Estate Planning is a very important process. Most people have worked their entire lives and lived sensibly with the result that they have accumulated some assets that they would like to pass along to their spouse and/or children or other family members or friends. If someone in New Jersey dies without a Will, the State writes a Will for them. This is called “intestacy.” The result of intestacy is seldom what anyone really wants and the process of administering an intestate estate is more complicated than it needs to be. The best plan is to design an estate plan, which would include basic Estate Planning documents such as a Will, Living Will, Power of Attorney and, possibly, a Living Trust.
A Will is a legal document that expresses the individual’s intention with respect to the distribution of property after death. It appoints someone to act as Executor to probate the Will with the Surrogate’s Office and carry out the individual’s wishes as expressed in the Will. Wills should appoint an Executor and a back-up Executor. Co-Executors can also be considered. The Will should address whether the Executor will be compensated and, if so, what that compensation will be. The Will should also appoint a Funeral Representative to make funeral arrangements, if they have not been made at the time of the individual’s death. If a Guardian is necessary for minor or incapacitated persons, this should be addressed in the Will. Compensation for the Guardian should also be addressed.
If there is a Living Trust, the Will typically leaves all assets to the Living Trust and the Living Trust contains dispositive provisions. If there is no Living Trust, the Will contains dispositive provisions.
A Living Trust is established during a client’s lifetime. Typically, the trust is revocable and the client serves as his or her own trustee. In a situation where there is a husband and wife, separate trusts are established for each party. The Living Trust should always name successor trustees in the event the client dies or becomes incapacitated. The successor trustees can serve as sole trustees or as co-trustees. If there is a Living Trust, it should contain dispositive provisions.
It is good practice to identify all beneficiaries setting forth the name of the beneficiary and the beneficiary’s relationship to the client. This is important for tax reasons. In New Jersey there is currently no estate tax for monies left to spouses and lineal ascendants such as parents and grandparents, and lineal descendants such as children, grandchildren, and stepchildren. However, there is an inheritance tax for other beneficiaries. This is why identifying the relationship of the beneficiary to the client is important. If the client has a power of appointment in a Living Trust established by someone else, it is important to determine if the client intends to exercise that power of appointment and, if so, to do so in the Will or Living Trust. If a client is going to disinherit someone such as a child or grandchild, it is important to state who is being disinherited and why in the Will or Living Trust so that the person disinherited doesn’t file a claim against the estate saying they were inadvertently left out.
The Will or Living Trust should address who will receive tangible personal property. If specific bequests are going to be made to children, grandchildren or others, these should be set forth. With respect to the remaining estate, also called the residuary estate, there are a number of options. Will the residuary estate be paid to the spouse outright or to a trust for the spouse? Will the spouse receive the minimum amount necessary to satisfy the elective share? Will monies be left to the spouse in certain trusts to minimize or eliminate federal or state estate taxes? Will a Disclaimer Trust for the spouse be established? Will monies be left to the children outright or in a Bloodline Trust? Will monies be left to minor children in trust until the beneficiary reaches a certain age? Will monies be left to grandchildren in trust? Should the Will or Living Trust include an equalization clause, so that if one person is receiving monies from non-probate assets, additional monies are left to others to equalize for the non-probate assets. If an individual beneficiary dies before the client, who will receive the deceased beneficiary’s share? Will it be descendants of the deceased beneficiary or remaining descendants of the client? Will there be distributions to charities? If retirement accounts are payable to a trust established under a Will or Living Trust, will the trust contain Conduit Trust provisions or Accumulation Trust provisions? How will death taxes be paid? Will they be paid from the residuary estate, from a Disclaimer Trust? Will they be apportioned among beneficiaries? Will the taxes be paid from a QTIP Trust? With respect to descendants, will adopted children, stepchildren or children born out-of-wedlock be included or excluded? If there is a common disaster, shall the husband be presumed to have predeceased the wife, or vice versa?
