been made three years prior to the date of death. If the gift was made within three years of death, then the gift is brought back into the estate for purposes of calculating the New Jersey Estate Tax. So, not only would the decedent have lost the benefit of the asset gifted during his/her life if he failed to live for three years after making the gift, the gift still would not escape the estate tax. Gifting is an option, but not a great option.
Credit Shelter Trust. Briefly, a married couple can draft trusts into their Wills that protect each spouse’s applicable exemption against the federal estate tax. In English, if the federal government gives a credit equal to $2,000,000 against federal estate tax, then the credit shelter trust will receive $2,000,000 of assets on the death of the first spouse. If the federal credit were $3,500,000, the trust will receive $3,500,000 on the spouse’s death, and so on.
If the credit against the State death tax is now frozen at $675,000, a trust could be drafted into the couple’s Wills that will be funded with $675,000, and the remainder of the estate of the deceased spouse can pass to the surviving spouse. This type of trust preserves each spouse’s credit against New Jersey Estate Tax and $675,000 of the federal credit.
What I think everyone can agree on is, the new law requires an estate plan to be reviewed if the estate is greater in value than $675,000.
Thursday, August 14, 2008
Estate Planning in New Jersey
Estate Planning in New Jersey
You can save a lot of money and potential chaos and hard feelings among those closest to you by preplanning how you want your assets managed when you are incapacitated, and how your property will be divided at your death.
Powers of Attorney
In New Jersey, you can sign a durable power of attorney to appoint someone to handle your assets if you become incapacitated. At a minimum, a power of attorney should include the power to:
Manage and transfer all assets
Deal with the IRS
Make gifts on your behalf
Create and amend any trusts you set up
You don't need to transfer any assets at the time you sign a power of attorney, but it's a good idea to keep the person you've chosen informed about your ongoing financial matters.
You can also appoint a Durable Power of Attorney for Health Care to make health care decisions for you when you're unable to do so yourself. This person can provide informed consent for treatment, or even refuse treatment for you.
Dying Without a Will
If you die without a will (known as dying "intestate") in New Jersey, your assets will be divided amongst your immediate family. If you do not have children or parents, your estate will go to your spouse. If you have a spouse and children, your spouse gets the first $50,000 plus one-half of the balance of your estate. The remainder will go to your children. If you have a spouse and parents but no children, your spouse also gets the first $50,000 plus one-half of the balance of your estate.
If you do not have a spouse, your children will receive your estate. If you do not have a spouse or children, your parents will receive your estate.
Alternatives to a Will
Wills eventually become public after your death, with the details of what you owned and how much it was worth available to anyone curious enough to read the court file. As a result, many people look for more private ways to transfer their assets.
In New Jersey, alternatives to making a will include:
Life insurance policies or trusts
Gifting cash or other assets before your death
"Transfer On Death" ("TOD") or "Payable On Death" ("POD") bank accounts
Holding assets by joint tenancy with right of survivorship ("JTROS"), with the assets transferring automatically to the other joint tenant at the time of death
Holding assets through a tenancy in common, with each tenant having a divided interest in the property which can be independently sold
Retirement plans and Individual Retirement Accounts ("IRAs")
"Revocable living trusts" (sometimes called "grantor trusts"), giving all your assets to a trustee for management before your death
Making a Will
In New Jersey, you can make a valid will if you are at least 18 years old and of sound mind. The will must be in writing and signed by you or by another at your direction and in your presence. Two or more competent witnesses must witness your signature.
A lawyer who does a lot of estate planning can explain the consequences of some of the most basic choices you must make, such as whether property you want to leave to your minor children should be put into a trust at your death. For that reason, it makes sense to consult with a New Jersey estate planning lawyer and have him or her draft your will, so that you don't make costly mistakes or accidentally not accomplish what you intended.
Providing For Young Children
There are many kinds of trusts, but the most common is one you would set up for your minor children or incapacitated adult relatives for their care after you are gone and until they are old enough or well enough to take care of themselves. A parent can name a trustee to be in control of the finances and decide whether to sell or keep property, and manage assets such as real estate. The trustee, usually a family member or trusted friend, can be paid an hourly rate or a set monthly amount for their services out of the trust assets.
You will probably also want to name a guardian for your children, someone who would have physical custody of and take care of your children on a daily basis should you or your spouse be unable to do so.
Probate
"Probate" is the public process of:
Filing and validating a will in court
Paying all the debts and taxes of the deceased person
Dividing up the assets according to the will or New Jersey law
If you have no debts and no "titled property" such as real estate or vehicles to pass along to heirs, there may be no need for probate.
Probate lawyers generally charge by the hour, and they make sure everything gets processed according to the law.
You can save a lot of money and potential chaos and hard feelings among those closest to you by preplanning how you want your assets managed when you are incapacitated, and how your property will be divided at your death.
Powers of Attorney
In New Jersey, you can sign a durable power of attorney to appoint someone to handle your assets if you become incapacitated. At a minimum, a power of attorney should include the power to:
Manage and transfer all assets
Deal with the IRS
Make gifts on your behalf
Create and amend any trusts you set up
You don't need to transfer any assets at the time you sign a power of attorney, but it's a good idea to keep the person you've chosen informed about your ongoing financial matters.
You can also appoint a Durable Power of Attorney for Health Care to make health care decisions for you when you're unable to do so yourself. This person can provide informed consent for treatment, or even refuse treatment for you.
Dying Without a Will
If you die without a will (known as dying "intestate") in New Jersey, your assets will be divided amongst your immediate family. If you do not have children or parents, your estate will go to your spouse. If you have a spouse and children, your spouse gets the first $50,000 plus one-half of the balance of your estate. The remainder will go to your children. If you have a spouse and parents but no children, your spouse also gets the first $50,000 plus one-half of the balance of your estate.
If you do not have a spouse, your children will receive your estate. If you do not have a spouse or children, your parents will receive your estate.
Alternatives to a Will
Wills eventually become public after your death, with the details of what you owned and how much it was worth available to anyone curious enough to read the court file. As a result, many people look for more private ways to transfer their assets.
In New Jersey, alternatives to making a will include:
Life insurance policies or trusts
Gifting cash or other assets before your death
"Transfer On Death" ("TOD") or "Payable On Death" ("POD") bank accounts
Holding assets by joint tenancy with right of survivorship ("JTROS"), with the assets transferring automatically to the other joint tenant at the time of death
Holding assets through a tenancy in common, with each tenant having a divided interest in the property which can be independently sold
Retirement plans and Individual Retirement Accounts ("IRAs")
"Revocable living trusts" (sometimes called "grantor trusts"), giving all your assets to a trustee for management before your death
Making a Will
In New Jersey, you can make a valid will if you are at least 18 years old and of sound mind. The will must be in writing and signed by you or by another at your direction and in your presence. Two or more competent witnesses must witness your signature.
