By Thomas D. Begley, Jr.
WHAT IS ESTATE PLANNING?
Estate planning is the process by which an individual defines his or her goals for passing assets to beneficiaries and chooses appropriate tools and strategies for achieving those goals. The process begins with a careful analysis of one’s situation, objectives, and potential tax liability. Only after all of those factors have been considered is it possible to select the tools and strategies that will allow assets to pass in the most effective manner.
It is important to coordinate estate planning decisions with broader financial plans. Absent adequate financial planning, even the best estate plan can easily fail. Just as important is getting an early start on estate planning to help mitigate undesirable outcomes in the event of a disability or incapacitation, both of which affect a majority of individuals at some point in life. For example, there is a 58% lifetime probability of suffering a disability lasting at least 90 days and requiring assistance with the management of property and affairs. There is approximately a 55% chance of eventually requiring some form of long-term care, whether home care, assisted living, or nursing home care, all of which can have a devastating impact on life savings.
HOW DO LIFE CIRCUMSTANCES IMPACT ESTATE PLANNING?
Life circumstances have a significant impact on estate planning decisions. When developing an estate plan, it is important to consider the following:
♦ Grandchildren. Do you want to take your grandchildren into consideration when designing your estate plan and documents?
– If so, would you like to leave your children a token amount (i.e. $1,000, $25,000, etc.)?
– Would you prefer to set aside one share of your estate for each of your children and one
share to be divided equally among your grandchildren? For example, if you have three
children, would you consider dividing your estate into four shares, one for each of your
children and one to be divided equally among your grandchildren?
– Have you established 529 plans for your grandchildren?
– Do you have custodial arrangements for your grandchildren under the Uniform Gifts to
Minors Act (UGMA) or the Uniform Transfer to Minors Act (UTMA)?
♦ Blended family issues. A family with children from more than one marriage is considered
“blended.” If you and/or your spouse or any of the children have blended families, you will need to consider a number of questions.
– If you have children from a previous marriage, is your goal to provide for your spouse first,
and then for your children?
– Do you want to ensure that your children receive an inheritance either at your death or the
death of your spouse?
– If any of your children have sons or daughters from previous marriages, do you want to
ensure that your grandchildren from those marriages receive an inheritance?
– Do you want your son- or daughter-in-law’s children from a previous marriage to receive an
– Do you have a prenuptial agreement?
– Do you have a contract to make a will?
– Do you have a mutual waiver of elective share?
♦ Disability. One in 10 American families has a member with disabilities. Many persons with disabilities are entitled to means-tested public benefits, such as Supplemental Security Income (SSI), Medicaid, and housing assistance. Receiving an inheritance could cause such individuals to lose their benefits. To prevent that outcome, it is necessary to establish a special needs trust that holds the inherited assets for the person with disabilities. This allows the person to benefit from the inheritance while maintaining critical benefits.
♦ Non-citizen spouses. If you are married, and your spouse is not a U.S. citizen, there are limits to how much can be left to him or her without triggering a significant tax liability. The solution may be to establish a Qualified Domestic Trust. The rules of this trust are complex, but must be considered to protect your spouse’s inheritance.
♦ Problem sons- or daughters-in-law. Given that 50% of marriages end in divorce, many parents are concerned about their children’s spouse, who may be spendthrifts, abusive, or domineering. One solution is to establish a bloodline trust, which ensures that assets left to a child can only be passed to blood relatives and cannot be squandered by abusive or improvident in-laws.
♦ Problem heirs. A trust may be designed to protect assets in an appropriate manner when there are children or grandchildren with problems such as the following:
– Drug addiction
– Criminal behavior
– Spendthrift behavior
– Inability to hold a job
♦ Different treatment for different children. In cases where one’s children have different strengths, weaknesses, or needs, it may be appropriate to treat them differently from an estate planning perspective. For example, some parents may want to disinherit children. In such cases, stating the reason in the will or trust can prevent confusion later on when a judge may wonder if the disinheritance was intentional.
♦ Children and grandchildren in need of incentives.
When there are children or grandchildren who seem to lack motivation, parents may want to establish a trust that provides incentives to achieve certain goals, such as graduating from a four-year college or obtaining a good job. Thought should be given to the types of goals that are desirable and appropriate incentives for achieving those goals.
♦ Caregivers. Many people require caregivers at some point in life. Some caregivers are honest and caring and become much like family members over time. Others are unscrupulous and predatory. Establishing a trust can help protect your assets from the latter.
♦ Business ownership. If you own a business, it is important to have a business succession plan that spells out what will happen to the entity upon your death. Business entity records must be kept up-to-date. There should be an Employment Agreement, as well as a Shareholders’ Agreement, if there is more than one shareholder.