A Living Will is sometimes known as an Advance Directive or a Medical Power of Attorney. Actually, it is good practice to combine the Advance Directive and Medical Power of Attorney into one document. The Living Will should appoint a Health Care Representative to make medical decisions for a client, if the client is no longer to make them for themselves. There should always be a successor named. It is good practice not to name Co-Health Care Representatives, because if there is a dispute as to whether or not certain medical treatment is to be given or withheld litigation could ensue. The document should indicate if there is no hope of recovery or regaining a meaningful quality of life, whether life-sustaining treatment should be instituted or continued or whether such treatment should be withheld or discontinued. If the client wants life care treatment to be withheld or withdrawn, the document should state whether the document controls or that the Health Care Representative controls, if there is any dispute. If the client indicates that he wants to continue treatment aggressively, even if a doctor says there is no hope, then the document should state that the document should control. If the client wants the Health Care Representative to consult with other family members, the document should so indicate. The document should also cover whether the client wants to make organ donations, an anatomical gift or, in the case of a woman of childbearing years, whether or not she would want to be kept alive artificially until the baby is delivered. A Living Will enables a designated Health Care Representative to make medical decisions for an individual, if they cannot make them for themselves.
The Power of Attorney enables the Agent named in the document to make financial decisions and engage in financial transactions on behalf of the principal. The Power of Attorney should be durable, which means that it remains in effect even after the mental incapacity of the principal. The document should name an Agent and/or Co-Agents, and Successor Agents and/or Successor Co-Agents. Compensation should be addressed, and the powers that the Agent should have should be carefully delineated. Powers should include the right to deal with real estate, securities, retirement plans, safe deposit boxes, gifting (including gifts to agents), operating businesses and/or partnerships, caring for or disposing of pets, environmental hazards, providing for the principal’s incapacitated children, establishing and/or contributing to 529 Plans, dealing with annuities, and establishing ABLE accounts for beneficiaries with disabilities.
In addition to a General Durable Power of Attorney, consideration should be given to carving out limited Powers of Attorney for banking, real estate, and securities. A thorough General Durable Power of Attorney will be approximately 20 pages. No one wants to read 20 pages. A Banking Power of Attorney or Securities Power of Attorney can be 2 or 3 pages. A Real Estate Power of Attorney can similarly be 2 or 3 pages. If the Power of Attorney is used for real estate, it would have to be recorded and County Clerk’s office charge for recording by the page.
The four fiduciaries that need to be considered in connection with Estate Planning are an Executor, a Trustee, a Health Care Representative, and an Agent under a financial Power of Attorney. Upon the death of the client, the Executor’s job is to take the Will to the Surrogate’s Office for probate, gather the assets, pay the bills, file any tax returns that may be required, render an accounting to beneficiaries, and distribute assets in accordance with the Will. Typically, a trusted family member or friend is selected for this job. If the estate is complicated, the Executor can retain the services of a law firm to assist in administration.
The job of the Trustee is to invest trust assets and make distributions in accordance with the terms of the trust document. Often a family member or a friend is selected to serve as Trustee. Age may be a factor. It is helpful if the Trustee can outlive the term of the trust, which usually means living longer than the beneficiary. The Trustee must have sufficient sophistication to manage investments or at least retain the services of a financial advisor to do so. The Trustee must also understand the terms of the trust document can be willing and able to carry them out. Another alternative for a Trustee is a professional. If the trust is large, i.e., $500,000 or more, and is complex, then a Professional Trustee should definitely be considered. A Professional Trustee can handle the investments and will understand the limits on distributions. It is much easier for a Professional Trustee to say no to a beneficiary who is requesting an inappropriate distribution than it is for a family member to do so. Professional Trustees also tend to avoid conflicts of interest. A trust frequently is established for a beneficiary during the beneficiary’s lifetime, but then names the person selected to serve as Trustee as the remainder beneficiary. This incentivizes the Trustee to minimize the distributions made to the initial beneficiary.