A lawyer who does a lot of estate planning can explain the consequences of some of the most basic choices you must make, such as whether property you want to leave to your minor children should be put into a trust at your death. For that reason, it makes sense to consult with a New Jersey estate planning lawyer and have him or her draft your will, so that you don't make costly mistakes or accidentally not accomplish what you intended.
Providing For Young Children
There are many kinds of trusts, but the most common is one you would set up for your minor children or incapacitated adult relatives for their care after you are gone and until they are old enough or well enough to take care of themselves. A parent can name a trustee to be in control of the finances and decide whether to sell or keep property, and manage assets such as real estate. The trustee, usually a family member or trusted friend, can be paid an hourly rate or a set monthly amount for their services out of the trust assets.
You will probably also want to name a guardian for your children, someone who would have physical custody of and take care of your children on a daily basis should you or your spouse be unable to do so.
Probate
"Probate" is the public process of:
Filing and validating a will in court
Paying all the debts and taxes of the deceased person
Dividing up the assets according to the will or New Jersey law
If you have no debts and no "titled property" such as real estate or vehicles to pass along to heirs, there may be no need for probate.
Probate lawyers generally charge by the hour, and they make sure everything gets processed according to the law.
Thursday, July 17, 2008
The New Jersey Civil Union Act: Tax Benefits?
On February 19, 2007, following the New Jersey Supreme Court’s decision in Lewis v. Harris, New Jersey effectuated the Civil Union Act (hereinafter, “the Act”). The Act grants couples in same sex civil unions equal protection and equal rights to couples in heterosexual marriages. In Lewis, the court unanimously held that although same-sex marriage is not a fundamental right, “committed same-sex couples must be afforded on equal terms the same rights and benefits enjoyed by married couples” and that the legislature amend or implement laws accordingly. New Jersey has decided to create a parallel civil union system rather than attempt to incorporate same-sex marriages within the existing marriage law framework. The Act provides that the legal benefits, protections and responsibilities afforded spouses in heterosexual marriages be granted to spouses involved in civil unions with respect to “laws relating to taxes imposed by the State or a municipality including but not limited to homestead rebate tax allowances, tax deductions based on marital status or exemptions from realty transfer tax based on marital status”.
This Act has vast tax implications affecting same sex couples’ property rights, estate transfer taxes, and income taxes.
Tax Advantages Under the New Jersey Civil Union Act
A. Property Rights
In New Jersey, civil union members can now own residential real estate as tenants by the entirety thereby avoiding probate and transferring full title to the surviving spouse by operation of the law in the event of the death of one of its members. Further, a civil union member can enjoy the tax-free realty transfer benefit afforded to those in a marriage.
Senior citizens and disabled persons in a civil union can now qualify for the Property Tax Reimbursement Program designed to reimburse these persons of property tax increases. Also if a civil union member is 65 years or older or permanently and totally disabled, they become eligible for a $250 local property tax deduction provided that the couple’s combined income is less than or equal to $10,000.
Under New Jersey law, veterans enjoy specialized tax exemptions based on their status as US war veterans. These exemptions are now applicable to the members in a civil union as well under the Act. In other words, a disabled war veteran in a civil union is entitled to a 100% tax exemption of real property taxes, as is his or her survivor in the couple in the event of death. Further, the member who is the survivor to the union of one who died during active duty in a war is entitled to a $250 local property tax deduction.
B. Estate Transfer
In New Jersey, property passing from a decedent to a beneficiary valued at $500 or
more is subject to a Transfer Inheritance Tax. However property passing to the decedents' spouse and child (among others) is exempt from this tax due to their classification as Class A Beneficiaries. Under the Act, members in a civil union will be applicable for this exemption. Further, under state estate tax, the survivor in a civil union can now qualify for the exemption of death taxes incurred on property valued under $675,000. However they are still accountable, as are other married couples, of the federal estate tax on property transferred valued over $2 million.
C. Income Taxes
On a state level, members of the civil union will be able to file either civil
union joint or separate tax returns. Therefore they will qualify for any and all exemptions and deductions provided at the state income tax level. This means that even though members of the civil union do not have to file separately at the state level, they still must do so at the federal level. In general, federal income tax rates are higher than state taxes and filing jointly provides many exemptions for income tax purposes.
The Inequalities That Remain in Taxes between Civil Union Members and Married Individuals
It is important to note that although the Act constitutes a great leap forward for the homosexual community, the advancements marked by this Act come with a large disclaimer. Specifically, federal laws still do not recognize same-sex marriages. As a result, members of civil unions are not qualified as a couple under the federal rules of tax, immigration, social security, bankruptcy and others. For example, members of a civil union do not qualify for the unlimited marital deduction of federal gift taxes between spouses subjecting them to federal gift tax of all transfers over $12,000 within a year.
The addition of New Jersey as the third state recognizing civil unions is an achievement for the homosexual community because a vast number of family issues such as health care, child custody and employment benefits are handled at the state level. However, federal law still treats members of civil unions unequally.
This Act has vast tax implications affecting same sex couples’ property rights, estate transfer taxes, and income taxes.
Tax Advantages Under the New Jersey Civil Union Act
A. Property Rights
In New Jersey, civil union members can now own residential real estate as tenants by the entirety thereby avoiding probate and transferring full title to the surviving spouse by operation of the law in the event of the death of one of its members. Further, a civil union member can enjoy the tax-free realty transfer benefit afforded to those in a marriage.
Senior citizens and disabled persons in a civil union can now qualify for the Property Tax Reimbursement Program designed to reimburse these persons of property tax increases. Also if a civil union member is 65 years or older or permanently and totally disabled, they become eligible for a $250 local property tax deduction provided that the couple’s combined income is less than or equal to $10,000.
Under New Jersey law, veterans enjoy specialized tax exemptions based on their status as US war veterans. These exemptions are now applicable to the members in a civil union as well under the Act. In other words, a disabled war veteran in a civil union is entitled to a 100% tax exemption of real property taxes, as is his or her survivor in the couple in the event of death. Further, the member who is the survivor to the union of one who died during active duty in a war is entitled to a $250 local property tax deduction.
