Although bills were introduced in Congress in 2009 to repeal the repeal, possibly to retain the $3.5 million estate tax exemption and 45% maximum tax rate in effect in 2009, nothing was accomplished.  So we have reached 2010 with less taxes on the books – why is this a bad thing?
   

First of all, the federal estate tax has not been permanently repealed, but only disappears for one year.  At midnight on January 1, 2011, it returns with a vengeance – with an exemption of only $1 million and a maximum tax rate of 55%.  In addition, most commentators and practitioners are unsure that the estate tax has truly disappeared for 2010.  The Democratic leadership of both the House and the Senate has indicated that they may attempt to pass legislation with an effective date retroactive to January 1, 2010.  This retroactive imposition of a tax will undoubtedly face legal challenges, specifically that such a law is unconstitutional.  The U.S. Supreme Court, however, has upheld such retroactive legislation in the past, most recently during the Clinton administration.
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Those clients who will be primarily affected by the 2010 estate tax repeal are those clients whose Wills or Trusts use a formula clause to divide property into shares, usually between the surviving spouse and children.  One typical formula that has been used by attorneys for their clients for many years allocates as much property as possible to children or other descendants without triggering a federal estate tax, with the balance passing to the spouse.  In 2009, this type of formula would have directed $3.5 million to the children, since that was the federal estate tax exemption in 2009.  In 2010, this same formula will direct the entire estate to the children, since there will be no estate tax due, and nothing will pass to the surviving spouse. 
   

Another type of formula clause that has often been used directs the exclusion amount to the children, and the balance to the spouse.  This formula, however, will result in nothing passing to the children since there is no exclusion amount in 2010, and everything will pass to the surviving spouse.  Although there will be no estate tax due at the first spouse’s death in 2010, this may actually be a worse scenario than the first:  if the surviving spouse dies in 2011, owning all of the property previously held by both spouses, and with only a $1 million exemption available, there may be substantial estate tax paid at the second spouse’s death.
New Basis Rules
   

Now here’s the real bad news -- the repeal of estate tax in 2010 brings with it a change to the rules on carryover basis.  Congressional officials estimated that an extension of the 2009 estate tax ($3.5 million exemption, 45% maximum rate) would have resulted in taxes on approximately 6,000 estates, but the carryover basis changes will result in taxes on over 70,000 estates.
   

Prior to 2010, the carryover basis rules provided for a “stepped-up” basis as of a decedent’s date of death.  The beneficiaries inherited property from an estate at the property’s fair market value on the date of death, not the decedent’s basis (usually the purchase price).   If an asset was sold by the estate or the beneficiary fairly close to the date of death, this often resulted in little or no capital gain, and little or no corresponding capital gains tax, since the stepped-up basis would have been close to the sales price.
   

The basis rules for inherited property have drastically changed for 2010.  The basis of property received from a decedent will now be calculated at either the decedent’s basis or the fair market value as of the date of death, whichever is lower.  For example, if the beneficiary inherits the decedent’s residence, which the decedent purchased in 1970 for $50,000, and which is now worth $400,000, the beneficiary receives the property with a basis of $50,000.  When the beneficiary sells the residence at its fair market value, the beneficiary will pay capital gains tax on the difference between the basis of $50,000 and the sales price of $400,000.
   

The new rules include a “Special Basis Adjustment” of $1.3 million.  This provides that this amount may be added to the basis of various estate assets (as allocated by the executor or administrator) to increase the basis of such assets from the decedent’s basis to the fair market value at the date of death.  In addition, the surviving spouse will have an additional $3 million that may be added to the decedent’s basis for various assets passing to the spouse, to increase the basis to the fair market value at the date of death.
 

What To Do Now?
The changes to the estate tax, and the changes that may occur within the next year, make it an uncertain future, with no clear overall answer for everyone.  These changes must be considered in light of each client’s individual circumstances, and in fact, may have to be reviewed again if Congress changes the law.  Should you wish to review your Will and estate planning documents, or have any questions as to how your estate plan may be affected, please do not hesitate to contact us.

IRS Circular 230 disclosure: In order to comply with requirements imposed by the IRS, please be advised that any tax advice contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or tax-related matter(s) addressed herein.