♦ Pets. If you wish to provide for your pets, to ensure their continued well-being, you will need to decide who will care for them and how much will be required for their maintenance. Some pet owners establish pet trusts to fund lifelong expenses, including those for food and veterinary care.
♦ Charities. If you wish to support one or more charities through your estate plan, you will need to consider how much to leave to the charity(/ies) and how the bequest will be made.
♦ Vacation homes. If you own a vacation home or a home in a vacation area, consideration should be given to associated income, gift, and estate tax issues. If your intention is to leave the home to future generations, an agreement should be signed during your lifetime, to spell out how the property will be managed after your death. For example, the agreement should: indicate who will pay the taxes, develop a schedule allocating time blocks to various family members, and make and/or pay for necessary repairs.
WHAT SHOULD YOU KNOW ABOUT TAXES?
When developing an estate plan, there are five taxes that need to be considered.
♦ Federal estate tax. Currently, there is a federal estate tax on all estates in excess of $ $5,450,000 in 2016. The tax is 35% on the excess amount.
♦ New Jersey estate tax. There is a New Jersey estate tax on all estates in excess of $675,000. With proper planning, a married couple can effectively increase the exemption to $1,350,000. The estate tax rate ranges from 0% to 16%.
♦ New Jersey inheritance tax. There is a New Jersey inheritance tax based on the relationship between the decedent and the person receiving the inheritance. The tax rate ranges from 0% to 15%. There is no inheritance tax on transfers to lineal ascendants (i.e. grandparents), descendants (i.e. children and grandchildren), or spouses or qualified domestic partners. There is an inheritance tax on siblings, in-laws, other relatives, and friends.
♦ Gift tax. Currently, there is an annual federal gift-tax exclusion of $14,000 per person. Married couples can potentially split gifts to enjoy a total annual exclusion of $28,000. Additionally, there is a $5,450,000 lifetime exemption. In 2016 the combined lifetime gift tax exemption for a married couple is $10,900,000. It is important to track changes in the law, which may affect this exemption amount.
♦ Income tax. It is important to consider the income tax consequences of various strategies for both you and your beneficiaries.
WHAT ESTATE PLANNING TOOLS ARE AVAILABLE?
Depending on one’s situation and goals, it is possible to benefit from numerous estate planning tools.
♦ Wills. A will is a document that spells out how an individual wants his or her estate to be distributed at death. Distributions can be made outright or through a trust. A will also appoints an executor, whose function is to probate the will, gather all assets, pay all bills, file all necessary tax returns, prepare an accounting, and make distributions in accordance with the terms of the will.
– Guardians. If you have minor or disabled children, the will should also appoint a guardian. That individual will often live with the children and look after them during minority or disability.
– Trustees. When appropriate, the will should also name a trustee. The trustee’s job is to invest the trust assets and make distributions in accordance with the terms established in the trust.
♦ Living wills/health care agents. A living will, sometimes called a health care power of attorney, has two components. The first part of a living will addresses the need to appoint someone to make medical decisions on an individual’s behalf when he or she is unable to do so due to incapacitation. These medical decisions do not include end-of-life decision making. The second component of a living will addresses end-of-life decision making. This applies only in situations when the individual is unconscious and/or otherwise unable to make medical decisions, and there is no hope of recovery or of regaining a meaningful quality of life. If there is hope of recovery or of regaining a meaningful quality of life, the living will does not apply.
There are four options with respect to the second component of a living will/health care power of attorney, but only the first three are advisable.
1. Terminate life.
2. Continue aggressive treatment.
3. Authorize a loved one to make decisions without guidance, if and when the time comes.
4. Leave the decision up to the courts. Failure to choose one of the first three options places an individual in the position of having the matter go to court, where a judge will make a decision as to whether or not life should be continued.
♦ Financial power of attorney. Sometimes called a general durable power of attorney, a financial power of attorney gives the agent the right to make financial decisions on behalf of an individual. Standard provisions should include:
– A reference to the New Jersey Banking Power of Attorney Act.
– A listing of any real estate by street address or tax block and lot.
– Specific language agreed to by the National Association of Securities Dealers and the American Bar Association, authorizing the agent to deal with securities.
– Power to make gifts, including any conditions or restrictions on such gifts.
♦ Living trusts.
-Revocable living trusts. A living trust is a document designed to avoid probate. It can be used to save estate and inheritance taxes, but it is not required for that purpose. The same tax savings can be achieved through a properly drafted will. It is almost always appropriate to use a living trust if you own real estate outside your state of residence, in order to avoid ancillary probate. The advantage is that the trust can easily be amended or changed at any time. The disadvantage is that assets in a revocable living trust are included in your estate.