B. Estate Transfer
In New Jersey, property passing from a decedent to a beneficiary valued at $500 or
more is subject to a Transfer Inheritance Tax. However property passing to the decedents' spouse and child (among others) is exempt from this tax due to their classification as Class A Beneficiaries. Under the Act, members in a civil union will be applicable for this exemption. Further, under state estate tax, the survivor in a civil union can now qualify for the exemption of death taxes incurred on property valued under $675,000. However they are still accountable, as are other married couples, of the federal estate tax on property transferred valued over $2 million.
C. Income Taxes
On a state level, members of the civil union will be able to file either civil
union joint or separate tax returns. Therefore they will qualify for any and all exemptions and deductions provided at the state income tax level. This means that even though members of the civil union do not have to file separately at the state level, they still must do so at the federal level. In general, federal income tax rates are higher than state taxes and filing jointly provides many exemptions for income tax purposes.
The Inequalities That Remain in Taxes between Civil Union Members and Married Individuals
It is important to note that although the Act constitutes a great leap forward for the homosexual community, the advancements marked by this Act come with a large disclaimer. Specifically, federal laws still do not recognize same-sex marriages. As a result, members of civil unions are not qualified as a couple under the federal rules of tax, immigration, social security, bankruptcy and others. For example, members of a civil union do not qualify for the unlimited marital deduction of federal gift taxes between spouses subjecting them to federal gift tax of all transfers over $12,000 within a year.
The addition of New Jersey as the third state recognizing civil unions is an achievement for the homosexual community because a vast number of family issues such as health care, child custody and employment benefits are handled at the state level. However, federal law still treats members of civil unions unequally.
Wednesday, July 16, 2008
Summary of New Jersey Estate Taxes
New Jersey Estate Taxes
The New Jersey estate tax was revised on July 1, 2002, and made significant changes to the previous New Jersey estate tax scheme. The changes apply retroactively to decedents dying after December 31, 2001.
The New Jersey estate tax is imposed on resident decedents and is intended to absorb the maximum state death tax credit allowed under federal estate tax law. However, New Jersey has decoupled itself from current federal estate tax laws and no longer has a true "pickup" tax. Instead, the personal representative of the estate can elect to apply either the maximum state death tax credit in effect on December 31, 2001, or an amount determined by the Division of Taxation under the Simplified Tax System.
The New Jersey Domestic Partnership Act, which establishes domestic partnerships for same sex and opposite sex (age 62 and older) unrelated partners, made significant changes to the New Jersey transfer inheritance tax, applicable to decedents dying on or after July 10, 2004. Provided that a valid domestic partnership is established, the Act exempts all transfers made by will, survivorship, or contract to a surviving domestic partner.
However, the New Jersey estate tax is not affected by the Act. The estate tax is based upon the federal estate tax credit for state death taxes allowable under the provisions of the Internal Revenue Code, which does not provide an estate tax deduction for property passing to a domestic partner.
New Jersey also 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. Transfers of property to the surviving spouse of a decedent, and, applicable to estates of decedents dying on or after July 10, 2004, transfers of property to a decedent's domestic partner, are exempt from the New Jersey transfer inheritance tax. Also exempt from the tax are transfers of property to a father, mother, grandparent, child or children, adopted child or children, mutually acknowledged child, stepchild or issue of any child or adopted child of a decedent.
Deductions. The following items can be deducted from a decedent's estate when calculating New Jersey estate tax liability:
decedent's debts
funeral expenses (e.g., burial, funeral luncheon, minister/rabbi, monument, flowers)
ordinary administration expenses (including executors' and attorneys' fees)
state and local taxes up to the date of death
inheritance taxes paid to other states
mortgages (to show actual equity of mortgaged property)
Returns. A New Jersey transfer inheritance tax return (Form IT-R) is due within eight months after the decedent's death. Any taxes owed must be paid within the same eight-month period. A self-executing waiver (Form L-8) is available for surviving spouses and Class A beneficiaries exempt from the tax.
New Jersey estate taxes are due on the decedent's date of death and must be paid within nine months. There are two ways to file an estate tax return: the Form 706 method and the Simplified Tax System (Alternative) method.
The Form 706 method requires that a New Jersey Form IT-Estate is filed along with a 2001 federal Form 706 estate tax return completed according to the provisions of the Internal Revenue Code in effect on December 31, 2001. Using this method, the New Jersey return is due within nine months and 30 days of the decedent's date of death.
The Simplified Tax System method is not intended for use with all estates. It can only be used when federal income and estate tax returns need not be filed. Under this method, a New Jersey Form IT-Estate must be filed within nine months of the decedent's death.
Generation-skipping transfer tax. New Jersey does not impose this type of tax.
The New Jersey estate tax was revised on July 1, 2002, and made significant changes to the previous New Jersey estate tax scheme. The changes apply retroactively to decedents dying after December 31, 2001.
The New Jersey estate tax is imposed on resident decedents and is intended to absorb the maximum state death tax credit allowed under federal estate tax law. However, New Jersey has decoupled itself from current federal estate tax laws and no longer has a true "pickup" tax. Instead, the personal representative of the estate can elect to apply either the maximum state death tax credit in effect on December 31, 2001, or an amount determined by the Division of Taxation under the Simplified Tax System.
The New Jersey Domestic Partnership Act, which establishes domestic partnerships for same sex and opposite sex (age 62 and older) unrelated partners, made significant changes to the New Jersey transfer inheritance tax, applicable to decedents dying on or after July 10, 2004. Provided that a valid domestic partnership is established, the Act exempts all transfers made by will, survivorship, or contract to a surviving domestic partner.
However, the New Jersey estate tax is not affected by the Act. The estate tax is based upon the federal estate tax credit for state death taxes allowable under the provisions of the Internal Revenue Code, which does not provide an estate tax deduction for property passing to a domestic partner.
New Jersey also 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. Transfers of property to the surviving spouse of a decedent, and, applicable to estates of decedents dying on or after July 10, 2004, transfers of property to a decedent's domestic partner, are exempt from the New Jersey transfer inheritance tax. Also exempt from the tax are transfers of property to a father, mother, grandparent, child or children, adopted child or children, mutually acknowledged child, stepchild or issue of any child or adopted child of a decedent.
Deductions. The following items can be deducted from a decedent's estate when calculating New Jersey estate tax liability:
decedent's debts
funeral expenses (e.g., burial, funeral luncheon, minister/rabbi, monument, flowers)
ordinary administration expenses (including executors' and attorneys' fees)
state and local taxes up to the date of death
inheritance taxes paid to other states
mortgages (to show actual equity of mortgaged property)
Returns. A New Jersey transfer inheritance tax return (Form IT-R) is due within eight months after the decedent's death. Any taxes owed must be paid within the same eight-month period. A self-executing waiver (Form L-8) is available for surviving spouses and Class A beneficiaries exempt from the tax.