The Health Care Representative makes medical decisions if the principal is not able to do so. These decisions can be end-of-life decisions or not. Perhaps the principal is unconscious and the physician recommends surgery, but it is not life-threatening. In other situations the doctors indicate that there is no reasonable hope of recovery or regaining a meaningful quality of life and the family member should interact with the physician to carry out the wishes of the principal. Probably a spouse or child is the appropriate person to serve as Health Care Representative. If someone in the family has a medical background, this is a consideration. If one family member is close by and the other lives far away, this should also be considered.
The Agent under the Power of Attorney makes financial decisions and engages in financial transactions on behalf of the principal. Typically this is a spouse or child. If the principal owns a business, someone with expertise in business, such as a partner, CPA, financial advisor or attorney, might be considered to be a Co-Agent. That person’s authority might be limited to decisions relating to the business.
Non-probate assets are assets that are owned jointly or tenancy by the entirety, life insurance, retirement accounts, annuities, payable on death (POD) accounts, and transfer on death (TOD) accounts. Joint accounts and tenancy by the entirety pass automatically to the surviving joint owner or tenant by the entirety. Life insurance, retirement accounts, annuities, POD accounts, and TOD accounts pass to the named beneficiary. All other assets are considered probate assets and pass through the estate of the decedent. It is very important to coordinate non-probate assets and beneficiary designations with the dispositive plan in the Will or Trust of the decedent.
In 2020 the federal estate tax exemption is $11,580,000. For a married couple, it is essentially double. The New Jersey estate tax has been repealed, but the New Jersey inheritance tax remains in effect. It is very possible that in the near future, because of the pandemic, the federal estate tax exemption will be reduced and the New Jersey estate tax may be reinstated. Income tax planning is always important, but now even more so because of the provisions of the SECURE Act discussed below.
If a client leaves assets to children, the assets can be subject to claims of creditors, can become entangled in divorce, and if the child dies the inherited assets can be left to the child’s spouse who then may remarry and leave the inherited assets to his or her new spouse effectively disinheriting the client’s grandchildren. Consideration should be given to leaving significant assets to children in a Bloodline Trust. The trust protects the assets from claims of creditors, claims of equitable distribution, squandering of assets by children, and preserves the inheritance for grandchildren rather than sons- or daughters-in-law and future spouses of sons- and daughters-in-law.
Blended families present a particularly difficult problem with respect to Estate Planning. Typically a blended family consists of a second or subsequent marriage where each spouse has children from prior marriages. The spouses love one another and trust one another and feel they can leave assets to the surviving spouse who will then take care of the client’s children by the prior marriage. Experience has shown that in a very high percentage of the cases, this is not the outcome. The better way to plan for a blended family situation is for each spouse to establish a trust for the benefit of the surviving spouse. The trustee could be a child from each spouse’s family serving as co-trustees. The surviving spouse could take as much money as is necessary for the surviving spouse’s health, education, maintenance, and support from the trust, but on the death of the surviving spouse the remaining funds would go to the children of the first spouse to die. If one spouse owns the home in their own name, the surviving spouse could be given the right to use and occupy the home for as long as he or she lives, unless he or she remarries or cohabits, provided the surviving spouse pays all of the bills in connection with the home, such as real estate taxes, insurance, utilities, etc.
Frequently spouses or children who are intended as beneficiaries of an estate are receiving means-tested public benefits, such as Supplemental Security Income (SSI) and Medicaid. There is an asset limit of $2,000 for eligibility for these programs. If someone dies and leaves a beneficiary receiving these benefits money, they will lose the benefits. The solution is to establish a Third Party Special Needs Trust to hold the assets for the benefit of the disabled beneficiary. Assets in the trust are not counted for SSI and Medicaid eligibility purposes. A professional trustee should always be considered where there is a disabled beneficiary. For small trusts (i.e., under $500,000) there are disability organizations that can serve as trustee. For large trusts the disability organizations or a bank specializing in Special Needs Trusts could be named to serve as trustee. Family members generally make poor trustees of Special Needs Trusts and have a large target on their backs. If the family member administers the trust improperly, he or she can be sued by Social Security and/or Medicaid.