In addition to the act of getting estate planning done, many other factors play into the fact that so many probate estates end up in litigation.  As families grow away from each other, natural suspicions arise.  Did someone influence the preparation of the Will?  Was the maker of the Will competent?  How were the assets divided?  How long was the marriage?  The questions are virtually endless.

In a recent case decided in the United States District Court for the District of New Jersey, the Federal District had to decide whether there was appropriate subject matter jurisdiction for the Federal District Court to hear probate matters.  In the matter of Berman v. Berman, 2009 WL 1617758 (D. N.J.) the case involved allegations of undue influence and lack of testamentary capacity to execute a Will, among other claims.   The plaintiff filed the case in the New Jersey State Court, Probate Division and the defendant removed the case to the Federal District Court.  The central issue for consideration was whether the Federal District Court could hear the dispute between the parties, which included probate issues.

The Federal District Judge noted that the United States Supreme Court had recognized a "probate exception" to otherwise proper federal jurisdiction.  Accordingly, when a case may otherwise qualify to be heard in Federal Court, the Federal Court would not have jurisdiction where the matter involved (1) the probate or annulment of a will; (2) administration of a decedent's estate; or (3) the assumption of jurisdiction of over property that was in the custody of the probate court.

Since the case in Berman involved questions of the validity of a Will, the Court determined that the "probate exception" applied and that the case had to be heard in the State Court.   The case was therefore remanded to the Superior Court of New Jersey, Chancery Division.

In the State of New Jersey, there are essentially two ways in which an individual may challenge a Will.  The first way is to allege that the decedent lacked the requisite capacity the date the Will was executed.  This is a fairly low standard to meet, as the decedent need only be aware that he/she possesses assets, and in addition, that he/she wishes to transfer these assets to certain other individuals.  In levying a challenge in this regard, the Court may review medical records and other information concerning the decedent’s physical and mental health in order to determine if this individual possessed the requisite mental capacity on the day the Will was executed.  The medical records are relevant as they may demonstrate physical or mental conditions which could suggest that the decedent may have lacked the capacity to execute a Will on the date the Will was executed.  This often involves the need for expert witnesses to review medical records, and thereafter, to render their opinion as to the capacity of the decedent on the date the Will was executed. 
 

The other way in which an individual may challenge a Will concerns an allegation of undue influence.  Simply put, undue influence means that the Will does not reflect the true intentions of the decedent, but instead, reflects the wishes of an individual who asserted their influence over the Testator, thereby rendering the Will inconsistent with the Testator’s true wishes.  In order to prove a claim of undue influence, the contestant must first establish that there existed a confidential relationship between the decedent and the party which is alleged to have unduly influenced the Testator.  A confidential relationship exists when the Testator and another individual shared a relationship where trust or confidence is naturally reposed by the decedent with this individual.  Another instance under which a confidential relationship arises is in an attorney/client relationship where there is a fiduciary relationship between the parties. 
 

Once the contestant of the Will has established the existence of  a confidential relationship, he/she must establish suspicious circumstances with regard to the creation and execution of the Will.  Once this has been achieved, the Court can shift the burden of proof upon the proponent of the Will to demonstrate the validity of this document. 
 

After a lawsuit has been commenced, the Court will often recommend that the parties consider mediation in an attempt to resolve the matter without the need for additional litigation.  Often, the parties are able to resolve the litigation through Mediation without the parties incurring additional expenses.  If a case cannot be resolved through mediation, the case will move forward through discovery, and thereafter, to Trial.  Once an Estate litigation matter is scheduled for Trial, the parties should be aware that the Trial will not be heard before a jury, but rather is decided by a Chancery Judge that hears probate matters.  Once the Judge renders his/her decision, either side may make an application for fees to the Estate. 
 

If the party prevails in contesting the Will, the Will could revert to a previous Will, if said document still exists, or the individual could be deemed as having died without a Will.  Thereafter, the Court may appoint an independent Executor if the named Executor is disqualified.  If the Will is not invalidated by the Court, then it will be probated in the manner which had been sought to be probated by the Executor originally.  Thereafter, the Estate litigation will conclude.

You can read the full article online here.

You can read the article here.

You can read the article here.