New Jersey estate taxes are due on the decedent's date of death and must be paid within nine months. There are two ways to file an estate tax return: the Form 706 method and the Simplified Tax System (Alternative) method.
The Form 706 method requires that a New Jersey Form IT-Estate is filed along with a 2001 federal Form 706 estate tax return completed according to the provisions of the Internal Revenue Code in effect on December 31, 2001. Using this method, the New Jersey return is due within nine months and 30 days of the decedent's date of death.
The Simplified Tax System method is not intended for use with all estates. It can only be used when federal income and estate tax returns need not be filed. Under this method, a New Jersey Form IT-Estate must be filed within nine months of the decedent's death.
Generation-skipping transfer tax. New Jersey does not impose this type of tax.
Tuesday, February 5, 2008
A Change in Domicile to Florida Can Help Minimize Taxes
The below article applies to New Jersey, as well as New York
Retirees who have homes in both New York and Florida may be able to reduce or eliminate New York income and estate taxes, and also reduce the real estate taxes on their Florida home by changing their domicile to Florida. The benefit of doing so has been enhanced by the elimination of the Florida estate tax and the repeal of the Florida intangible tax on stocks and bonds, which went into effect on January 1, 2007
It has been further enhanced by the Florida constitutional amendment that places a cap of 3% on any annual increase in assessments applicable to a Florida homestead, but not to a Florida home owned by a New Yorker.
Retirees who have a substantial securities portfolio have benefited from the 15% federal income tax on stock dividends and capital gains. In contrast, both the dividends and capital gains are subject to New York income taxes at a rate as high as 7%. Similarly, Congress has increased the federal estate tax unified credit to $2 million, while New York continues to impose its estate tax on estates greater than $1 million. The failure of New York to give comparable tax relief has motivated many New Yorkers with homes in both New York and Florida to consider a change of domicile to eliminate New York income and estate taxes in their entirety.
Checklist to Determine Eligibility
Not all retirees who own homes in New York and Florida are eligible to elect Florida as their domicile. Domicile is characterized in the New York tax regulations as the place that an individual intends to be his permanent home and the place to which he intends to return whenever he may be absent. The regulations provide that, once established, a domicile continues until the person moves to a new location with the bona fide intention of making his fixed and permanent home there. A person’s declarations are given due weight, but they will not be conclusive if they are contradicted by conduct. For example, the regulations state that registering and voting in one place is important but not necessarily conclusive. Likewise, the length of time customarily spent at each location is important but not conclusive. A person can have only one domicile. If an individual has two or more homes, the domicile is the one regarded and used as the permanent home.
The leading case in New York was decided by the New York Court of Appeals in 1908 (Matter of Newcomb, 192 N.Y. 238). It remains “good law.” Mrs. Newcomb, during a 30-year period, and until she was 80, was domiciled in New York City. She generally resided during the winter in her home in New Orleans and resided during the summer in her residence in New York City. She wanted to make substantial bequests to Tulane University and was concerned that the will might be contested by her relatives. She consulted with a Louisiana attorney, who advised her to change her domicile by making an express declaration in writing to that effect. She signed a declaration stating that New Orleans was her permanent home and her place of domicile. It was argued that Newcomb resided in New York City and merely visited New Orleans, and that her later visits to New Orleans differed in no material respect from those made earlier. It was also argued that she sought to become a nominal resident of Louisiana merely for the purpose of making a Louisiana will and not for making a permanent home. The court rejected that approach and established the following rules for determining domicile when the retiree maintains two residences:
There must be a present, definite, and honest purpose to give up the old place and take up the new place as the domicile.
Every retiree may select and make his or her own domicile, but the selection must be followed by proper action. Motives are immaterial except as they indicate intention.
A change of domicile may be made through caprice, whim, or fancy; for business, health, or pleasure; to secure a change of climate or a change of laws; or for any reason whatsoever, provided that there is an absolute and fixed intention to abandon one and acquire another and that the acts of the persons confirm this intention.
A retiree may elect between a winter and summer residence and make a domicile of either, provided she acts in good faith.
The right to choose implies the right to declare one’s choice, formally or informally, as he or she prefers, and even for the sole purpose of making evidence to prove what the choice was.
No pretense or deception can be practiced, for the intention must be honest, the action genuine, and the evidence clear and convincing. The burden of proof rests upon the party who alleges a change of domicile.
Demonstrating Intent
Retirees who elect to make Florida their permanent residence should demonstrate such intention in a clear and convincing way by taking as many of the following steps as appropriate:
File a declaration of domicile.
File for a Florida homestead exemption.
Obtain a Florida driver’s license and relinquish a New York license.
Acquire Florida license plates and relinquish New York license plates.
Register to vote in Florida and remove oneself from the New York voting rolls.
File a nonresident, rather than a resident, New York income tax return if there is New York–source income.
File a federal income tax return with the IRS Center in Atlanta.
Transfer safe deposit box contents to Florida and close out a New York box.
Open a Florida bank account.
Change credit cards to the Florida address.
Execute a new Florida will, Florida durable power of attorney, and Florida health care proxy.
Refer to Florida residence in all trusts and other legal documents.
Affiliate with Florida organizations and consider disaffiliation with New York ones.
Have family gatherings and social activities centered in Florida rather than New York.
Affiliate with a church or temple in Florida.
If investing in real estate or businesses, focus on areas in Florida rather than New York.
Transfer works of art, expensive furniture, heirlooms, and other valuable personal items to Florida.
Consider acquiring cemetery plots in Florida.
List the Florida residence as the primary residence on all homeowners insurance.
Turn in any New York resident fishing or hunting licenses.
License pets in Florida.
If a retiree is a New York notary public, resign and become a Florida notary public.
Cancel any New York real estate STAR exemption.
Stay in Florida as long as practically possible each year.
Consider acquiring a larger or more expensive home in Florida, or remodeling or redecorating it, and acquiring a smaller or less expensive home in New York, and document any steps taken in doing so.
If a physician has advised that either extremely cold weather or hot, humid weather may be harmful to the retiree’s health, the physician should document the medical issues accordingly.
