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Estate Administration by the Use of the New Federal Tax Portability Option

Friday, September 30th, 2011

By:  Fredrick P. Niemann, Esq., a New Jersey Estate Planning Attorney

This is the 2nd part of a three part series on credit shelter trusts and the new federal estate tax portability laws.

Portability vs. Credit Trust Costs

Portability may actually increase the cost of administration by requiring the filing of an estate tax return that otherwise would not be necessary.  For example, assume that a husband dies in 2011 or 2012 with an estate of $3 million, all of which he leaves to his wife, who has an estate of $3 million.  No estate tax return is required because the husband’s estate is less than his applicable exclusion.  In order for the wife to make use of the husband’s DSEUA, a timely estate tax return must be filed with the appropriate irrevocable election.  The cost of preparing an otherwise unnecessary estate tax return could easily equal or exceed the cost savings of not including a credit trust in the husband’s estate plan.  Moreover, complexity is actually increased because the client must not only file an otherwise unnecessary estate tax return but that return must be filed timely and must contain the appropriate election.

Reliance on portability in lieu of the use of credit shelter trusts creates several other problems as well.  Although the 2010 Tax Act provides that the $5 million applicable exclusion amount is subject to an inflation adjustment, that adjustment ceases to apply once the taxpayer dies.  Unlike a credit trust that shelters post-death appreciation in value, the amount of the DSUEA is fixed as of the date of the pre-deceased spouse’s assets.

If for example, the husband who dies in 2011 with an estate of $3 million, all of which is left to a window with a separate estate of her own of $3 million, assume that the husband’s assets appreciate in value to $3 million and the widow dies on December 31, 2015.  Had the husband left his estate in a credit shelter trust, the entire appreciated value of the assets would have been excluded from the widow’s taxable estate, as well as having been exempt from the generation-skipping transfer tax.  Because the parties relied on portability, the husband’s exemption is fixed at $5 million.

In our next post we will look at the subject of portability as it applies to blended families.

For more information, please contact Fredrick P. Niemann, Esq. toll free at (888) 800-7442 or e-mail him at fniemann@hnlawfirm.com.

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Estate Administration by the Use of the New Federal Tax Portability Option

Wednesday, September 21st, 2011

By: Fredrick P. Niemann, Esq., a New Jersey Estate Planning Attorney

         
This is the first part of a three part series on credit shelter trusts and the new federal estate tax portability laws.

Does portability mean the end of the “Credit Shelter Trust”?

The answer is no!  The 2010 Tax Act has made it possible for the estate of a surviving spouse to make use of the unused estate tax exemption of his or her predeceased spouse. Some have suggested that portability makes it unnecessary to continue to draft estate plans that include credit shelter trusts.

Understanding portability involves understanding two new estate tax terms:  the basic exclusion amount and the deceased spousal unused exclusion amount (DSUEA).

The new $5million estate tax exclusion is available for people dying beginning January 1, 2011, and December 31, 2012.  Portability will exist only if both spouses die within the next 18 months.

A second issue may make use of his or her predeceased spouse’s exclusion, if the predeceased spouse’s estate files a timely estate tax return.  Advocates of using portability in lieu of credit trusts argue that portability reduces the cost of estate planning because plans relying on portability will be simpler documents to draft and the survivor will be faced with less post-death complexity because the number of trusts the survivor must contend with will be reduced.  Both assumptions are questionable.

In our next post we will discuss why.

For more information, please contact Fredrick P. Niemann, Esq. toll free at (888) 800-7442 or e-mail him at fniemann@hnlawfirm.com.

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Beware the Beneficiary Form

Wednesday, September 21st, 2011

Part 3 of 4
By: Fredrick P. Niemann, Esq.
         
This is the third post of a four part series on estate planning by use of a beneficiary designation form.

Avoid leaving assets to minors outright. Also avoid disabled people, and in certain cases, your estate or spouse.  If you do, a court will appoint someone to look after the funds, a cumbersome and often expensive process.  Also think about what can happen when the money reverts to the child at age 18 or 21, depending on the state.