The presenters, Allen Silk, Chair of Stark & Stark's Business Law group, Donald Cowan, Managing Director of Cowan, Gunteski & Co., and Deborah Mathis, Principal of Cowan, Gunteski & Co. will cover such topics as succession planning, practice valuation and retirement planning.  

Download the seminar information here.

On the issue of "undue influence", Judge Doyne, citing the Haynes case, noted that undue influence is the "mental, moral or physical" exertion which destroys the "free agency of the testator" by preventing him "from following the dictates of his own mind and will and accepting instead the domination and influence of another." As in the case of testamentary capacity, the burden of proving undue influence falls upon the party claiming that there was undue influence.

However, of particular significance is the fact that the burden of proof will switch if it can be shown that a confidential relationship existed between the testator and beneficiary and suspicious circumstances are present.

These basic concepts and points of law are relevant to almost every will contest. Unfortunately, probate litigation usually involves fights among family members where the relationship has deteriorated over the years. When a loved one dies, some family members will have remained close with the decedent, and the relationship with others will have faded. Whatever the relationship, questions as to the disposition of a loved one's assets often present issues of capacity and undue influence.

If a will has been admitted to probate by the Surrogate's Court, New Jersey Court Rule 4:85-1 allows a party four months to file a complaint to set it aside. However, if the complaint is not filed within the four month period, a party may seek relief under the "escape provision" of Rule 4:85-1 and file the complaint within a "reasonable time under the circumstances". Under section (f) of New Jersey Court Rule 4:50, this relief can only be secured where there are exceptional, extraordinary and compelling grounds for such relief.

In The Matter of the Estate of Florence Schifftner, Deceased, decided on April 25, 2006, the Appellate Division of the New Jersey Superior Court dealt with the issue of whether an inability to afford counsel constitutes "exceptional, extraordinary and compelling grounds" and therefore a reason to allow a litigant to attack the probate of a will after the four month period.

The plaintiff in the Schifftner case was seeking to overturn a judgment admitting the will of his late mother to probate. The will had been probated after due notice to the plaintiff and he did not file an appeal. The plaintiff argued that although he was aware of the will being probated, he was unable to take appropriate action as his did not have sufficient funds at the time to hire an attorney. The Appellate Division concluded that indigence, under the circumstances of this case, was not an "extraordinary" reason justifying relief. The Court noted that it was an unfortunate fact that many litigants were unwilling to obtain, or unable to afford, representation. The Court went on to say that pro se litigants are allowed the same protection afforded to represented litigants and pro se litigants are given the right to be heard. The Court held that counsel is only required when a litigant faces a "consequence of magnitude" such as a criminal prosecution that threatens actual incarceration or the loss of a fundamental constitutional right such as an interference with the parental relationship.

The Court went on to say that where the consequences are less severe, the failure of representation is not fatal. The possibility of losing a civil suit does not implicate the need to have counsel. The plaintiff in Schifftner, having filed his complaint to overturn probate of a will more than four months after probate, was therefore not allowed to use the Rule 4:50 "escape provision" based upon the fact that he could not afford to hire a lawyer during the applicable time period.

Most individual business owners do not have sufficient plans in place to address the many issues which will arise upon their death or severe disability. This podcast outlines the things that business owners should be thinking about now to ensure the smooth transition of their business should a catastrophic event occur.

You can download the New Jersey Legal Update Podcast # 26 here.(7.5MB)

Technorati Tags: New Jersey : Podcast : Succession Planning

In The Matter of the Estate of Lee Siegel, deceased, Docket No. P-480-04, Judge Gerald C. Escala, Presiding Judge of the Chancery Division for Bergen County, rendered a decision on December 8, 2005, following a two-day bench trial in an estate matter. The decision centered around attorney fee applications made in the case.

While finding the attorney fee applications themselves to be reasonable, the Court admonished the litigants and counsel for having failed to perform a reality check as they proceeded with the case toward trial. Judge Escala noted that:

"All too often, litigants leave common sense behind when they embark on litigation in which they convince themselves they are destined to prevail, oblivious to the fact that they might not be successful. They also fail to notice the sometimes astounding amount of time in legal services (and costs) they are incurring to pursue their claim. It must be because in addition to their self-conviction of the justice of their case, they also firmly believe they will not have to pay for the legal services, so they proceed vigorously without regard to the costs. Or, they have a notion that counsel fees can be assessed by the court from some unidentified source, that is, one not related to the cause at hand."