A change of domicile from New York to Florida will not save any New York income taxes if the retiree is present in New York in a calendar year for more than 183 days. Taxpayers will be considered “statutory residents” of New York only if they maintain a “permanent place of abode” in New York and are present in New York for more than 183 days. A diary should be kept, and a partial day is considered a full day. Therefore, if a retiree leaves New York at 6 a.m. on Friday morning and returns at 11 p.m. Sunday night, he will be considered absent from New York for only one day. In addition to a diary, the burden of proof as to the taxpayer’s physical presence can be onerous. The taxpayer should retain as much documentation as possible to support the entries in the diary. Failure to account for a day will be presumed by auditors to be a day inside New York. There are some exceptions to the general rule, such as when a retiree is confined to a New York hospital or is present in New York only to go to or from an airport.
Savings in New York Income Taxes
Certain income derived from, or connected with, New York sources will continue to be taxable in New York even if paid to the retiree after a change of domicile to Florida. For example, New York will tax items such as the distributable share of income from a former law or accounting partnership and rental income from New York real property. New York will not continue to tax income from annuities, dividends, and interest, even if from New York sources, unless the income is from property employed in a business, trade, profession, or occupation carried on in New York. In 1996, Congress passed legislation that prohibits New York from imposing its income tax on any retirement income of an individual who is no longer a resident or domiciliary of New York. To quantify the savings in New York income taxes, taxpayers may want to restate the most recent New York resident income tax return on a nonresident return and include only New York–source income.
Savings in New York Estate Taxes
The amount of New York estate tax is based on the net taxable estate as shown in the Exhibit. The following simplified examples illustrate the magnitude of the estate tax savings that will result from a change of domicile to Florida:
If a former New Yorker has changed his domicile to Florida and dies with net assets of $10 million (none of which are in New York), his estate will pay federal estate taxes of approximately $3,680,000 and no New York estate taxes.
If that same individual had not changed his domicile to Florida and all his assets are in New York, his estate will pay New York estate taxes of approximately $1,067,600. That amount will be deducted on the federal estate tax return and the federal estate taxes will be reduced from $3,630,890 to $3,190,000. Thus, the estate will pay a total of $4,257,600 versus a total of $3,680,000, a difference of $577,600.
If that same individual has changed his domicile to Florida, but at the time of his death owned a home in New York valued at $1 million, his estate will pay a federal estate tax of $3,630,890 and a New York estate tax of $106,760 for a total of $3,737,650. Thus, the estate pays additional net estate taxes of $57,650 because the home is located in New York. Note the computation of the New York tax starts out with a calculation of a New York tax on all assets wherever located and then applies the applicable percentage (one-tenth of $1,067,600).
A retiree dies in New York with an estate of $1,500,000. His estate will pay a New York estate tax of $64,400. There will be no federal estate taxes because of the $2 million threshold (i.e., equivalent to the federal unified credit). If the decedent had changed his domicile to Florida and had no assets in New York, there would be neither a federal estate tax nor a Florida estate tax. If the $1,500,000 included a New York home valued at $500,000, however, then there would be a New York estate tax of $21,465 (one-third of $64,400).
As indicated in the above examples, even if there is a change of domicile, New York will nevertheless impose a New York estate tax on real property and tangible personal property having any actual situs in New York. If retirees decide to change their domicile to Florida, it may be desirable to transfer the New York home to a limited liability company or other similar entity. Because shares of the limited liability company constitute intangible property, they should not be subject to New York estate taxes even though the entity owns real property in New York.
Marriage and Domicile Change
Most married couples have the same domicile. When a change of domicile occurs, both spouses change their domicile at the same time. The primary residence of one is the primary residence of the other. But consider the situation where they have a home in New York and a home in Florida and the wife stays in Florida from mid-October until mid-May and is not in New York for more than 183 days during a calendar year. On the other hand, the husband returns to their New York home one week a month for business reasons while his wife stays in Florida. As a result, he is in New York for more than 183 days in each calendar year, although his wife is not. The husband and wife file a joint federal income tax return. The husband files a resident New York tax return. The wife has no New York–source income and files no New York tax return. The wife has substantial income from her stocks and bonds. The Florida home is titled in the wife’s name. She files a declaration of Florida domicile, registers to vote in Florida, receives a homestead exemption on her Florida home, and follows many of the items on the checklist. As a result, there is a 3% cap on any increase in its assessment. A New York auditor claims she must pay New York income taxes on the dividends and interest she receives because she has not effectively changed her domicile. The auditor points out that her husband retained a significant tie to a New York business and, therefore, she cannot change her domicile to Florida. The auditor cites the New York tax regulations:
Husband and wife. Generally, the domicile of a husband and wife are the same. However, if they are separated in fact, they may each, under some circumstances, acquire their own separate domiciles even though there is no judgment or decree of separation. Where there is a judgment or decree of separation, a husband and wife may acquire their own separate domicile. [20 NYCRR 105.20(i)(5)]
This regulation should be changed. A 2005 decision of the New York Court of Appeals recognizes that spouses can each elect their own domicile (Glenbriar Co. v. Lipsman, 5 N.Y.3d 388). Although the case involved an issue related to a rent stabilized residence in New York City, its reasoning appears to sanction a change of domicile by one spouse while the other remains a New Yorker.
Caveat
A change of domicile makes the laws of Florida, rather than New York, applicable, including marital rights. Although a New Yorker may have the requisite intent to make a domicile change, if challenged, such intent must be demonstrated by clear and convincing evidence, which requires a high degree of proof. The lack of such evidence may result in not only an assessment, but also substantial interest and penalties. Where the result is uncertain, a change of domicile should not be attempted unless the taxes that will be saved are substantial. No change should be made without professional legal guidance.
By Allan R. Lipman
Allan R. Lipman, JD, is a partner in the Buffalo, N.Y., law firm of Lipman & Biltekoff, LLP, and also has an office in Boca Raton, Fla.
Retirees who have homes in both New York and Florida may be able to reduce or eliminate New York income and estate taxes, and also reduce the real estate taxes on their Florida home by changing their domicile to Florida. The benefit of doing so has been enhanced by the elimination of the Florida estate tax and the repeal of the Florida intangible tax on stocks and bonds, which went into effect on January 1, 2007
It has been further enhanced by the Florida constitutional amendment that places a cap of 3% on any annual increase in assessments applicable to a Florida homestead, but not to a Florida home owned by a New Yorker.
Retirees who have a substantial securities portfolio have benefited from the 15% federal income tax on stock dividends and capital gains. In contrast, both the dividends and capital gains are subject to New York income taxes at a rate as high as 7%. Similarly, Congress has increased the federal estate tax unified credit to $2 million, while New York continues to impose its estate tax on estates greater than $1 million. The failure of New York to give comparable tax relief has motivated many New Yorkers with homes in both New York and Florida to consider a change of domicile to eliminate New York income and estate taxes in their entirety.