Clients frequently want to leave money to their grandchildren. People often think they’ll leave money to their children who will then take care of the grandchildren. However, a gift to grandchildren directly, however small, reinforces the special bond between grandparents and grandchildren. The gift can be a small sum of money and can be held by the parent as custodian until the grandchild reached a certain age (e.g., 18 or 21) or the gift can be large and left in a trust for whatever purpose is desired (e.g., payment of educational expenses).
Sometimes parents have made gifts or loans to one child (e.g., to use as a down payment on a home) and to equalize that gift in their Will. Any outstanding balance on the loan can be forgiven and the children who did not receive a gift or loan can be given an extra share equal to the gift or loan amount.
A Retirement Plan Trust should be considered where there is a significant retirement account (i.e., $500,000 or more). By leaving the retirement account to a Retirement Plan Trust, the distributions to the children who are the beneficiaries of the trust can be limited to the Required Minimum Distribution (RMD) so that the money is not squandered. The money in the trust can also be protected from the children’s creditors, divorce, remarriage of children’s spouses, etc. Prior to the SECURE Act, parents could establish stretch IRAs for their children. The children could then take the money out of the retirement account over the child’s life expectancy. Under the SECURE Act, with certain exceptions, monies must be withdrawn from the retirement account with 10 years. Exceptions include spouses, minor children, individuals with disabilities, individuals with chronic illnesses, individuals less than ten years younger than the Plan Participant. There are two types of clauses to be considered in a Retirement Plan Trust. One is a Conduit Trust. This means that all of the monies withdrawn from the retirement account must be distributed to the beneficiaries in the year of their withdrawal. The advantage is the beneficiary typically pays tax at a lower rate than the trust. The disadvantage is that the distributions receive greater protection while in the trust. The other type of trust is an Accumulation Trust. This trust gives the trustee the right to accumulate withdrawals from the retirement account in the trust. The disadvantage is that the trust may pay higher taxes than the beneficiary. The advantage is that withdrawals receive greater protection while in the trust.
If the client owns a business the succession plan should be reviewed, or if one does not exist, should be designed. Business entity records should be kept up to date. There should be a Shareholder’s Agreement or an Operating Agreement. There should be Employment Agreements for the client and all key employees. Consideration should be given to having a business valuation.
Many clients are charitably inclined and intend to make a gift to charity on death. The best way to do this is to name a charity as a beneficiary of a portion of a retirement account, because the charity will pay no estate or income tax on the gift. If that strategy is not possible, then the charity or charities can be named in the Will or Living Trust. The client should give careful consideration to which charities he or she wants to name and how much to leave to each charity. The gives can be lump sums or a percentage of the estate.
For older clients, and by that the authors mean clients age 75 or above, or any client having a diagnosis indicating an eventual need for long-term care, consideration should be given to incorporating a Long-Term Care Planning in with Estate Planning. For example, an Irrevocable Trust should be established and the residence transferred to the trust. If this is done five years prior to applying for Medicaid, the home would be protected. If the home were transferred to the trust four years before needing long-term care the client would have to pay one year before applying for Medicaid, but it is cheaper to pay for one year than it is to pay for five years. The deed transferring the residence to the trust would retain a right for the client to use and occupy the home for the rest of his or her life and contain the obligation on the part of the client to pay all costs and expenses of maintaining the home. If the client has income-producing assets, an irrevocable Income Only Trust could be established and income-producing assets transferred to that trust. The client will reserve the right to the income produced by those trust assets. New Jersey has a broad definition of “estate” for estate recovery purposes. This means that Medicaid would recover from the assets in the Income Only Trust on the death of the Medicaid recipient. To avoid this result, prior to applying for Medicaid the trustee would distribute the assets in the Income Only Trust out to beneficiaries other than the Medicaid applicant or spouse. There would be a Medicaid penalty based on the amount of income being produced by the trust multiplied by the remaining life expectancy of the Medicaid recipient.
