Tag: Estate Planning

ONLINE ESTATE PLANNING AND E-WILLS

The Uniform Electronic Wills Act (the “E-Wills Act”) was introduced and, finally, approved by the National Conference of Commissioners on Uniform State Laws also known as the Uniform Law Commission (“ULC”) in July of 2019.  The E-Wills Act provides that a Last Will and Testament, a document traditionally printed and executed on paper, can now be created, signed, witnessed and notarized electronically.  The ULC has worked, for over a century, to propose laws in an effort to simplify life for people who live, work, or travel in multiple states and to facilitate interstate commerce.

For example, the 1999 Uniform Electronic Transactions Act, adopted in all but three states, permits electronic signatures in commercial and contract matters.  However, the Uniform Electronic Transactions Act contains an exception for Wills which cannot be electronically signed. The execution requirements of Wills are normally set by state statutes to ensure validity of a Will.  The long-standing tradition of executing paper Wills is now changing as people are increasing using technology in more and more aspects of their lives.

The ULC has provided through the E-Wills Act that a testator’s electronic signature or even a “mark,” using a stylus or typed signature, must be witnessed contemporaneously and/or notarized contemporaneously with all physically present.  However, states that adopt the E-Wills Act will have the option to include language that allows remote witnessing of a Will and remote notarization.  The E-Wills Act allows a testator to execute his or her “electronic will” with witnesses who are in the “electronic presence” of the testator and allows probate courts to give such a Will legal effect.  In addition, notaries can be permitted to notarize E-Wills remotely to make a Will self-proving.

Hopefully, the E-Wills Act and online estate planning will not increase fraud and coercion with respect to Will creation and execution.  While New Jersey has not yet adopted the E-Wills Act, the issue of electronic Wills executed under the law of another state is one that New Jersey residents, businesses and Courts are soon to face.

Pass Through Deduction Under Tax Cuts and Jobs Act (the “Act”)

General

A.  Under the Act a new deduction is introduced effective for tax years beginning after December 31, 2017, available to individuals, trusts, and estates. The deduction is equal to 20% of “qualified business income” from income earned directly by the taxpayer, and income from so-called pass through entities.  Pass through entities are essentially defined as partnerships (including limited liability companies or other entities treated as partnerships for tax purposes) and S corporations, where the taxable income or loss of the entity is generally reported by its partners or shareholders.  Qualified business income also includes certain dividends from real estate investment trusts and other defined entities (including certain cooperatives and publicly traded partnerships).  Unless it is extended by Congress, the deduction expires for tax years beginning after December 31, 2026.

B.  In general, the pass through deduction is limited to 20% of the taxpayer’s taxable income with certain adjustments. Thus, where a taxpayer has reduced taxable income through other adjustments, the benefit of the pass through deduction may be limited.

C.  The benefit of the 20% “flow through” deduction obviously depends upon the taxpayer’s tax bracket. For example, for a taxpayer in a 35% bracket the 20% deduction in effect reduces the tax rate on the taxpayer’s qualified business income, from 35% to 28%.

Qualified Business Income – Exclusion for Services

A.  As indicated, the 20% deduction relates to qualified business income. Generally, qualified business income means income from any trade or business, but it excludes certain service trades or businesses.  Disqualified service trades or businesses include any trade or business in accounting, health, law, consulting, athletics, financial services and brokerage services.  Service trades or businesses also include any business, if the principal asset of the business is the “reputation or skill of one or more of its employees”.

B.  The exclusion for services income is phased in based upon the taxpayer’s taxable income. Taxpayers with income below a certain level are not subject to the exclusion – for a single taxpayer the limitation on services income does not apply unless the taxable income of the individual is in excess of $157,500, and in the case of a joint return, the limitation does not apply, unless the taxable income on the joint return is in excess of $315,000.  For taxpayers with taxable income in excess of those amounts, the exclusion for services income is phased in, so that the deduction is eliminated entirely for single taxpayers with taxable income in excess of $207,500, and married taxpayers with taxable joint return income in excess of $415,000.