I’ve seen 18-year olds receive proceeds from life insurance policies.  While one of them still has her money, “the other two bought and wrecked brand new cars, splurged on clothes, and champagne, lent money to friends and generally went from $150,000.00 to actually owing money in just one year.”  The problems could have been avoided if the parents had set up trusts for the kids payable at, say age 30, and named the trusts as beneficiaries of the life-insurance policies.

Disabled children and adults-require “special or supplemental needs trusts” that preserve their ability to receive government benefits, as even a small outright inheritance can prevent them or disqualify them from getting public aid and assistance.

For retirement plans, the biggest mistake is to name your estate as beneficiary, because that means when you die, the full amount of the plan must be paid out and taxed within five years. Individual beneficiaries, by contrast, could stretch out the distributions and the taxes for decades.  Because many people have a large portion of their assets in retirement accounts, they also should be sure that the combination of the distribution arrangements on those accounts and their wills provide for family members as they wish, particularly in complex situations such as a second marriage when there are children from the first union.

Beneficiary designations are crucial to estates in New Jersey.  For more information please contact Fredrick P. Niemann, Esq. toll-free at (888) 800-7442 or email him at fniemann@hnlawfirm.com.   For further information, go to http://www.youtube.com/user/NJElderLawCenter#p/search/0/XpuVawQtBnQ to learn more.

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ESTATE PLANNING FOR A SECOND MARRIAGE – PROTECTING YOUR SPOUSE AND YOUR CHILDREN

Wednesday, September 21st, 2011

By Fredrick P. Niemann, Esq., an Estate Planning Attorney
Individuals don’t get serious about estate planning until they are well into middle age.  By then, some of them are in second marriages. They are married, and one or both spouses have children from a previous marriage.  Estate planning should be taken very seriously because each the spouse may want to provide for each other and their own children.  If you’re in such a situation, proceed cautiously.

SECOND MARRIAGES AND YOUR RETIREMENT PLAN

In a second marriage, one or both spouses may have a sizable retirement account such as an IRA, SEP or 401 (k).  One technique is to name the other spouse as primary beneficiary of the IRA, with the children as secondary beneficiaries.  This approach is common in first marriages, in which the children are the offspring of both spouses, but it can lead to trouble in a blended family:  Real trouble.

 EXAMPLE 1: Tom Jones (no, not the singer) has $500,000 in his 401 (k).  He names his wife Martha as the primary beneficiary and his three children from a prior marriage as the secondary beneficiaries.  Thus, if Martha predeceases the children, they will inherit the IRA.  Even if Martha does inherit the account, the balance will pass to Tom’s children at Martha’s death.

There are several mistakes in this approach.  First, Martha can use the IRA at will as she takes required minimum distributions.  She can take out all $500,000 at once, pay the income tax, and then either spend the money or give it to, her own children not Tom’s children.

Second, in this example Martha is a surviving spouse and only beneficiary of Tom’s IRA.  Under the federal tax code, Martha can roll over Tom’s IRA to her own new or existing IRA (no other beneficiary can do this).  Then Martha can name any beneficiaries she wishes, such as her own children.

In either example, there is no assurance that Tom’s children will see a penny of his $500,000 IRA.

How can Tom avoid this outcome if he wants to provide for Martha and his own children?  One strategy is to divide his $500,000 IRA into two $250,000 IRA’S.  He can designate Martha as the beneficiary of one IRA; his children can be co-beneficiaries of the second IRA.  Alternatively, Tom can leave the entire $500,000 IRA to his children, who can spread out required distributions over their longer life expectancy and thus enjoy extended tax deferral.  If Tom adopts this plan, he can leave other assets to Martha, depending on the size of his estate and her economic needs.

TRUSTS TRAPS

In second marriages, spouses also can create trusts in their estate planning.  The first spouse might leave assets in trust for the surviving spouse, who will get the trust income and access to the trust principal.  At the surviving spouse’s death, the balance of trust assets may pass to the children of the spouse who funded the trust.  Some trusts can be qualified terminable interest property (QTIP) trusts and defer estate tax.