Make a list of tangible personal property. One column should include the item, and an opposite column should include the name of the recipient. The list must be signed and dated. The Will will incorporate the list by reference.
Provide an informational memo to the fiduciary indicating the location of all important documents, list of persons to notify upon death, list of telephone numbers, security system companies, security codes, etc. in connection with real estate, information pertaining to life insurance and annuities, information pertaining to property insurance, medical insurance, retirement accounts, business interests, inventory of safe deposit box, personal property, outstanding loans or debts, pets, and a list of all passwords for digital assets.
Be sure to put your Will and/or Living Trust in a safe place. This could be a safe deposit box, a fireproof box at your home, or a vault in your attorney’s office.
Consider retaining the services of a financial advisor to manage your investments. Yes they charge a fee, but they usually obtain far superior investment results and payment of the fee is worthwhile.
Make an analysis of life insurance. This could be done with your financial advisor, life insurance agent, or attorney. Is your life insurance term insurance or whole life insurance? Term insurance makes sense for younger clients, because the premiums are cheaper. However, only a small percentage of beneficiaries ever collect on term insurance. Whole life insurance may be important as the client gets older. Whole life insurance is particularly important, if business assets are involved or if the client has a beneficiary with disabilities. Life insurance is a wonderful asset to fund a Special Needs Trust.
If a client has significant assets, he or she should consider protecting them with an umbrella liability policy.
If a client is still working, disability insurance should be considered.
Traditional long-term care insurance policies are much less attractive than they were originally thought to be many years ago. However, there are hybrid policies that are sold in connection with life insurance policies or annuities that may be worth exploring with a financial advisor or insurance agent.
The single biggest mistake that the authors’ office sees in Estate Planning is that the lawyer who prepared the previous documents failed to ask the right questions. Clients work hard for their whole lives, they live sensibly, and the estate plan should be done thoroughly to help the clients achieve their goals.
In New Jersey the spouse of a deceased individual is entitled to an elective share, which is typically about one-third of the estate. If the client fails to leave the spouse the elective share, the spouse can bring a lawsuit against the estate to obtain it. The situation should be carefully analyzed.
On occasion a client wants to disinherit a child or grandchild. While this is heartbreaking, it should be done carefully. The person or persons to be disinherited should be named and the reason given for the disinheritance. The reason may simply be that the client is estranged from the person, or there may be other reasons. If the disinherited person is not specifically named, they may bring a lawsuit claiming that they were left out of the Will or Living Trust inadvertently.
If money is left outright or in a Support Trust to a children, grandchildren, or other beneficiaries with disabilities, they may lose their benefits. A Third Party Special Needs Trust must be considered, but is frequently overlooked. Usually this is because the attorney didn’t ask the right questions.
Frequently money is left outright to a second or subsequent spouse when there are children from a previous marriage. The client trusts the second spouse to take care of the client’s children, but frequently the second spouse immediately changes his or her Will to disinherit the children of the deceased spouse.
There is a 70% chance that an individual will require long-term care. This could be home care, assisted living, or a nursing home. Most clients put their heads in the sand and declare, “I am never going to a nursing home.” Everyone in a nursing home made a similar declaration. There is a 70% those individuals will be wrong. All of the hard-earned money that is saved can be used for long-term care with nothing left for spouses and children. Careful planning should be considered.
It is good practice to try to roughly balance the estates of husband and wife, especially if New Jersey estate tax is a consideration. This is frequently overlooked.
Beneficiary designations on life insurance, retirement accounts, annuities, POD accounts, and TOD accounts must be carefully coordinated with Wills and Trusts. This is frequently overlooked.
