Paul O. Dillon, Attorney at Law

What Does an Estate Planning Attorney Really Do?

Vents Magazine’s recent article, “Understanding What an Estate Planning Attorney Does,” explains that estate planning is a legal set of instructions for your family about how to distribute your wealth and property after you die. Estate planning attorneys make sure the distribution of property happens according to the decedent’s will.

An estate planning attorney can provide legal advice on how to prepare your will after you pass away or in the event that you experience mental incapacity. She will have all the information and education on all the legal processes, beginning with your will and moving on to other important estate planning documents. She will also help you to understand estate taxes.

An estate planning attorney will also help to make certain that all of your savings and property are safe and distributed through the proper legal processes.

Estate planning attorneys can also assist with the power of attorney and health care directives. These documents allow you to designate an individual to decide issues on your behalf, in the event that you become mentally incapable of making decisions for yourself. They can also help you with a guardian who will look after your estate.

It’s important that you select the right estate planning attorney to execute the legal process, as you’ve instructed in your estate plan. You should only retain an attorney with experience in this field of law because other legal counsel won’t be able to help you with these issues—or at least, they may say they can, only to find out later that they’re not experienced in this area.

You also want to feel comfortable with your estate planning attorney because you must disclose all your life details, plans and estate issues, so she can create an estate plan that’s customized to your circumstances.

If you choose the right attorney, it will save you money in the long run. She will help you save from all the estate taxes and make all the processes smooth and easy for you and your loved ones.

Reference: Vents Magazine (December 12, 2019) “Understanding What an Estate Planning Attorney Does”

How Can I Avoid Inheritance Tax for my Step-Grandchild?

nj.com’s recent article, “How can I avoid the inheritance tax for step-grandchildren?” explains that the New Jersey Inheritance Tax is a tax imposed on inheritances, depending on the relationship between the deceased and the inheritor, or beneficiary. The relationship between the deceased and the inheritor can be placed into four different categories, and depending upon the category, a tax may be imposed.

Most inheritors fall into Class A. This category includes a spouse, child, parent, grandparent, stepchild, and grandchild. The next most common category is Class C—siblings and daughters-in-law or sons-in-law, and the surviving spouse of a deceased child are included here. Class E beneficiaries include charities, religious institutions and other exempt organizations. Finally, there’s Class D. These beneficiaries includes anyone who’s not a member of another class. In case you’re wondering, there’s no longer a Class B.

Class A beneficiaries will not see any inheritance tax. For Class C, the first $25,000 is exempt and the rate on amounts in excess of that begins at 11% and goes up to 16%. Class D rates range from 15 to 16%. There’s no inheritance tax for Class E.

Step-grandchildren are considered Class D beneficiaries, despite the fact that grandchildren and stepchildren are Class A beneficiaries. You can avoid the tax, by leaving life insurance death benefits to a step-grandchild, because these benefits aren’t subject to New Jersey’s inheritance tax. If the step-grandchild is the step-child of your child or the child of your step-child, leave the bequest to your child or your step-child and make an unenforceable request that she use the bequest for that step-grandchild.

Another option is to make a gift to the step-grandchild, while you’re living. If the gift is made more than three years before your death, then it won’t be subject to the inheritance tax. However, if it’s within that three-year period, there’s a presumption that the gift was made in contemplation of death, so it will be subject to inheritance tax.

You could avoid this, by making a lifetime gift to your child or stepchild, even within the three-year period preceding death, and request that they use it for the benefit of the step-grandchild. The only issue here is that it's not an enforceable obligation. Otherwise, the gift will be deemed to have been made to the step-grandchild and subject to the three-year gift in contemplation of death rule.

If you have real estate outside of New Jersey, you may want to leave some of that property to the step-grandchild, because out-of-state real estate isn’t subject to New Jersey’s inheritance tax.

Reference: nj.com (October 31, 2019) “How can I avoid the inheritance tax for step-grandchildren?”

What Happens to Estate Tax Benefits After 2025?

You may recall that the 2017 Republican tax reform legislation roughly doubled the estate and gift tax exemption.

This means starting in 2019, people are permitted to pass on, tax-free, $11.4 million from their estate and gifts they give before their death. Couples can pass on twice that amount, or $22.8 million.

These higher levels expire in 2026, but those who make large gifts while the exemption is higher and die after it goes back down, won’t see the estate tax benefit eroded, the IRS announced recently via new regulations.

“As a result, individuals planning to make large gifts between 2018 and 2025 can do so, without concern that they will lose the tax benefit of the higher exclusion level once it decreases after 2025,” the agency said in a press release.

Yahoo Finance’s recent article, “IRS Says Millionaires Can Keep Estate Tax Benefits After 2025,” says that the exemption increase was a big priority for Republicans in the 2017 tax overhaul.

This exemption decreased the number of individuals who’d be subject to the 40% estate tax by about two-thirds.