– Irrevocable living trusts. An irrevocable trust is one that cannot be changed. Such a trust can be designed so that the assets it holds are not included in a person’s estate for estate tax purposes. Typically, irrevocable trusts own life insurance policies when the insured does not want the proceeds included in his or her taxable estate.
♦ Special Needs Trusts. A Special Needs Trust can be established for a disabled beneficiary. The trust is designed so that the disabled person will not lose his or her public benefits, such as SSI, Medicaid, or low-income housing, upon the receipt of an inheritance.
HOW SHOULD YOU TITLE ASSETS AND MAKE BENEFICIARY DESIGNATIONS?
Many assets pass outside the will. When developing an estate plan, it is important to ensure that such assets are properly titled and that beneficiary designations are accurate and up to date.
Among the assets that pass outside the will are jointly owned property, which automatically goes to the survivor, and property in trust, which goes to the beneficiar(y/ies) in accordance with the terms of the trust. Life insurance, retirement plan assets, and annuities are also paid directly to the named beneficiaries. Married couples who wish to achieve tax savings should avoid joint ownership of assets and retitle assets as necessary. Typically, the assets are divided about equally between husband and wife, with consideration given as to which asset gets transferred to whom. If you have life insurance policies, IRAs, and other retirement accounts and/or annuities, you must consider beneficiary designations based on your estate planning goals. For each asset, it is necessary to name both primary and contingent beneficiaries.
WHAT ABOUT LONG TERM CARE PLANNING?
Many people carefully plan for the transfer of their estate, taking steps to minimize taxes, only to see their assets eroded by long term care expenses. The cost of long term care, whether home care, assisted living, or nursing home care, can easily exceed $100,000 a year. Since approximately 55% of all individuals over age 65 require some form of long term care, it is important to consider this potential risk when developing estate and financial plans. A good long term care insurance policy will pay for virtually all forms of long term care, including adult day care, home care, assisted living, and nursing home care. The best time to purchase long term care insurance is before age 60, when premiums are far more affordable. Studies show that 25% of applicants aged 65 are rejected because they are deemed uninsurable.
Long term care policies can be customized to control costs. You should consider factors including:
♦ The type of care covered
♦ The amount of daily benefits
♦ Elimination periods
♦ The length of coverage
♦ Inflation riders
♦ The financial strength of the insurance company
WHAT SHOULD YOU KNOW ABOUT INVESTMENT PLANNING?
During the estate planning process, attorneys often find that clients have made significant investment mistakes. Such mistakes could jeopardize your ability to achieve maximum investment returns, as well as your ability to realize estate planning goals. To help address this situation, Begley Law Group encourages you to follow this 12-step process:
1. Set goals. Identify and put into writing your investment goals.
2. Consolidate. Consolidate all of your assets into one investment account. That account should then be invested in a diversified manner.
3. Utilize. Utilize professional management. Retain a professional investment manager. Usually the increased cost is more than offset by increased investment performance and reduced risk. You can minimize costs by using a fee-based, rather than commission-based, advisor.
4. Be objective. Make investment decisions in an objective, rather than emotional, manner. This can help you avoid the common pitfall of buying at market highs and selling at market lows.
5. Start early. Start saving as early as possible to benefit from the enormous power of compounded investment earnings.
6. Buy and hold. Use a buy-and-hold strategy, avoiding speculation and day trading, and focusing on good stocks in solid companies.
7. Avoid. Avoid tax-driven investment decisions. Tax shelters frequently make poor investments.
8. View. View your home as “personal.” Consider your home a place to live, rather than an investment. despite the fact that the value of homes does tend to increase significantly over time.
9. Diversify. Diversify across different asset classes to help reduce investment risk and increase returns. Asset allocation is the chief factor influencing investment returns.
10. Understand. Understand inflation risk. Historically, the annual rate of inflation has been about 3%.
Individuals who attempt to avoid investment risk by purchasing certificates of deposit usually receive little or no investment return after paying taxes on the interest income and factoring in inflation.
11. Monitor. Monitor investment performance and rebalance investment allocations at least once a year.
12. Review. Review your estate and financial plans periodically. If you are over age 65 and have assets in excess of $1 million, excluding your home, review your plans annually. Also review your plans whenever relevant laws change or when you experience life changes such as:
– The birth of a child
– The death of a spouse or beneficiary
– A second marriage
– The onset of disability
– A significant change in income or assets
– A change of residence from one state to another
– The marriage of children
– The divorce of children
Begley Law Group, P.C. has served the Southern New Jersey and Philadelphia area as a life-planning firm for over 75 years. Our attorneys have expertise in the areas of personal injury settlement consulting, special needs planning, Medicaid planning, estate planning, estate & trust administration, guardianship, and estate & trust litigation. Contact us today to begin the conversation.