Estate Planning


In this episode of Your Wealth Curve, I sit down for a discussion on estate planning with attorney Brad Shalit, a partner in the taxation and estate planning group at Connell Foley LLP, one of New Jersey’s largest and most respected firms. Brad’s practice focuses on tax planning, specializing in estate planning and asset protection planning for businesses and individuals.

When considering our estate plan, many of us assume it is just as easy as collecting our assets and passing them along to our spouse and children after we die. Unfortunately, it’s not so easy, and there are many things to consider when sitting down to figure out what happens to your assets after you die. There are a number of tax implications affecting the assets in our estate at both the state and federal levels, as well as many moving parts in our plan that will guarantee our assets will go where we want them to with as much ease as possible. Brad takes us through what things should be covered in our estate plan, as well as some of the ways we can avoid these heavy tax burdens on our estate.

Estate Tax: The Numbers

Currently in the United States at the federal level, we as individuals are entitled to a lifetime exemption on the first $5,340,000 (for 2014) of any gifts we give while we are still alive, with a 40% tax rate applied to any excess.  Any portion of the gift exemption not used during life carries over to death. In any year, we can also give gifts up to $14,000 without being subject to the gift tax to as many recipients as we choose. Any gift amount to an individual that exceeds the $14,000 limit goes against your total lifetime gift exemption. For example, if you give a gift to your child of $100,000 in 2014, once the $14,000 annual exemption is subtracted, you are left with a “taxable” gift of $86,000, which then reduces your lifetime gift tax total. If you die in 2014, that $86,000 is subtracted from your $5,340,000 estate tax exemption, leaving only $5,254,000 of your estate exempt from tax. Many states also impose an estate tax on top of what we already have to pay to the federal government, and in New Jersey, not only are we on the hook for the state estate tax, but we are subject to a state estate tax, and potentially an inheritance tax as well.

Estate Tax Portability

Portability laws pertaining to estate taxes say that the first spouse to die can transfer his or her unused portion of the estate tax exclusion to the surviving spouse. For example, if the wife dies having used only $2,000,000 of her estate tax exemption, the remaining $3,340,000 can be added to her husband’s exemption, making $8,680,000 of his estate exempt from federal tax. While portability laws do help our beneficiaries save on taxes owed upon death, Brad points out that portability can fail the taxpayer in the following ways: Portability has no index for inflation, meaning the money added to the surviving spouse’s exemption would presumably grow over time, but that growth would not be considered in the new exemption. Portability has no generation skipping tax exemption, which means any money left to your grandchildren under the portable exemption would be subject to taxes upon the death of your children. Third, portability offers no asset protection, says Brad, leaving any inheritance subject to creditors of the surviving spouse.

How to Structure Your Estate Plan

The numbers related to estate taxes can be confusing, and the amounts may seem overwhelming, but Brad assures us there are things we can do in a properly structured estate plan to mitigate the tax burden and protect assets for your heirs. First, Brad says there are three main components to any estate plan: a Will, a living will and a power of attorney.

The Will is the document laying out where your assets go when you die and how they will get there. It also delineates guardianship of any minor children upon your death. A Will is important for so many reasons, Brad says, the most important being that you want to be the one to decide where your assets go instead of the courts. Currently, if you were to die with no will, or “intestate,” state law dictates that your assets go to your living spouse when all children are of the current marriage. If there are children not from the current marriage, the assets are divided among the spouse and the non-marital children. In addition, the administrator must be “bonded,” or in simpler terms, they must get insurance to prevent themselves from stealing from themselves if they are also the beneficiary. This can be extremely costly and time-consuming says Brad, and in most Wills, people will waive the bond requirement, saving their estate from this expense.

A Will can establish in no uncertain terms how your assets should be divided, instead of letting it be dictated by law, and will prevent family fighting for guardianship of your minor children upon your death. Typically, you can also protect your benefactors by creating a system of checks and balances, with both an executor of the Will, responsible for tax filings and collecting and delivering assets, and a separate trustee who will then oversee how your assets are invested and how they are distributed to your children or other beneficiaries.

A living will states your wishes to withhold artificial measures to keep you alive in the event you become incapacitated. Adding a healthcare proxy to your living will would name someone to make health care decisions for you if you are unable to make them for yourself. Brad suggests having only one person named at a time, with a few successors.

A power of attorney (POA) gives someone the power to make property or asset decisions for you while you are alive but incapable of doing so due to injury or illness. A POA can give someone the ability to pay bills, access bank accounts, etc., quickly and easily, since it is typically immediately enforceable. If you are weary of giving a child power of attorney presently, one option is to utilize an escrow letter directing your attorney to hold the POA, and then make the decision when to deliver the POA when you are incapacitated.

Asset Protection in Your Estate Plan

Brad says the easiest way to shelter your assets from taxes and shield them from creditors is to place them into a trust instead of passing them to your heirs outright. Having a trust can allow your assets to avoid probate, which is the process in which a judge must authenticate your Will and then oversee the transfer of your assets to your beneficiaries. Depending on the circumstances and the location of your assets, probate can be costly and can take a long time to resolve, says Brad. A revocable trust is the most common type of trust, says Brad, and it enables you to pass down your assets free of probate and can be tailored to create tax shelters and protection of your assets from creditors. A revocable trust may also remove the administration of a trust from the jurisdiction of the court. A trust can be extremely beneficial when your will deviates from your state’s laws regarding asset distribution. All families are different, and so often there is some situation that would make us want our assets or a portion of them to go to someone other than a spouse or a child. In court, this would be considered assets “not passing in a natural way.” If the court deems this the case, anyone can easily challenge your Will. But with a trust in place, challenging is much more difficult to do and must be done by filing a lawsuit.

Creating an estate plan can seem overwhelming and a bit confusing all things considered, but together with your financial advisor and with the help of an attorney specializing in this field, it’s possible to come up with a plan that will ease your mind now and ease the minds of your benefactors once you are gone.

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