Calculation of the Deduction

A.  As noted, for each qualified trade or business, the deduction is equal to 20% of the qualified business income from that trade or business. However, except for taxpayers with taxable income below certain levels, as discussed below, the deduction is limited under two methods.  The first method, defines qualified business income as 50% of W2 wages paid with respect to the business.  The second method provides that qualified business income is equal to 25% of the W2 wages paid with respect to the business, and a portion of the tax basis of the business, in depreciable property owned by the business.  Thus, for capital intensive businesses, the second method would typically produce better results.

B.  The limitations on the pass through deduction based on W2 wages, or W2 wages and tax basis in depreciable property as discussed above, are phased in, in the same manner as the exclusion of service trades or businesses, depending on the level of the taxpayer’s taxable income. Thus, if a single taxpayer has taxable income not in excess of $157,500, or a married taxpayer has joint return income not in excess of $315,000, the pass through deduction is 20% of qualified business income, without any limitation based on W2 wages or tax basis in depreciable assets.

C.  In determining the 20% deduction, qualified business income does not include investment income, such as capital gains, dividends and interest.

Open Questions and Planning Possibilities

A.  A number of questions with respect of the application of the pass through deduction will need to be clarified. Indeed, the Treasury Department recently advised that guidance with respect to rules for determining whether a pass through entity generates income qualifying for the pass through deduction, is a high priority area.  One area which is likely to receive attention, relates to the exclusion of certain specified service businesses from the benefits of the deduction.  In particular, the treatment as service businesses, if the principal asset of the trade or business is the “reputation or skill of one or more of its owners or employees”, will need to be clarified.

B.  Depending on the nature of the business, to the extent the limitations on the pass through deduction, based upon W-2 wages, or based upon W-2 wages and capital investment, may apply, planning may be available to maximize the deduction. For example, it may be appropriate to increase the amount of W-2 wages paid, by converting independent contractor relationships to employee relationships.

C.  There has been some discussion as to the benefits of operating a business as a C Corp rather than as a pass through S corporation, to take advantage of the new low corporate tax rate – 21% – under the Act, which may be lower than the S corporation shareholders, individual tax rate. However, in many cases the benefit of the lower corporate tax rate may be offset by the pass through deduction available to S corporations shareholders (which is not available to C Corps or their shareholders) and of course, by the additional tax, which may apply, when a C Corp makes distributions to its shareholders.

D.  Obviously, the particular circumstances would need to be examined to determine if operating as a C Corp rather than an S corporation, may be beneficial.

The New Tax Law – A Good Deal for Estates. . .or Maybe Not so Good

Most of the buzz surrounding the new tax law effective this year has been on corporate income tax rate reductions, treatment of pass through entities, limitations on state and local deductions and other higher profile income-tax related changes.  For estates, the one big change is the increase of the Estate, Gift and Generation Skipping Tax exemption to $10 million, $20 Million for married individuals. This is a good thing for very high net worth families, but for the vast majority of Americans, the $5 million plus exemption already in place worked just fine.  The new tax act, however, has another provision relating to trusts and estates which doesn’t work out so well for anybody, and that’s the suspension of the deduction for miscellaneous expenses subject to the 2% floor.

Heretofore, individuals could take as itemized deductions on their 1040 certain miscellaneous expenses to extent they exceed in the aggregate 2% of the taxpayers adjusted gross income. These expenses include employee business expenses, investment management fees, tax preparation fees and many others. In this group of expenses one relating directly to trusts and estates is excess deductions on termination of estates and trusts that can be passed through to estate and trust beneficiaries.