Out-of-state real estate should be transferred to a Living Trust. If the out-of-state real estate remains in the name of the client, the client’s Will must be probated in New Jersey and then again in the state in which the real estate is located. By transferring the out-of-state real estate to a Living Trust, the ancillary probate in the second state can be avoided.
On the death of the decedent, the executor should obtain multiple original death certificates, usually from the funeral home, and additionally should determine whether the decedent had a Will. The executor then takes the original Will, an original death certificate, and a blank check, which will probably be in the neighborhood of $200, to the Surrogate’s Office of the county in which the decedent resided at the time of his or her death. The executor fills out a form for the Surrogate and receives Executor’s Short Certificates. One Short Certificate is needed for each financial institution with which the executor will deal. After being appointed as executor, one of his or her first tasks will be to send notices to all beneficiaries named in the Will notifying them of such.
Next, the executor then must determine whether the spouse is entitled to an elective share, whether the spouse is a U.S. citizen, whether there has been a divorce after the date of the Will, whether there is a Prenuptial Agreement, and whether the spouse will be disclaiming any assets to which he or she is entitled. The executor should determine whether any of the beneficiaries are receiving Medicaid, whether they are disabled, or if there is any pending litigation against the estate. The executor must also determine if there are any real or potential environmental claims against the estate. The executor must determine if there is a safe deposit box and if it should be closed. If there is a safe deposit box, an inventory of the contents of the box must be made. The executor should obtain a tax id number for the estate and open an estate checking account.
Another duty of the executor is to determine who will file the income tax returns for the decedent’s life. This would include the year of death and any prior years for which returns have not been filed. If the decedent owned real estate in another state that was not transferred to a Living Trust, ancillary probate proceedings in that state must be commenced. IRS Forms 56 and 2848 must be filed where appropriate. Social Security must be advised of the death of the Social Security recipient. Typically funeral homes do this, but the executor should check to be sure. If the decedent is receiving veteran’s benefits, the executor must notify the Veterans Administration of the decedent’s death and determine the status of any veteran’s benefits and insurance. If a charity is a beneficiary, a letter must be sent to the charity requesting the taxpayer identification number and the NJ State Attorney General should be advised that a charity has been named as beneficiary.
All estate assets must be valued as of the decedent’s date of death, and real estate should be appraised. Plan administrators of any retirement accounts should be contacted to determine beneficiaries and arrange for distributions in accordance with the Will or Living Trust and beneficiary designations. The Blue Book value of any automobiles must be obtained. If the decedent owned a business, a Buy-Sell Agreement should be obtained and the procedures outlined in the agreement should be followed. The executor must determine if the decedent is entitled to any refunds and if so obtain those refunds. The executor should prepare an estate inventory and distribute it to estate beneficiaries. The executor should contact the state unclaimed property to determine if the estate is entitled to any unclaimed property. Appropriate tax returns must be filed with the Internal Revenue Service and the New Jersey Estate Tax Bureau. A determination must be made as to whether tax returns must be filed in any other states.
A Charles Jones search must be ordered to determine if there are any outstanding liens against the decedent and to determine if there are any unpaid child support obligations on record for any beneficiaries. Such obligations must be paid by the estate before that particular beneficiary can receive his or her remaining inheritance from the estate. The executor should calculate the amount of his or her executor’s commissions. The executor is entitled to 5% of the first $200,000 of the state, 3.5% of the next $800,000, and 2% of the balance. Commissions are calculated only on probate assets. The executor must distribute tangible personal property in accordance with the list, and make distribution of specific bequests and residuary distributions. The executor should obtain a Release and Refunding Bond from each beneficiary prior to making distribution. The executor should also provide an informal accounting to beneficiaries or obtain a Waiver of Accounting and Release from each beneficiary prior to releasing any funds. Last, all signed Release and Refunding Bond forms must be filed with the County Surrogate’s Office in order to close the estate once all estate funds have been distributed to beneficiaries are all debts and taxes of the estate have been paid.