Checklist to Determine Eligibility
Not all retirees who own homes in New York and Florida are eligible to elect Florida as their domicile. Domicile is characterized in the New York tax regulations as the place that an individual intends to be his permanent home and the place to which he intends to return whenever he may be absent. The regulations provide that, once established, a domicile continues until the person moves to a new location with the bona fide intention of making his fixed and permanent home there. A person’s declarations are given due weight, but they will not be conclusive if they are contradicted by conduct. For example, the regulations state that registering and voting in one place is important but not necessarily conclusive. Likewise, the length of time customarily spent at each location is important but not conclusive. A person can have only one domicile. If an individual has two or more homes, the domicile is the one regarded and used as the permanent home.
The leading case in New York was decided by the New York Court of Appeals in 1908 (Matter of Newcomb, 192 N.Y. 238). It remains “good law.” Mrs. Newcomb, during a 30-year period, and until she was 80, was domiciled in New York City. She generally resided during the winter in her home in New Orleans and resided during the summer in her residence in New York City. She wanted to make substantial bequests to Tulane University and was concerned that the will might be contested by her relatives. She consulted with a Louisiana attorney, who advised her to change her domicile by making an express declaration in writing to that effect. She signed a declaration stating that New Orleans was her permanent home and her place of domicile. It was argued that Newcomb resided in New York City and merely visited New Orleans, and that her later visits to New Orleans differed in no material respect from those made earlier. It was also argued that she sought to become a nominal resident of Louisiana merely for the purpose of making a Louisiana will and not for making a permanent home. The court rejected that approach and established the following rules for determining domicile when the retiree maintains two residences:
There must be a present, definite, and honest purpose to give up the old place and take up the new place as the domicile.
Every retiree may select and make his or her own domicile, but the selection must be followed by proper action. Motives are immaterial except as they indicate intention.
A change of domicile may be made through caprice, whim, or fancy; for business, health, or pleasure; to secure a change of climate or a change of laws; or for any reason whatsoever, provided that there is an absolute and fixed intention to abandon one and acquire another and that the acts of the persons confirm this intention.
A retiree may elect between a winter and summer residence and make a domicile of either, provided she acts in good faith.
The right to choose implies the right to declare one’s choice, formally or informally, as he or she prefers, and even for the sole purpose of making evidence to prove what the choice was.
No pretense or deception can be practiced, for the intention must be honest, the action genuine, and the evidence clear and convincing. The burden of proof rests upon the party who alleges a change of domicile.
Demonstrating Intent
Retirees who elect to make Florida their permanent residence should demonstrate such intention in a clear and convincing way by taking as many of the following steps as appropriate:
File a declaration of domicile.
File for a Florida homestead exemption.
Obtain a Florida driver’s license and relinquish a New York license.
Acquire Florida license plates and relinquish New York license plates.
Register to vote in Florida and remove oneself from the New York voting rolls.
File a nonresident, rather than a resident, New York income tax return if there is New York–source income.
File a federal income tax return with the IRS Center in Atlanta.
Transfer safe deposit box contents to Florida and close out a New York box.
Open a Florida bank account.
Change credit cards to the Florida address.
Execute a new Florida will, Florida durable power of attorney, and Florida health care proxy.
Refer to Florida residence in all trusts and other legal documents.
Affiliate with Florida organizations and consider disaffiliation with New York ones.
Have family gatherings and social activities centered in Florida rather than New York.
Affiliate with a church or temple in Florida.
If investing in real estate or businesses, focus on areas in Florida rather than New York.
Transfer works of art, expensive furniture, heirlooms, and other valuable personal items to Florida.
Consider acquiring cemetery plots in Florida.
List the Florida residence as the primary residence on all homeowners insurance.
Turn in any New York resident fishing or hunting licenses.
License pets in Florida.
If a retiree is a New York notary public, resign and become a Florida notary public.
Cancel any New York real estate STAR exemption.
Stay in Florida as long as practically possible each year.
Consider acquiring a larger or more expensive home in Florida, or remodeling or redecorating it, and acquiring a smaller or less expensive home in New York, and document any steps taken in doing so.
If a physician has advised that either extremely cold weather or hot, humid weather may be harmful to the retiree’s health, the physician should document the medical issues accordingly.
A change of domicile from New York to Florida will not save any New York income taxes if the retiree is present in New York in a calendar year for more than 183 days. Taxpayers will be considered “statutory residents” of New York only if they maintain a “permanent place of abode” in New York and are present in New York for more than 183 days. A diary should be kept, and a partial day is considered a full day. Therefore, if a retiree leaves New York at 6 a.m. on Friday morning and returns at 11 p.m. Sunday night, he will be considered absent from New York for only one day. In addition to a diary, the burden of proof as to the taxpayer’s physical presence can be onerous. The taxpayer should retain as much documentation as possible to support the entries in the diary. Failure to account for a day will be presumed by auditors to be a day inside New York. There are some exceptions to the general rule, such as when a retiree is confined to a New York hospital or is present in New York only to go to or from an airport.
Savings in New York Income Taxes
Certain income derived from, or connected with, New York sources will continue to be taxable in New York even if paid to the retiree after a change of domicile to Florida. For example, New York will tax items such as the distributable share of income from a former law or accounting partnership and rental income from New York real property. New York will not continue to tax income from annuities, dividends, and interest, even if from New York sources, unless the income is from property employed in a business, trade, profession, or occupation carried on in New York. In 1996, Congress passed legislation that prohibits New York from imposing its income tax on any retirement income of an individual who is no longer a resident or domiciliary of New York. To quantify the savings in New York income taxes, taxpayers may want to restate the most recent New York resident income tax return on a nonresident return and include only New York–source income.
Savings in New York Estate Taxes
The amount of New York estate tax is based on the net taxable estate as shown in the Exhibit. The following simplified examples illustrate the magnitude of the estate tax savings that will result from a change of domicile to Florida:
If a former New Yorker has changed his domicile to Florida and dies with net assets of $10 million (none of which are in New York), his estate will pay federal estate taxes of approximately $3,680,000 and no New York estate taxes.
If that same individual had not changed his domicile to Florida and all his assets are in New York, his estate will pay New York estate taxes of approximately $1,067,600. That amount will be deducted on the federal estate tax return and the federal estate taxes will be reduced from $3,630,890 to $3,190,000. Thus, the estate will pay a total of $4,257,600 versus a total of $3,680,000, a difference of $577,600.