Estates and trusts are taxpayers and must report and pay tax on net income earned or pass that income through to estate or trust beneficiaries.  To arrive at net income estates and trusts may deduct among other items attorney fees and fiduciary fees like executor and trustee commissions.  In the estate context attorney and fiduciary fees are very often the largest expenses of an estate and can exceed income by a wide margin, especially where there are few income producing assets or they have been sold or distributed during the tax year. If this disparity occurs in the final tax year of the estate, the excess deductions can be passed through to the beneficiaries and added to their other miscellaneous expenses and deducted to the extent they all exceed 2% of AGI.  That is until 2018.

Note attorney and fiduciary fees are also deductible against Federal  Estate Tax as well as against estate income, but not both.  An estate must choose between deducting them on the Estate Tax return, or on the income tax return. In past years, when the many more estates were subject to Federal Estate Tax and the estate tax rates were higher, the choice was more often to deduct against estate tax. Now, with increase in the estate tax exemption to $5 million in 2011 and now $10 million, many more estates will deduct these fees against income.  However, the added tax benefit of excess deductions on termination passed through to estate beneficiaries enjoyed by many more of them in recent years, is now, unfortunately, lost.

The Tax Cuts and Jobs Act is a Major Change to Estate Planning

The Tax Cuts and Jobs Act is a major change to estate planning.  We encourage you to contact the Firm to review and update your estate plan.  We recommend that clients review their estate plan at least every five years, or sooner if there are changes in your financial or personal life, changes in your relationship with your fiduciaries or beneficiaries, or changes in the state or federal estate tax law.

Federal Estate and Gift Taxes.  On January 1, 2018, the federal estate tax exemption doubled to $11.2M per person ($22.4M for married couples).  The exemptions are set to expire and revert back to $5M per person, adjusted for inflation, after 2025.  Your beneficiaries will continue to receive the benefit of a “step up in basis” to the date of death value on assets included in your estate.  If a new administration is elected after the 2020 federal elections it is possible the exemptions may be reduced back to current levels.  Thus, consideration should be given to utilizing the large estate and gift tax exemptions while they are available.  However, clients must also weigh the potential estate tax savings against the loss of a “step up in basis” at death.  The Act provides for regulations to be implemented to prevent the gifts which utilized the additional exemptions from being “clawed back” at death in the event the exemption sunsets (as it is scheduled to do in 2025).

Federal Gift Tax Annual Exclusion.  The federal gift tax annual exclusion is $15,000 per recipient for 2018 (increased from $14,000 due to an adjustment for inflation).  There is an unlimited gift tax marital deduction for U.S. citizen spouses.  The annual exclusion for gifts to non-citizen spouses is $152,000 for 2018.

State Estate and Gift Taxes.  States that impose their own estate tax will not be affected by the Act.  Clients in Connecticut must consider the impact of the state gift tax (the only state with a gift tax).

  • Connecticut Estate and Gift Tax: The Connecticut estate and gift tax exemption rose to $2.6M in 2018.  The exemption is scheduled to rise to $3.6M in 2019 and then match the federal exemption in 2020.   In addition, beginning January 1, 2019, the cap on the maximum estate tax imposed on the estates of decedents dying on or after January 1, 2019, and the maximum gift tax imposed on taxable gifts made on or after January 1, 2019, will lower from $20M to $15M.
  • Massachusetts Estate Tax: The Massachusetts estate tax exemption remains at $1M per person.
  • New Jersey Estate and Inheritance Tax: Effective January 1, 2018, New Jersey eliminated its estate tax, but the inheritance tax remains in effect.  Transfers to spouses, children and grandchildren will remain inheritance tax-free, however, any transfers to a sibling, aunt/uncle, niece/nephew, friend, etc., would be subject to the inheritance tax.
  • New York Estate Tax: The New York Estate Tax exemption is $5.25M for 2018 and it is scheduled to match the federal exemption starting January 1, 2019.

