Photo of Rosemary D. Durkin

In the wake of Hurricane Harvey and the incredible devastation wrought across the State of Texas, many Americans want to do what they can to help. Unfortunately, there are some unscrupulous individuals who will seek to personally profit from the generosity of their neighbors.

The U.S. Department of Justice estimates that over $20 million was lost to charity scammers after Hurricane Katrina, and this disaster has the potential to cause just as much harm. The Internal Revenue Service (IRS) and the Department of Justice (DOJ) have both issued warnings about fake charity scams that are emerging, and are urging Americans to only reach out to recognized charitable organizations.

Continue Reading Avoiding Charity Scams in the Wake of Hurricane Harvey

I was recently contacted by a fraternal organization regarding an estate that I represented. The decedent, who was in his 80’s when he died, had an insurance policy through the organization that had been issued when he was 16! His parents were the named beneficiaries. The estate is able to collect the insurance proceeds since the beneficiaries had predeceased the decedent. But how much easier would everything have been, and possibly more aligned with the decedent’s wishes, if the named beneficiaries had been current?

Certain assets, such as insurance and retirement accounts, pass by beneficiary designation and not under the terms of a Will or under the intestacy laws (unless the beneficiary has predeceased). When is the last time you checked your beneficiary designations on:

  • Your employer-provided life insurance?
  • Your employer-sponsored 401(k)?
  • Any individual retirement accounts (IRAs)?
  • Policies that you have purchased directly from an insurance company?

Your circumstances may have changed since you filled out that original beneficiary designation. Maybe you have married. Maybe you have divorced. Maybe you had named your parents or siblings or cousins, and they are either deceased or you are estranged from them.

Retirement accounts and IRAs are especially problematic if you do not have current beneficiaries. In general, if an individual is the beneficiary of a 401(k) or IRA, the individual may stretch out the payments over his or her life expectancy. Since the income tax was deferred when funds were deposited to the retirement account, the individual receiving the payments must pay the income tax – but if the payments are stretched out, the tax hit is lessened. If a 401(k) or IRA is paid to an estate, however, no stretch-out is available – an estate does not have a “life expectancy.” The estate will pay all of the income tax in one year, which could possibly be a very substantial tax hit.

Take a few minutes to check your records. Each insurance company or financial institution will have forms to change your beneficiaries if need be, many available online. For only a few minutes of your time, you will be able to save your family members much aggravation and possibly a great deal of money.

If someone were to die without having a will in place, a common misconception that is often times mentioned is that the deceased’s assets are turned over to the State. This is completely false. Instead, state law determines who will receive the deceased’s property. Each state has a statute (the intestacy statute) that provides who the people are that are the closest relatives to the deceased, and those relative receive the deceased’s estate.
 

New Jersey law is as follows:

For a single person:

  1. To the person’s descendants
  2. If there are no descendants, to the person’s parents
  3. If there are no descendants or parents, to the descendants of the person’s parents
  4. If there are no descendants, parents, or descendants of parents, one-half to the paternal grandparents, or if they are also deceased, to their descendants; and the other one-half to the maternal grandparents, or their descendants
  5. If there are no descendants of grandparents, to stepchildren
  6.  

For a married person (spouse or domestic partner):

  1. The entire estate passes to the surviving spouse, if there are no descendants or parents of the deceased.
  2. If there are descendants, all of whom are also descendants of the surviving spouse, then the surviving spouse receives the entire estate.
  3. If the deceased is survived by a spouse and parent(s), the spouse receive the first 25% of the estate, but not less than $50,000 nor more than $200,000, plus 75% of the balance; the parent(s) receive the remaining property of the estate.
  4. If the surviving descendants are also descendants of the surviving spouse, and the surviving spouse has other descendants; or if there is a descendant of the deceased who is not a descendant of the surviving spouse, then the spouse receives the first 25% of the estate, but not less than $50,000 nor more than $200,000, plus 50% of the balance.  The descendants receive the remaining property of the estate.

Now, maybe these are the people who you would want to inherit from you. But maybe they are not. Preparing and signing a Will gives you the power of choice to benefit others – family, friends, and/or charity – rather than relinquishing that choice to the government.
 

There is another important issue that state law will control if a person has died without a Will: guardianship of your minor children. If a child under the age of 18 has no living parent, state law determines that the child’s closest next of kin have the first right to serve as the child’s guardian. Being the closest relative does not really qualify someone to raise a child. And, if several persons are related in the same way to the child (for example, both sets of grandparents), the Court then decides, with both sides of the family incurring legal fees as well suffering an emotional hardship. Again, it is a matter of choice – should you choose who should raise your child in the event of an untimely death, or should the government?
 

Preparing a Will is not something you do for you – it is something you do for your family. To ensure your loved ones are benefitted, that your children are properly cared for, and that your estate is administered at the least possible cost, please contact us as to how we can assist you in preparing a Will and other estate planning documents.

 

Rose Durkin is a Shareholder in Stark & Stark’s Lawrenceville, New Jersey office specializing in Wills & Estate Planning. For questions, please contact Ms. Durkin.

Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the federal estate tax was repealed for 2010.  This repeal, however, is only effective through December 31, 2010.  The federal estate tax returns in 2011, at the rates and exemptions in effect in 2001 when EGTRRA was effective.
   

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.
Review Your Estate Plan
   

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.

Estate planning is important for everyone: most people would prefer to make their own decisions as to who will be in charge if they become disabled, and to make the decision as to who receives their property at death. If a person does not plan ahead, each state has laws that favor persons who will be in charge if that person becomes disabled. And, each state has laws that control who will inherit if a person dies without a will. Married couples are protected by federal and state statutes; same sex couples do not always have similar benefits.

New Jersey’s Domestic Partnership Act provides the same sex community with new rights and protections. However, these rights are still not at the same level that married couples in that state enjoy. As such, proper estate planning still remains a major consideration.

Estate planning is especially important for same sex couples, because that is the only way they can make their preferences known. The following is intended to provide ideas of the estate planning options available to same sex couples.

LIFETIME PROTECTION

A Durable Power of Attorney designates another person, an Agent, to handle financial affairs. This may include paying bills, transferring funds between accounts, buying and selling securities, buying and selling real estate, accessing a safe deposit box, and other financial matters. It is an essential part of any client’s estate planning documents. In planning for same sex couples, the Durable Power of Attorney may be more crucial because of the high potential for resentment toward the well partner as they attempt to look after the needs of the stricken partner. The well partner may be confronted by the family members of the ill partner in an attempt to challenge the well partner’s decisions regarding the assets of the stricken partner.

In many respects, the Health Care Power of Attorney is even more important than the Durable Power of Attorney. A Health Care Power of Attorney designates an Agent to make health care decisions for the Principal (the person signing the Health Care Power of Attorney), in the event that the Principal cannot make their own medical decisions. Given the possibility that the well partner will be placed in a difficult position regarding the stricken partner’s family members, a well-drafted health care power of attorney will be crucial to not only address issues of medical treatment, but also for the well partner’s ability to visit and give comfort to the stricken partner.

In future posts I will discuss disposition plans, estate and inheritance taxes, irrevocable trusts and other matters that same sex couples should be aware of when planning their estate.