Trusts can play a valuable role in your estate planning.  Trusts can cause problems in second marriages. With the situation described before, the trustee could be conflicted between investing for current income (which would benefit the surviving spouse) and investing for long-term growth (which would benefit the children).  Also, the children may have to wait many years before receiving their inheritance if the first spouse to die leaves all of his assets to such a trust.

Dividing and separating out the estate might be a better option.  Some assets could be left to the surviving spouse and some to the children, outright or in separate trusts.  If the spouses fear that such a plan would leave insufficient amounts to the beneficiaries, they might buy life insurance and increase the total estate value.

If you have any questions about this post, please call Fredrick P. Niemann, Esq., a knowledgeable Estate Planning Attorney. He can be reached toll free at 888 800-7442 or by email at fniemann@hnlawfirm.com.  For further information, go to http://www.youtube.com/user/NJElderLawCenter#p/search/0/8be14yDEeJc to learn more.

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You May Be Entitled to a Tax Deduction If You Make Charitable Donations

Friday, August 19th, 2011

Fredrick P. Niemann, Esq., a NJ Estate Planning & Tax Law Attorney

As some of you may be aware, the IRS allows tax deductions to be made for certain charitable contributions. Unfortunately, the government has made this a somewhat complicated area, resulting in many confused individuals who are eligible for a tax deduction not claiming it. This may be because they are unsure if they meet the requirements or even simply because they do not know what to do in order to receive their deduction. A knowledgeable tax law attorney can assist you in making sure your charitable contributions qualify for a deduction.

The IRS rules are very specific. In order to receive the deduction, you must meet all of the requirements. While the specifics should undoubtedly be discussed with an attorney to assure you meet the criteria, some of the basics rules are easy to understand. First, your donation must be to a qualified organization that the IRS has approved. Donations to individuals and unapproved organizations do not qualify for the deduction. Second, your donation cannot exceed a certain percentage of your adjusted gross income. This amount is determined based on what you are donating, what type of organization you are giving it to and other factors. Your donation must also be in a permitted form. The IRS allows cash, property, gifts, and contributions to be deductible. You must be sure to value your cash, property, or contribution properly, usually using a fair market value standard. You must also have records to back up your donation. Finally, it is important to report your donation appropriately on your tax return. Depending on the value of your donation, a different section of your tax return must be filled out and possibly additional records must be attached. These are just some of the basic requirements that the IRS has mandated you follow in order to receive a tax deduction for your charitable contribution.

Receiving an estate tax deduction can be complicated. If you have donated to charity and want to make sure you appropriately file for your deduction or if you are seeking to make a charitable donation but want to make sure your donation will qualify for a tax deduction, please call Fredrick P. Niemann, Esq. today. Mr. Niemann is experienced in charitable donations and would be happy to help you. He can be reached toll-free at 888-800-7442 or by email at fniemann@hnlawfirm.com. He looks forward to speaking with you.

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The Different Types of Estate Taxes Associated With Your Estate in New Jersey

Friday, August 19th, 2011

By Fredrick P. Niemann, a NJ Estate Planning Attorney

Did you know that there are three different types of taxes associated with death and the passing on of an estate in New Jersey? Both the federal government and the state of New Jersey will tax you upon your death, making it expensive and sometimes difficult for your family to receive your assets. While a properly written irrevocable trust can help minimize some of these taxes, it is important to understand the different types of taxes and the exemptions for each.

THE FEDERAL ESTATE TAX IS IMPOSED BY THE FEDERAL GOVERNMENT. This is one of the largest taxes you and your family will ever have to pay. For 2011 and 2012, the federal estate tax rate is 35%. Fortunately, the federal government currently offers an exclusion of $5 million for 2011 and 2012, meaning you will only be taxed on the amount of your estate that exceeds $5 million. However, in 2013, that exemption amount is expected to shrink to $1 million, possibly with an increased top rate of 55% taxation depending on how much the estate is worth.  Another reason you should think about who you’ll vote for in 2012.