Update Your Estate Planning Documents:  Many estate plans provide for the creation of a Family Trust (or Credit Shelter Trust) upon the first spouse to die.  In older estate plans, the formula for funding that trust may continue to reference funding it with the maximum amount that can pass free of federal estate tax.  The doubling of the federal estate tax exemption could result in significant state estate tax.  In newer plans, the funding formula may have been based upon the maximum state estate tax exemption.  With the larger state estate tax exemptions this may no longer be necessary or a desired result.  Estates below the state and federal exemption may be suitable for a simplified estate plan.  Clients should contact the Firm to review and update their estate plans.

New Jersey Court Recognizes ‘Wrongful Prolongation of Life’ Cause of Action

New Jersey’s Advance Directive for Health Care Act (the “Act”) guarantees the right of an individual to make decisions regarding his or her healthcare.  But what happens if those decisions and wishes are ignored?  Morris County Superior Court Judge W. Hunt Dumont recently recognized a cause of action for wrongful prolongation of life against a Defendant hospital, doctor, and several nurses, for their alleged failure to follow a patient’s healthcare wishes.

Suzanna Stica was admitted to the hospital after complaining of breathing problems. She had signed “do not resuscitate” and “do not intubate” orders ahead of her admission.  Despite those orders, the Defendants resuscitated Ms. Stica after she went into cardiac arrest. She lived an additional six months before she ultimately passed away.  During that time, Ms. Stica was intubated, had difficulty breathing, was confined to a wheelchair, suffered from depression and dementia, and had trouble speaking.

The court explained Ms. Stica’s wishes were “simply ignored” by the hospital and its staff.  “Ms. Stica lived an additional six months in a diminished condition that included unwanted pain and suffering,” and the Defendants “violated Ms. Stica’s fundamental right to refuse unwanted medical treatment.”

The court held that its ruling was a logical extension of the New Jersey Supreme Court’s 1979 ruling in Berman v. Allan, which recognized the doctrine of wrongful birth.  New Jersey, the court explained, has taken a leadership role in recognizing patients’ rights regarding treatment options.  These rights include “a well-established right to reject lifesaving treatment.”

By denying the Defendants’ motion for summary judgment, the court extended a legal cause of action against those who ignore a person’s decisions regarding his or her healthcare.  To ensure that your healthcare decisions and end-of-life wishes are properly integrated into your estate planning instruments, or if you have any questions regarding this recent ruling, we encourage you to contact the Firm.

The Tax Cuts and Jobs Act Headed to President Trump’s Desk

Today, the U.S. House of Representatives and the U.S. Senate passed Tax Cuts and Jobs Act, sending the bill to President Trump’s desk for his signature.  We call your attention to some of the key provisions in the law and encourage you to contact the Firm to discuss best practices for incorporating its provisions into your business, estate, and tax planning, along with any questions you may have about how the law impacts you.

Corporate Rate: The corporate rate is cut to 21 percent starting January 1, 2018.

Taxation on Pass-Through Entities: Pass-through entity owners that meet certain conditions are eligible for a 20 percent deduction on their business income. Pass-through owners who file jointly and earn at least $315,000 in business profits are subject to limitation on the deduction. The restriction is based on how much the pass-through pays in wages or invests in equipment and machinery. Service businesses, such as law and accounting firms, are eligible for the deduction if owners are under the threshold. The deduction would expire in 2026.

Individual Rates: The top individual rate is 37 percent for individuals earning $500,000 and above, and joint filers earning at least $600,000. There are seven tax brackets total: 10, 12, 22, 24, 32, 35, and 37 percent. The law doubles the standard deduction to $24,000 for a couple filing jointly. The rates and standard deduction expansion expire in 2026.

Interest Deductibility: The law limits the interest deduction to 30 percent of a company’s earnings before interest, tax, depreciation, and amortization (EBITDA) for four years. After that, the law limits the deduction to 30 percent of earnings before interest and taxes (EBIT).

Business Expensing: Full expensing of new and used capital investments is permitted for five years.

Corporate Alternative Minimum Tax: The corporate AMT is repealed.