The exemption was $5.5 million prior to the law change.

However, Democrats are looking to reverse those changes, if they sweep the House, Senate and White House in the 2020 national elections.

Nearly every Democratic presidential candidate would like to see the estate tax apply to a greater number of wealthy families.

Senator Bernie Sanders has called for the estate tax, to begin when fortunes are worth at least $3.5 million. He has also proposed rates as high as 77%.

Reference: Yahoo Finance (November 22, 2019) “IRS Says Millionaires Can Keep Estate Tax Benefits After 2025”

Do I Have to Pay Taxes on My Inheritance?

For all practical purposes, the U.S. government doesn’t have an inheritance tax. The inheritances of cash or property aren’t taxed as income. As of 2019, the estate tax is only imposed on estates above $11.4 million for singles, or twice that for couples.  In Maine the estate tax is only imposed on estates above $5.4 million per person.

Investopedia’s recent article asks “Are Estate Distributions Taxable?” The article explains that the only exception is for income taxes due on withdrawals from retirement accounts that are ordinarily subject to taxes, like traditional IRA accounts.

However, some states do tax inheritances, and to date, those states include Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. None of those states applies the tax to the spouse or children of the deceased. When imposed, the taxes range from about 5% to about 15% of the inheritance.

If an estate executor doesn’t pay income tax before he or she distributes the inheritance, the IRS may impose limited beneficiary taxes on those who inherit.

Right now, the federal estate tax applies only to inheritances above $11.4 million per individual. Estates, just like individuals, are required to file income tax forms. They may also owe taxes in the form of interest payments on accounts.

The estate can pay the taxes due or distribute the taxable income to the heirs. In certain cases, this actually saves the beneficiary money because the entire estate may be in a higher tax bracket than the individual who’s getting just a portion of the inheritance.

An exemption to the estate tax for inheritances up to $5 million was instituted about nine years ago in 2010 and 2011 (but there were special rules for decedents dying in 2010). This exemption has been reaffirmed, and the limits have been raised in subsequent laws passed by Congress. The current rules exempts from estate taxes the first $11.4 million inherited by an individual, and twice that amount if the inheritance is distributed to a couple.

It’s believed that approximately 2,000 Americans a year are liable for the inheritance tax under that tax exemption law. These individuals usually work with estate planning attorneys and accountants who are skilled at finding strategies to avoid or minimize the estate tax they owe. One way of avoiding any estate tax, is to give away some of the estate in advance to family members. Your attorney may also discuss the use of an irrevocable life insurance trust.

Reference: Investopedia (August 4, 2019) “Are Estate Distributions Taxable?”

What Do I Need to Know About Portability?

Tax efficiency means transferring the most assets, while paying the least amount of estate tax. In the past, this meant complex trust structures. However, with portability, it’s much simpler.

The Monterey Herald recently reported, in the article “Financial planning: What you need to know about portability,” that the federal lifetime estate tax exemption determines how much wealth a person can leave to their family, without being subject to estate tax. The current lifetime estate tax exemption is $11.4 million, which means that you can leave up to $11.4 million to your heirs, without the 40% estate tax on whatever remains.

With individual taxpayers, this is pretty straightforward. However, with couples, it becomes more complicated.

For example, assume a married couple has an estate worth $18 million. The husband dies first without using any of his estate tax exemption. The wife dies two months later, leaving the entire estate to their children. Without portability, it’s “use it or lose it” for the estate tax exemption.

When the husband dies, the entire estate passes to his wife (if she is a U.S. citizen) without any estate tax implications. This is known as the unlimited marital deduction rule. However, when the wife dies two months later, the estate will owe estate tax of $2.64 million, or the value of the estate above the wife’s $11.4 million exemption times the 40% estate tax rate.

That’s why trusts were so essential in pre-portability estate planning. Before portability, any unused estate tax exemption went to fund a bypass trust. The bypass trust was usually set up to provide for the health, education, maintenance, and support of the surviving spouse. The remaining assets went to the surviving spouse in a marital trust. The trust structure helped make sure the estate tax exemption of the first-to-die spouse was used to its fullest, but it also increased the paperwork with estate transfers.

With portability, the unused estate tax exemption transfers to the surviving spouse. In the example, the wife’s lifetime estate tax exemption after her husband’s death would be $22.8 million (her $11.4 million plus his unused $11.4 million.) When she dies two months later, the estate value of $18 million is below the combined lifetime exemption. Voila! No estate tax is owed.

Portability isn’t automatic. For a surviving spouse to claim the deceased spouse’s unused estate tax exemption, the decedent’s executor must file IRS form 706 within nine months of the decedent’s date of death. If you need more time, you can ask for an automatic six-month extension.

Speak with your estate planning attorney to learn how to maximize the assets that you can leave to loved ones.

Reference: Monterey Herald (February 27, 2019) “Financial planning: What you need to know about portability”