THE STATE OF NEW JERSEY WILL ALSO TAX YOU WHEN YOUR ESTATE PASSES. New Jersey has both an inheritance tax and an estate tax. Both taxes depend on the value of the estate being passed, with higher taxation rates being imposed the more valuable your estate is. The NJ Inheritance tax applies to all property that has a total value of $500 or more and passes from a decedent to a beneficiary, while the NJ Estate Tax allows for a $675,000 exemption, meaning the tax would only apply to the value of the assets over that amount. New Jersey does not anticipate any changes in the near future to its taxation laws.

Both the federal government and the state of New Jersey exempts all transfers of assets between a husband and wife, meaning there will be no tax whenever the first spouse dies. Proper estate planning, such as placing your assets in an irrevocable life insurance trust, may also allow certain individuals to avoid or minimize some of the taxation. For example, proper estate planning may allow a married couple to double the $675,000 exclusion in New Jersey, while preserving the availability of these assets throughout their lives.

Estate taxation can be a complicated and burdensome area of the law. Proper estate planning can help you and your family minimize the effects that taxation will have on your estate. Please call Fredrick P. Niemann, Esq., an experienced New Jersey Estate Planning attorney today toll-free at 888-800-7442 or email him at fniemann@hnlawfirm.com. He will be happy to meet and discuss estate planning and answer any questions you may have about taxation of your estate.  For further information, go to http://www.youtube.com/user/NJElderLawCenter#p/search/0/iysxOtkAByo to learn more.

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Who is Entitled to Receive a Copy of Your Will Upon Death?

Tuesday, August 9th, 2011

By Fredrick P. Niemann, Esq., a NJ Will Attorney

The question of who receives a copy of the will after a death is a common one. Despite what most people think, there is no requirement that a copy of the will be read aloud to all family members gathered in a room. Instead, the original will is supposed to be given to the lawyer for the estate. The attorney then distributes a copy of the will to the people who have an interest in it.

So who exactly should receive a copy of the will? Are you entitled to receive a copy? Who should you give the will of a recently deceased person to? Obviously the first person that must receive the original will is the estate’s attorney. If you have the original copy of the will of a family member that has recently passed away, you should give it to your attorney immediately. They will then read the will and determine who has an interest in it, sending copies to all those interested. The executor or personal representative of the estate is entitled to a copy of the will for obvious reasons. They represent the estate in all probate matters.

Anyone who is named as a beneficiary should also receive a copy of the will. This includes the guardians of any minors who are named as beneficiaries in the will. If it is expected or even possible that the validity of the will may be challenged, the attorney should send a copy to those who aren’t included in the will and are contemplating challenging it. This begins the clock on the time allowed for them to challenge the will.

If the will funds a trust, the trustee and successor trustee are entitled to a copy of the will. The estate’s accountant is usually entitled to a copy of the will as well, as is the IRS if the estate is taxable. It is also important to note that once a will goes through the probate process it becomes court record. Since court records are open to the public, the will therefore becomes available for anyone to see after the probate process is complete.

If you are a beneficiary of a will, or associated with the will in any of the matters listed above, you are entitled to a copy of the document. If you have any further questions please contact Fredrick P. Niemann, Esq., a knowledgeable New Jersey Will and Estate Planning Attorney today. He can be reached by telephone toll-free at 888-800-7442 or by email at fniemann@hnlawfirm.com. You’ll be glad to know that he is very approachable and experienced in Wills and Trusts.

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Additional Estate Planning Issues for New Jersey Residents from other Countries with International Ties

Wednesday, August 3rd, 2011

By Fredrick P. Niemann, a NJ Estate Planning Attorney

Estate planning can be especially important for those with international ties. Typically, international estate planning issues come up in two contexts. First, there are situations where a U.S. citizen or resident has international ties, such as owning foreign assets, living abroad, or desired beneficiaries who do not live in the U.S. Second, there are nonresident aliens who have ties to the United States, such as those who own property in the U.S. or have desired beneficiaries who live in the U.S. Tax implications are different everybody, but regardless of your international ties, one thing is certain: you can benefit from estate planning.