Individual Alternative Minimum Tax: The individual AMT is increased to apply to individual filers earning more than $500,000 or joint filers earning $1 million.

Estate Tax: The exemption is doubled to estates worth $11 million for individuals, $22 million for couples. The exemptions would revert to current levels after 2025.

State and Local Tax Deduction: Taxpayers can deduct up to $10,000 of state and local taxes paid—property taxes and either income or sales taxes.

Mortgage Interest Deduction: The law preserves the deduction for existing mortgages and caps it at $750,000 for newly purchased homes starting Jan. 1, 2018.

Child Tax Credit: The child tax credit is increased to $2,000 per child with up to $1,400 of it being refundable.

Why Estate Planning is Still Important in Light of the Tax Cuts and Jobs Act

Last week, we covered some of the important provisions in the Tax Cuts and Jobs Act passed by the U.S. House of Representatives and Senate.  Under the House and Senate versions, the individual estate tax exemption amount is doubled to $10.98 million in 2018, and the House version would completely repeal the estate tax for individuals dying after 2023.  Because this means married couples can effectively leave up to $22 million to beneficiaries tax-free, you may believe estate planning is no longer necessary.  However, estate planning is still important to ensure your assets are properly managed, and here are a few reasons why:

  • Federal Income Tax Remains Under the Law: Income taxation affects potential beneficiaries and heirs to your estate.  Upon death, your assets’ basis is “stepped-up”.  The step-up basis of assets that occurs is an important tax planning technique that affects beneficiaries’ income.  In order to ensure your beneficiaries are not negatively impacted by the step-up basis, proper estate planning is required.
  • Planning for potential disabilities or illness: There may come a time where you become disabled or fall ill. It is best to put documents in place, such as a power of attorney, in advance of such circumstances. Further, you may lack the required mental capacity to appoint persons to handle your affairs in the future. If a valid power of attorney does not exist, a court may appoint a legal guardian to control your assets, who may mismanage your affairs or may not act in your best interest.
  • Asset Protection and Control: Asset protection is another important reason to consider implementing an estate plan. The use of a last will & testament and trusts allow you to maintain control of your assets for future generations to enjoy.

ο  Transferring assets outright to your beneficiaries allows them to take direct ownership of the assets, which exposes the assets to creditors, divorcing spouses, as well as bad decisions of those beneficiaries. Placing the assets into a trust, however, does not allow the beneficiaries to unilaterally draw down on the assets for their own desires (e.g., extravagant purchases, gambling, addictions). Further, the trusts generally provide protection from the beneficiaries’ creditors and divorcing spouses. Moreover, if properly structured, the assets can be placed in a trust that is domiciled in a state that affords asset protection benefits against your creditors.

ο  While providing these protections, trusts typically are structured to provide the beneficiaries to access funds for lifetime needs (e.g., health, education, maintenance, support) upon the approval of a trustee. Additionally, a trust may allow for distributions outright to the beneficiaries when they reach an appropriate age or circumstance (e.g., lack of creditors, existence of prenuptial agreement, no addictive behavior)

  • Protecting Familial Relationships: Estate planning decisions can cause some hard feelings within families.  Careful thought and consideration must be given to how your assets are transferred, and having a discussion with family members about wealth-planning decisions often leads to better outcomes.  An experienced estate planner can offer their advice and expertise, ultimately making sure your assets are transferred smoothly.

Tax Law Client Alert: How the Tax Cuts and Jobs Act Affects You

In November, the U.S. House of Representatives passed the Tax Cuts and Jobs Act, sending the bill to the U.S. Senate.  This past Saturday, the Senate passed its version of the Tax Cuts and Jobs Act.  There are many differences between the House and Senate bills, including the individual tax brackets and how pass-through entities are taxed.  We call your attention to some of the key provisions in the House and Senate bills, along with how the bills change the current tax code.  Now that the Senate has passed its version, the bills need to go through the reconciliation process before they are sent to President Trump’s desk to sign into law.  If the Tax Cuts and Jobs Act is signed into law, we encourage you to contact the Firm to discuss best practices for incorporating the changes into your business and tax planning, along with any questions you may have about how the law impacts you.