If that same individual has changed his domicile to Florida, but at the time of his death owned a home in New York valued at $1 million, his estate will pay a federal estate tax of $3,630,890 and a New York estate tax of $106,760 for a total of $3,737,650. Thus, the estate pays additional net estate taxes of $57,650 because the home is located in New York. Note the computation of the New York tax starts out with a calculation of a New York tax on all assets wherever located and then applies the applicable percentage (one-tenth of $1,067,600).
A retiree dies in New York with an estate of $1,500,000. His estate will pay a New York estate tax of $64,400. There will be no federal estate taxes because of the $2 million threshold (i.e., equivalent to the federal unified credit). If the decedent had changed his domicile to Florida and had no assets in New York, there would be neither a federal estate tax nor a Florida estate tax. If the $1,500,000 included a New York home valued at $500,000, however, then there would be a New York estate tax of $21,465 (one-third of $64,400).
As indicated in the above examples, even if there is a change of domicile, New York will nevertheless impose a New York estate tax on real property and tangible personal property having any actual situs in New York. If retirees decide to change their domicile to Florida, it may be desirable to transfer the New York home to a limited liability company or other similar entity. Because shares of the limited liability company constitute intangible property, they should not be subject to New York estate taxes even though the entity owns real property in New York.
Marriage and Domicile Change
Most married couples have the same domicile. When a change of domicile occurs, both spouses change their domicile at the same time. The primary residence of one is the primary residence of the other. But consider the situation where they have a home in New York and a home in Florida and the wife stays in Florida from mid-October until mid-May and is not in New York for more than 183 days during a calendar year. On the other hand, the husband returns to their New York home one week a month for business reasons while his wife stays in Florida. As a result, he is in New York for more than 183 days in each calendar year, although his wife is not. The husband and wife file a joint federal income tax return. The husband files a resident New York tax return. The wife has no New York–source income and files no New York tax return. The wife has substantial income from her stocks and bonds. The Florida home is titled in the wife’s name. She files a declaration of Florida domicile, registers to vote in Florida, receives a homestead exemption on her Florida home, and follows many of the items on the checklist. As a result, there is a 3% cap on any increase in its assessment. A New York auditor claims she must pay New York income taxes on the dividends and interest she receives because she has not effectively changed her domicile. The auditor points out that her husband retained a significant tie to a New York business and, therefore, she cannot change her domicile to Florida. The auditor cites the New York tax regulations:
Husband and wife. Generally, the domicile of a husband and wife are the same. However, if they are separated in fact, they may each, under some circumstances, acquire their own separate domiciles even though there is no judgment or decree of separation. Where there is a judgment or decree of separation, a husband and wife may acquire their own separate domicile. [20 NYCRR 105.20(i)(5)]
This regulation should be changed. A 2005 decision of the New York Court of Appeals recognizes that spouses can each elect their own domicile (Glenbriar Co. v. Lipsman, 5 N.Y.3d 388). Although the case involved an issue related to a rent stabilized residence in New York City, its reasoning appears to sanction a change of domicile by one spouse while the other remains a New Yorker.
Caveat
A change of domicile makes the laws of Florida, rather than New York, applicable, including marital rights. Although a New Yorker may have the requisite intent to make a domicile change, if challenged, such intent must be demonstrated by clear and convincing evidence, which requires a high degree of proof. The lack of such evidence may result in not only an assessment, but also substantial interest and penalties. Where the result is uncertain, a change of domicile should not be attempted unless the taxes that will be saved are substantial. No change should be made without professional legal guidance.
By Allan R. Lipman
Allan R. Lipman, JD, is a partner in the Buffalo, N.Y., law firm of Lipman & Biltekoff, LLP, and also has an office in Boca Raton, Fla.
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.
Thursday, April 5, 2007
Watch Out: The NJ Inheritance 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.
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.
Sunday, February 5, 2006
Stretching Your IRA to the Next Generation
It's no secret that retirement accounts come in all shapes and sizes ... from the account that is strictly set aside to generate retirement income to an account earmarked for heirs. For those intending to bequeath their individual retirement account funds to survivors, a change in Internal Revenue Service regulations in January of 2001 (followed by an April 2002 revision) created a wealth-transfer strategy that actually allows for the tax benefits of an IRA to be "stretched" beyond the lifetime of the person who established the IRA.
In the past, IRS law had required non-spouse beneficiaries to completely withdraw IRA assets either within five years of the originator's death or heretofore remaining life expectancy. The stretch IRA allows for the IRA to be passed down several generations over the life expectancies of non-spousal beneficiaries like grandchildren, great-nieces, nephews and others.
The biggest advantage to establishing the stretch IRA is its earning power. The smaller required minimum distributions to younger, non-spouse beneficiaries and the extended time for the investments in IRAs to grow at a compounded, tax-deferred rate allow for the payouts to substantially increase. For example, at an 8 percent annual return, $100,000 inherited by a 20-year-old could translate into distributions totaling $2.9 million during the course of the beneficiary's life expectancy.
Financial institutions should be aware of the stretch IRA for customers for whom it is applicable. It has been around for a while but, surprisingly, it's not being utilized as much as it could be. To make it work, encourage clients to work with estate planning attorneys who have stayed current with these laws.
There are some rather tricky areas in terms of structuring the stretch IRA. For example it is imperative that the IRA remain in the name of the original holder for non-spouse beneficiaries to avoid tax consequences. They cannot simply roll it into their own IRA without tax implications.
"Look-through trust options" add additional flexibility and control for stretch IRAs. There are two effective trust dispositive provisions that "stretch" distributions. The "option" method allows the named beneficiary the option of choosing the amount and timing of the distribution of IRA assets over and above the annual required minimum distribution. The "trustee discretion" method allows for the trustee to distribute additional amounts if the trustee deems advisable in terms of health, education, support and welfare.
Stretch IRAs enhance the element of control a holder can exercise over the disposition of retirement assets. There is no down side for incorporating a stretch IRA into one's financial plan, and the upside can provide ongoing income for several generations.
In the past, IRS law had required non-spouse beneficiaries to completely withdraw IRA assets either within five years of the originator's death or heretofore remaining life expectancy. The stretch IRA allows for the IRA to be passed down several generations over the life expectancies of non-spousal beneficiaries like grandchildren, great-nieces, nephews and others.