The Court went on to explain that New Jersey follows the American Rule with regard to payment of legal fees, which requires that each side pay their own legal fees, with certain limited exceptions.

Judge Escala's words should be seriously considered by every attorney and client that becomes involved in litigation. Our courts are not a place to litigate personal feelings or personal agendas. Economic realities must play a key, if not defining, role. The toll in terms of cost, time and emotion is often not appreciated at the outset of a case. Parties should assess the strength of their case at the outset and honestly consider the strength of the other side. Playing the devil's advocate is a must. Attempting to settle early on through the process of mediation is a wise course to follow. It is true that certain cases will go to trial. However, all trial attorneys and litigants should heed the well written words of Judge Escala.

Technorati Tags: New Jersey : Litigation

The seminar included a presentation by Allen Silk and Rosemary Durkin, members of the Firm's Trusts & Estates group. Also presenting at the seminar was Richard Oring of Oring and Company who discussed long term care insurance.

You can listen to the presentation here (67MB).

You can also download PDF versions of the PowerPoint slides which were used.

Protecting Your Family: Estate Planning

Long Term Care

Ms. Durkin will discuss the legal issues surrounding living wills and health care powers of attorney.

The panel discussion will be held at 12:00PM at Covenant Presbyterian Church, Trenton New Jersey. Admission in free but registration is required. To register, please call 609.393.9922.

On January 4, 2005, the appellate court ruled that a state regulation capping the amount of funds that a Medicaid applicant may use to purchase a commercial annuity contravenes federal law. Estate of F.K. V. Division of Medical Assistance and Health Services (App. Div. No. A-1004-02T5).

Then on January 21, 2005, in the matter of A.B. v. Division of Medical Assistance and Health Services (App. Div. No. A-4973-02T2), the appellate court held that federal law prohibits the State of New Jersey from requiring that it be named as the remainder beneficiary of an actuarially sound commercial annuity purchased by the community spouse of a Medicaid applicant.

In both cases, Medicaid applicants successfully challenged state regulations which went far beyond what federal law provided and which were used to deny Medicaid eligibility for the applicant. The courts found that the State exceeded its authority and that the regulations were improperly drawn or enforced.

Supporting the State of New Jersey's aggressive efforts to pursue the recovery of Medicaid benefits paid for a nursing home resident following the resident's death, the New Jersey Appellate Division concluded in a November 10, 2004 opinion, Estate of Michael DeMartino v. State of New Jersey, Division of Medical Assistance and Health Services, that the State could assert a lien against a testamentary trust created by Anne DeMartino upon her death for the benefit of her husband, Michael. Although Michael died less than one year later, Anne had given to the trustee authority to distribute the trust funds in limited circumstances for her husband's benefit. The balance remaining in trust after the husband's death was to be distributed to Anne's children. After Michael's death, the State sought to recover from the testamentary trust benefits which were paid by the State for the benefit of Michael - despite the fact that Anne had specifically disallowed the funds to be used in such a manner.

Federal law supports and encourages the states to recover Medicaid benefits paid following a recipient's death from property of the recipient at death, as well as property in which the recipient had a legal interest, specifically described as 'other arrangements' including joint accounts and living trusts. New Jersey has adopted the most aggressive definition of a decedent's estate for recovery purposes, and has expanded the reach of federal law by adopting regulations which permit recovery from third party trusts which contain property in which the recipient had an interest in the previous five years.

Despite the fact that New Jersey laws can be no more restrictive than federal law, the Appellate Court in this case stretched to find that the testamentary trust created by Anne fell into the category of 'other arrangements' which entitled the State to make recovery from it. The judges deemed the testamentary trust to be an arrangement intended to pass assets to Anne's children and avoid estate recovery, focusing on Anne's perceived intent and not on specific laws and regulations.

Three months ago, the New Jersey Supreme Court overturned a similarly reasoned decision of the Appellate Division relating to Medicaid planning, In Re Keri, recognizing that individuals can work within the framework of existing laws and regulations to undertake Medicaid and estate planning. It is expected that the DeMartino decision will be appealed.