YOUNGER LAW NEWS: THE NEED FOR A NEW LOOK AT ESTATE PLANNING - -
PART II
Last month, I wrote about the controversial new gasoline tax and the rider that increases the New Jersey estate tax exemption. The exemption will go from $675,000 to $2,000,000 for individuals who die in 2017, and the New Jersey estate tax will be completely eliminated in 2018. I won’t get into whether the law was a sound fiscal move. I will say, however, that tying the estate tax decrease/elimination to the gasoline tax was a political deal. If the Legislature had not agreed to eliminate the estate tax, the Governor would not have signed into law the gasoline tax increase. What will happen after Christie is gone if there is a Democratic Legislature and a Democrat in the State House is anyone’s guess. Don’t be surprised if the estate tax comes back sometime in 2018. It’s too early to speculate what the exemption might be, but don’t be surprised if it happens.
This month, I want to focus on the need for reviewing and updating estate plans (or creating one if you have not gotten around to it). In recent years, I have met with a number of clients who had wills and trusts dating back to the early 2000’s. In general, their estate plans were based around the creation of trusts intended to avoid the Federal and New Jersey estate tax rates that went into effect in 2001. Before 2001, the Federal estate tax exemption was $675,000, and New Jersey had no estate tax. During the years 2001 through 2010, the Federal estate tax applicable exclusion amount went from $675,000 in increments $3.5 million. For 2010, the Federal estate tax was eliminated, and there was uncertainty as to whether the exemption for 2011 would be as low as $1 million or as high as $5 million. The New Jersey estate tax remained constant at $675,000. It is beyond the scope of this article for me to deal with the reasoning about how the exemption came to be $675,000 and why it stayed that way until now. I generally discuss this with my clients during our initial consultation.
Until Congress settled on $5 million for 2011 (subject to annual cost of living increases), there was significant uncertainty in the estate planning field. For a period of almost ten years, individuals with relatively modest estates by today’s standards resorted to estate plans built around trusts whose purpose was to double the amount of the estate tax exemption. The good news was that, if the trusts were properly set up, they worked to reduce, or completely eliminate, estate taxes for a couple. The bad news was that maintaining two trusts was, in many cases, inconvenient. Unfortunately, many couples did not have their estate plans reviewed after the estate tax exemption was increased to $5 million (increasing annually). In addition, the 2011 changes added a new dimension: Portability. Briefly stated, if the first spouse to die has an estate that is less than the applicable exclusion ($5.49 million for 2018), the unused portion of the exclusion can be added to the surviving spouse’s exemption simply by checking the right box on the first estate tax return. In essence, a couple can set up their estate plan to provide almost $11 million in exemptions. As a result, for many couples, elaborate trust provisions that were often mandatory, became optional. Unfortunately, I have seen too many instances where a surviving spouse was saddled with two trusts, both unnecessary. The existence of trust provisions makes the filing of estate tax returns more complicated and more expensive to administer.
To make matters worse, until a few months ago, New Jersey did not have a statute allowing the termination by consent of an irrevocable trust that had become obsolete. The only way to terminate such a trust was to go to court and participate in an expensive lawsuit, hoping, but not being certain, that a judge would grant the relief being sought. The adoption of the Uniform Trust Code by New Jersey this year, allows irrevocable trusts to be terminated by consent as long as proper procedures are followed.
One of the estates I recently represented involved a husband and wife who had gone to a seminar and free lunch in 2002 at a restaurant. They were convinced to execute an unduly complicated revocable living trust with provisions for the establishment of two irrevocable trusts upon the death of the first spouse to die. Part of the fee they paid entitled them to annual consultations with the attorneys who drafted the trusts. They took advantage of the consultations each year from 2003 until 2013. They were never told that the 2011 changes to the Federal estate tax law made the two trust provisions unnecessary. [I will not comment on the creation of revocable living trusts to avoid probate in New Jersey other than to say they are almost always unnecessary.] When the husband died, the wife was faced with two trusts whose purpose was to avoid estate taxes, even though the estate was not subject to estate taxes. Fortunately, we received tax waivers just after the Uniform Trust Code was adopted, and we are now in the process of doing away, by agreement, with the unnecessary trusts.
Any reader who has an estate plan that sets up either A & B Trusts, or QTIP and Credit Shelter Trusts, whether in a Last Will and Testament or in a Living Trust, should have those documents reviewed, first to see if the trust provisions are necessary, and also to see whether the other provisions of the estate plan are still relevant. Next month, I will mention a simplified way of dealing with potential New Jersey estate tax issues in case the estate tax is resurrected and will also discuss some of the many non-tax reasons to review your estate plan - - or create the one you have been putting off for so long.
THINK AHEAD. PLAN AHEAD. ACTD NOW!