The biggest advantage to establishing the stretch IRA is its earning power. The smaller required minimum distributions to younger, non-spouse beneficiaries and the extended time for the investments in IRAs to grow at a compounded, tax-deferred rate allow for the payouts to substantially increase. For example, at an 8 percent annual return, $100,000 inherited by a 20-year-old could translate into distributions totaling $2.9 million during the course of the beneficiary's life expectancy.
Financial institutions should be aware of the stretch IRA for customers for whom it is applicable. It has been around for a while but, surprisingly, it's not being utilized as much as it could be. To make it work, encourage clients to work with estate planning attorneys who have stayed current with these laws.
There are some rather tricky areas in terms of structuring the stretch IRA. For example it is imperative that the IRA remain in the name of the original holder for non-spouse beneficiaries to avoid tax consequences. They cannot simply roll it into their own IRA without tax implications.
"Look-through trust options" add additional flexibility and control for stretch IRAs. There are two effective trust dispositive provisions that "stretch" distributions. The "option" method allows the named beneficiary the option of choosing the amount and timing of the distribution of IRA assets over and above the annual required minimum distribution. The "trustee discretion" method allows for the trustee to distribute additional amounts if the trustee deems advisable in terms of health, education, support and welfare.
Stretch IRAs enhance the element of control a holder can exercise over the disposition of retirement assets. There is no down side for incorporating a stretch IRA into one's financial plan, and the upside can provide ongoing income for several generations.
Monday, July 11, 2005
Tax Bite: New Jersey Has Increased its Death Tax
Everyone has heard of the Federal estate tax, sometimes referred to as the “death tax,” but did you know that New Jersey also has an estate tax? And, did you also know that the New Jersey estate tax has recently been changed to prevent a reduction in that tax which would otherwise have occurred as a result of the 2001 reductions in the Federal estate tax?
The Background: Federal tax law changes made in 2001 call for a gradual increase in the Federal estate tax exemption equivalent (the amount which each individual can pass to his/her heirs without incurring Federal estate tax). In 2001 the Federal exemption equivalent was $675,000. Today, the exemption equivalent is $1.5 million, remaining at that level through 2005. It then increases to $2 million in 2006, 2007 and 2008, and to $3.5 million in 2009. The Federal estate tax is eliminated in 2010, but then returns in 2011 with an exemption equivalent of $1.0 million.
The N.J. estate tax, just like the Federal estate tax, is a “death tax” based upon the value of the deceased individual’s estate. It should not be confused with the N.J. inheritance tax which is another “death tax” but is based upon the relationship between the deceased individual and the beneficiary.
Prior to July 1, 2002, if there was no Federal estate tax due, then there would also be no N.J. estate tax. However, if an estate owed a Federal estate tax, then a portion of the Federal estate tax liability would be paid to New Jersey in the form of the N.J. estate tax and the balance would be paid to the Federal government. The N.J. estate tax did not increase the estate’s death tax liability, but rather, resulted in a “sharing” of the Federal estate tax between the Federal government and New Jersey.
The Change: As a result of the gradually increasing Federal estate tax exemption equivalent, New Jersey was facing potential losses in revenue, since there would be no N.J. estate tax until estates exceeded the increased Federal exemption equivalent. To avoid this loss of revenue, New Jersey amended its estate tax law to provide that the N.J. estate tax will be calculated based upon the Federal estate tax as it existed in 2001 (when the Federal exemption equivalent was $675,000).
The Impact: This change in the N.J. estate tax particularly impacts married couples whose estate tax planning includes Wills incorporating so-called “credit shelter trusts” also referred to as A“by-pass trusts” (i.e., a trust funded with the full amount of the Federal exemption equivalent available to the first spouse to die). If such a trust is funded with an amount greater than $675,000, there will be an immediate N.J. estate tax, whereas prior to the change, no N.J. estate tax was due. In short, where previously taking full advantage of the Federal exemption upon the death of the first spouse to die resulted in no Federal or state estate tax liability, now doing so results in an immediate N.J. estate tax which could range between $64,400 (2004-2005) and $229,200 (2009). In light of the changes, both in the Federal and New Jersey estate taxes, it is important to revisit existing estate plans and reexamine existing Wills and Trusts. Failing to do so could result in an unplanned tax bite.
The Background: Federal tax law changes made in 2001 call for a gradual increase in the Federal estate tax exemption equivalent (the amount which each individual can pass to his/her heirs without incurring Federal estate tax). In 2001 the Federal exemption equivalent was $675,000. Today, the exemption equivalent is $1.5 million, remaining at that level through 2005. It then increases to $2 million in 2006, 2007 and 2008, and to $3.5 million in 2009. The Federal estate tax is eliminated in 2010, but then returns in 2011 with an exemption equivalent of $1.0 million.
The N.J. estate tax, just like the Federal estate tax, is a “death tax” based upon the value of the deceased individual’s estate. It should not be confused with the N.J. inheritance tax which is another “death tax” but is based upon the relationship between the deceased individual and the beneficiary.
Prior to July 1, 2002, if there was no Federal estate tax due, then there would also be no N.J. estate tax. However, if an estate owed a Federal estate tax, then a portion of the Federal estate tax liability would be paid to New Jersey in the form of the N.J. estate tax and the balance would be paid to the Federal government. The N.J. estate tax did not increase the estate’s death tax liability, but rather, resulted in a “sharing” of the Federal estate tax between the Federal government and New Jersey.
The Change: As a result of the gradually increasing Federal estate tax exemption equivalent, New Jersey was facing potential losses in revenue, since there would be no N.J. estate tax until estates exceeded the increased Federal exemption equivalent. To avoid this loss of revenue, New Jersey amended its estate tax law to provide that the N.J. estate tax will be calculated based upon the Federal estate tax as it existed in 2001 (when the Federal exemption equivalent was $675,000).
The Impact: This change in the N.J. estate tax particularly impacts married couples whose estate tax planning includes Wills incorporating so-called “credit shelter trusts” also referred to as A“by-pass trusts” (i.e., a trust funded with the full amount of the Federal exemption equivalent available to the first spouse to die). If such a trust is funded with an amount greater than $675,000, there will be an immediate N.J. estate tax, whereas prior to the change, no N.J. estate tax was due. In short, where previously taking full advantage of the Federal exemption upon the death of the first spouse to die resulted in no Federal or state estate tax liability, now doing so results in an immediate N.J. estate tax which could range between $64,400 (2004-2005) and $229,200 (2009). In light of the changes, both in the Federal and New Jersey estate taxes, it is important to revisit existing estate plans and reexamine existing Wills and Trusts. Failing to do so could result in an unplanned tax bite.
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