By: Arthur M. Brown, JD, LLM, CPA
Many of our clients associate estate planning with tax planning. While estate planning is often driven by a desire to minimize estate tax, tax savings is only one aspect to consider. Recent increases in the exemption amounts for federal and New Jersey estate tax may make some clients think they no longer need to consider and execute an estate plan, but this could be a critical mistake. More often than not, clients must focus on the “who”, “what”, “when” and “how” a client’s estate will pass to his or her beneficiaries.
An individual has a federal estate exemption that allows them to give and/or devise property with values close to $11 million per person (and almost $22 million for a married couple with a properly structured estate plan). [These amounts drop to about $5.5 million and $11 million commencing in calendar 2026.] As a result, few estates will be subject to the federal estate or gift tax. However, the high exemption amount creates an opportunity to reduce or eliminate the potential income tax your beneficiaries could pay if and when they sell or dispose of inherited assets. In other words, the focus has shifted from reduction of estate tax to reduction of income tax.
New Jersey’s estate tax exemption for decedents dying prior to calendar in 2017 was $2 million per person ($4,000,000 for a married couple with a properly structured estate plan). Under current law, the New Jersey estate tax is repealed commencing with decedents dying in 2018. However, this repeal is not certain. During his campaign, Governor Phil Murphy stated that he would delay the repeal given New Jersey’s need for tax revenue. Thus, at this point, planning to minimize or avoid the New Jersey estate tax is still important.
Regardless of whether your estate will be subject to tax, serious consideration should be directed to determining how your estate will pass to your loved ones. There are many things to consider and frequently our clients have not considered common family issues that should be addressed. The following is a brief summary of the most common issues that we frequently see in our practice.
The easiest way to dispose of your estate is to simply give your assets outright to your beneficiaries, no strings attached. However, we find that our clients need or want to protect their beneficiaries by using trusts to hold assets. The most common example is the need to protect minor children. Clients realize that assets cannot pass outright to children who are too young to manage an inheritance and therefore usually decide to pass those assets to a trust for the children’s benefit and protection. The trust assets are typically managed by a trustee until the children reach a certain age.
We also find that parents often want to provide the protection a trust offers for adult children to protect their inheritance from the child’s creditors, an ex-spouse, and in many cases, to protect a child from him or herself, as may be the case with a child who mismanages money or has a substance abuse problem.
We also see married couples that realize one spouse may need help managing a large estate if he or she has little or no experience doing so, as well as spouses that want to preserve their estates for the surviving spouse and their children in case the surviving spouse remarries.
Special Consideration for Blended Families
Careful consideration and proper execution of an estate plan is critical for “blended families”. Commonplace today, a blended family is one in which one or both spouses have families from prior marriages. Planning for the disposition of each spouse’s estate to the various beneficiaries is critical to avoid misunderstandings and fighting over assets.
All clients want to provide for their spouse and children. This general statement ignores many issues. Some clients have specific or additional beneficiaries that they wish to address in their planning, such as a parent or a charity. Additionally, special provisions are often needed to effectively provide for and protect a disabled child.
Special care may be required for the disposition of certain assets like a closely held business owned by the client. Small business owners must be very careful to properly plan for the disposition of business assets. They must consider who will run the business following their death and/or make the arrangements for its sale. If the client has business partners, consideration should be given to adopting a buy-sell plan among the partners. A very common but complicated situation is passing a business to a client’s children when not all of them work in the business, or will be charged with running the business for the benefit of the entire family.
Another example we see with greater frequency is the desire to set aside and preserve a family vacation home to keep it in the family for the next generation.
It is crucial to carefully consider and plan for the appointment of executors and trustees, not only to serve at the client’s death, but to serve for the duration of any trust that will be created under an estate plan.
Many clients also believe a Will is all that is needed. This is not correct. Every estate is essentially comprised of two parts. The first part is the probate estate, which passes pursuant to your Last Will and Testament or, if you do not have a Will, by the intestacy laws of the State of New Jersey. New Jersey’s intestacy laws dictate who will receive your property if you pass away without a Will. The other portion of your estate is the non-probate estate, comprised of those assets which pass by operation of law and those assets that pass by a contractual arrangement.
It is very common for a client to assume all he or she needs to dispose of his or her estate is a Last Will and Testament. It is very important to understand that a Will only controls property included in the decedent’s probate estate. A Will does not control the distribution of non-probate assets. Homes and bank and brokerage accounts are frequently owned jointly, with right of survivorship. These are non-probate assets. The non-probate estate also includes assets that pass by agreements, such as IRAs and other retirement accounts and life insurance proceeds. It is extremely important to make sure the disposition of non-probate assets is properly addressed. In fact, more and more frequently, we find that the largest part of our clients’ estates are non-probate assets.