U.S. citizens and residents are subject to the estate and gift tax not only on their property in the U.S., but on all of their worldwide assets. This may subject the individual to a double-tax based on the foreign jurisdiction your assets are in and other factors, such as whether you are considered a resident there or not. The U.S. government grants individuals a foreign estate tax credit which encompasses assets abroad, but this credit has limitations and requires specific circumstances be met. Treaty relief may also be present if the U.S. has entered into a specific treaty with the nation that your assets are in. The Federal Government allows for the U.S. marital deduction to encompass foreign property if your spouse is a U.S. citizen. If you transfer property to a spouse who is not a citizen however, certain additional requirements must be met for your spouse to receive the marital deduction.

Nonresident aliens in the U.S. are subject to U.S. estate and gift taxes only on their assets which are situated in the county. The Federal Government has specific criteria for identifying what is considered to be situated in the United States, as well as a list of assets which fall under this category. Similar to U.S. citizens, treaty relief may be available for nonresident aliens if the U.S. has entered into a specific treaty with your home country addressing tax obligations. Nonresident aliens are limited in the different types and amounts of deductions they are eligible for relating to tax purposes. For example, nonresident aliens are limited to a $60,000 estate tax exemption for their assets situated within the U.S. There are numerous other limitations and exceptions to the limitations, such as a qualified domestic trust (QDOT), which are beneficial for tax purposes. It is important to consult an experienced estate planning attorney if you have assets overseas.

 International estate planning is a complicated field with numerous specific rules and regulations. Every person’s situations is most likely different, depending on your status as a U.S. citizenship status, where your assets are kept, and what your goal is in transferring them just to name a few. Fredrick P. Niemann is a New Jersey Estate Planning Attorney who welcomes you with your international estate planning matter. Please call him today toll-free at 888-800-7442 or email him at fniemann@hnlawfirm.com to discuss questions you may have. He looks forward to hearing from you.

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Converting your IRA to a Roth IRA by Fredrick P. Niemann, a New Jersey IRA Estate Planning Lawyer

Tuesday, July 19th, 2011

We all must pay taxes.  But when we pay certain taxes is a choice we can each make, especially when the rules change.  Making the right decision about converting a traditional IRA to a Roth IRA could save your estate thousands of dollars in income and estate taxes.

Until this year, taxpayers could only convert funds to a Roth IRA if their adjusted gross income was under $100,000.00.  Starting in 2010 conversion is open to anyone regardless of annual income.

Why could converting to a Roth IRA be beneficial?  A traditional IRA allows tax deductions for contributions and grows, tax-deferred.  A Roth IRA does not provide up-front deductions, but earnings and withdrawals are tax-free.  And unlike a traditional IRA which requires minimum distributions starting at age 70 1/2, a Roth IRA does not require minimum distributions during your lifetime.  A Roth IRA could provide a number of advantages depending on your age, the growth rate of your funds, and your total retirement needs.  Say you have a $1 million IRA balance and $300,000 in other funds.  If you convert to a Roth you could use the $300,000 to pay taxes.  Then the $1 million Roth IRA and all future earnings on it will not be taxed at withdrawal.  Further, as the law stands, in 2011 anything over $1 million in your estate would be taxed at a rate of at least 41% at your death.  In this case, converting could save estate taxes of $124,000.

Should you make the switch?  If you convert, you can undo the conversion or “recharacterize”, until October 15, 2011, the extended due date for 2010 tax returns.  If a stock increases dramatically in value you may choose to stay in the Roth IRA since withdrawals are tax-free; if the stock falls, you could un-do the conversion.
Converting to a Roth IRA could reduce the value of your estate for tax purposes, let you take distributions tax-free, and avoid minimum distribution requirements.

Do you have a question(s) not addressed here?  If so, contact Fredrick P. Niemann, Esq. toll-free at (888) 800-7442 or e-mail him at fniemann@hnlawfirm.com to schedule a consultation about your particular needs.  He welcomes your calls and inquiries and you’ll find him very approachable and easy to talk to.

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