Provision Current Law House Tax Cuts and Jobs Act Senate Tax Cuts and Jobs Act
Income Tax Rates 10%, 15%, 25%, 28%, 33%, 35% and 39.6% Would create four personal tax rates of 12%, 25%, 35%, and 39.6% that generally would kick in at higher thresholds than current law, effective in 2018. Would retain seven tax brackets that would apply to higher tax brackets. The proposed brackets are 10%, 12%, 22%, 24%, 32%, 35%, and 38.5%

 

Standard Deduction and Personal Exemption $12,770 for married couples filing jointly; $9,350 for head-of-household; $6,350 for all other taxpayers $24,000 for married couples filing jointly; $18,000 for head-of-household; $12,000 for all other taxpayers. The personal exemption is eliminated.

 

$24,000 for married couples filing jointly; $18,000 for head-of-household; $12,000 for all other taxpayers. The personal exemption is eliminated.
SALT Deductions Currently, taxpayers may deduction state, local and property taxes. Eliminates individual state and local income tax deduction, but retains property tax deduction with cap of $10,000.

 

Eliminates individual state and local income tax deduction, but retains property tax deduction with cap of $10,000.
Taxation of Pass-Through Businesses Currently taxed at the applicable individual income tax rate. The tax rate applied to business-related income from partnerships, limited liability companies and S corporations would be 25% for active participants in the business operations.  Passive investors who do not materially participate in the business would be subject to a 9% tax rate.

 

Permits individuals to deduct 23% of qualified domestic business income, equating to a 29.6% maximum rate, effective in 2018.
Estate Tax For an individual who dies during the 2017 calendar year, the estate tax exemption is $5.49 million. The estate tax exemption amount would be doubled in 2018.  The estate tax would be repealed completely for individuals dying after 2023. The estate tax exemption amount would be doubled in 2018, however the estate tax will be retained going forward.

 

Tax, Trusts, and Estates Client Alert

Many of us have digital assets.  Until now, the fiduciary you selected in a Will or other document may not have had the legal right to obtain, manage or distribute those assets.  Even if you had a Will or similar document prepared within the past few years, it probably did not contain provisions which gave your fiduciary the right to carry out your wishes with respect to digital assets.  New Jersey recently adopted the Uniform Fiduciary Access to Digital Assets Act (the “Act”).

We call your attention to key ways in which the Act affects you, your family, your assets, and your estate planning.  Please contact the Firm to discuss best practices for incorporating this new development into your estate planning instruments.

  • The Act authorizes fiduciaries, agents under a Power of Attorney, guardians, trustees, or executors of estates to manage digital assets in the same way they have authority to manage traditional, tangible assets.
  • The Act defines a digital asset as “an electronic record in which an individual has a right or interest.” What does this mean to you?  Digital assets include your online financial accounts, email accounts, social media accounts, computer files, web domains, and virtual currency.
  • The Act does not apply to digital assets of an employer used by an employee. For example, your work email account would not be able to be accessed by your fiduciary.
  • Under the Act, fiduciaries are bound by the same fiduciary duties that normally apply to management of tangible assets. For example, an executor would violate his or her duty by publishing a decedent’s confidential communications.
  • In order to gain access to digital assets, the fiduciary must send a request to the custodian with a copy of the document granting fiduciary authority. If you wish to grant your fiduciary access to these types of assets, it is important you contact us to update your estate planning instruments.  The Act will go into effect on December 12, 2017.
  • In addition to updating your estate planning instruments to authorize a fiduciary to manage your digital assets under the Act, some service providers (Facebook, Google, etc.) directly allow you to appoint someone to have access to your digital assets. This is similar to a beneficiary designation under a Life Insurance Policy, IRA or similar asset, and is referred to as a “user tool”.