Reasons to Leave New Jersey That Have Nothing to do With Reality TV

As previously discussed on this blog, in addition to the federal estate tax, the State of New Jersey imposes its own estate tax on individual estates larger than $675,000.  In client meetings, we spend a lot of time discussing and developing solutions that revolve around the New Jersey estate tax.  At the end of this discussion, clients usually say something along the lines of “isn’t there an easier way?”  My answer is always simple: “yes, you can become a resident of a state without a state estate tax.”  Now, for most people, leaving the state is not an option, but to be a resident of a state for estate tax purposes, you only have to reside in that state for 6 months and 1 day.  So if you’ve ever considered a beach house in Florida or a ski cabin in Colorado, here’s one more incentive to go for it: you won’t have to pay estate taxes to New Jersey or any other state from the list below.  The only caveat here is that you actually have to live in the state in which you are claiming residency for the 6 months and 1 day.  The New Jersey Division of Taxation has gone to great lengths to determine whether a taxpayer was a resident of another state at the time of his or her death, including looking into phone records, electricity bills, airplane tickets and other similar records.

States that do not impose an estate tax as of this writing*:

1. Alabama                  13. ***Kansas               25. North Dakota

2. Alaska                     14. **Kentucky            26. ***Oklahoma

3. Arizona                   15. Louisiana                 27. **Pennsylvania

4. Arkansas                 16. Michigan                 28. South Carolina

5. California                17. Mississippi               29. South Dakota

6. Colorado                 18. Missouri                  30. Texas

7. Florida                     19. Montana                  31. Utah

8. Georgia                   20. **Nebraska             32. Virginia

9. Idaho                       21. Nevada                    33. West Virginia

10. **Indiana              22. New Hampshire      34. Wisconsin

11. ***Illinois             23. New Mexico           35. Wyoming

12. **Iowa                  24. ***North Carolina           

* Please be advised that with the future of the federal estate tax uncertain, some states may alter their state estate tax laws once the federal estate tax situation is resolved.

** These states do not collect a state estate tax, but do collect a state "inheritance tax."

*** Estate taxes in these states were repealed on January 1, 2010 due to the repeal of the federal estate tax and are may return once the federal estate tax uncertainty is resolved.

George Steinbrenner's Estate Escapes Taxation

On July 13, 2010, George Steinbrenner passed away.  Steinbrenner’s estimated worth was approximately $1.15 billion according to multiple media outlets.  However, unlike Joe Robbie, the former owner of the Miami Dolphins, whose family had to sell the Dolphins to pay estate taxes, Yankee fans have nothing to worry about. Why?  Because as of January 1, 2010, federal estate taxes have been repealed.  Since there is no federal estate tax this year, Mr. Steinbrenner’s estate will not be subject to a tax bill that in 2009 could have equaled approximately $500 million (a 45% rate). 

Mr. Steinbrenner joins three other billionaires who have died this year during the temporary estate tax repeal.  The largest estate is that of Texas energy mogul Dan Duncan, co-founder, chairman and majority shareholder of Enterprise Products.  His estate was estimated at nearly $10 billion, a potential tax bill of approximately $4.5 billion.  Another noted billionaire to die this year is Mary Janet Morse Cargill, whose family owns food and fertilizer conglomerate Cargill, who left behind an estimated estate of $1.6 billion.  Also, commercial real estate titan Walter Shorenstein died in June, with a net worth similar to Mr. Steinbrenner’s.

Although these billionaires likely engaged in significant estate planning, which would have reduced their ultimate tax bill, their passing has generated debate on the estate tax repeal and the cost to the government from repeal.  Senators Jon Kyl (R-AZ) and Blanche Lincoln (D-AR) issued a press release on July 14, 2010 describing their estate tax proposal: a 35% rate; a $5 million exemption phased in over ten years and indexed for inflation.  USA Today ran opposing stories in July 19’s edition debating whether there should be an estate tax at all – see Our view on death and taxes: Loopy estate tax policy highlights D.C. dysfunction and Opposing view on death and taxes: End the 'death tax'.  Now that the estate tax repeal is front and center, Congress may begin to take action.

A few more notes on repeal:  Remember, that during the repeal, there is only a limited step-up in basis for inherited assets; before repeal the basis of all inherited assets was stepped-up to date of death fair market value.  While it is impossible to determine what Mr. Steinbrenner’s basis in the Yankees was, he paid a mere $10 million for a controlling interest in the team in 1973.  Should the family choose to sell the team after Mr. Steinbrenner’s death (which, I assume is unlikely to happen), there would be a significant capital gains tax that would be due.  While this tax would no doubt be significant, it is far less than the estate taxes that would have been due had he died in 2009 or 2011. 

Battle of the Mall Heirs

Recently, Melvin Simon, the founder of Simon Property Group (the largest mall operator in the United States) died.  It was reported that his estate was valued at about one billion dollars.  According to the Wall Street Journal, citing court filings, seven months before he died, he "altered his will during a three-hour meeting in Asherwood, his palatial home near Indianapolis.  A financial adviser had to hold and guide his hand as he signed the revised document."

As a result of that revision, his second wife, Bren Simon, is now involved in a heated contest against the children of his first marriage.  It appears that the last will greatly increased Bren's share of her husband's estate, to the detriment of his children.  In the prior will, Mr. Simon's widow was to receive one-third of the estate, his children were to receive one-third, at Mrs. Simon's death, from a trust that paid her the income for her life, and the final third was to go to charity.  The new will gave Mrs. Simon one-half of the estate, and the other half was to go into charitable trusts after Mrs. Simon's death, with the children of Mr. Simon taking the remaining balance of the charitable trusts after 12 to 15 years.  Thus, Mrs. Simon's inheritance was significantly increased and the inheritance of Mr. Simon's children was greatly reduced.

A court will now have to decide if Mr. Simon possessed the necessary capacity to execute a new will.

In New Jersey, in order to execute a valid will, an individual must possess “testamentary capacity.”  The requirements for testamentary capacity are minimal: the testator must be an adult (age 18 or older) and must be capable of knowing and understanding in a general way (i) the nature and extent of his or her property, (ii) the natural objects of his or her bounty, and (iii) the disposition that he or she is making of that property, and must also be capable of (iv) relating these elements to one another and forming an orderly desire regarding the disposition of the property.  Unfortunately, whether an individual does, or does not, possess the necessary level of capacity is uncertain.

Every 71 seconds, someone in America develops Alzheimer's disease - the most common cause of dementia. The Alzheimer's Association estimates that about 14 million baby boomers can expect to develop dementia, including Alzheimer's disease, in their remaining lifetime.  Often, dementia goes undiagnosed.  Moreover, there are many different levels of dementia. What legal issues arise when a loved one suffers from dementia or Alzheimer's disease, leading to decreased mental capacity?  Is that individual, per se, incapable of possessing the necessary level of capacity to execute a new will?

This question may arise in various circumstances. For instance, a loved one may be in the early stages of Alzheimer's and he or she has not executed a will, or perhaps has executed a will, which is now lost. How can he ensure that his testamentary wishes are accomplished? May he execute a valid will given his diminished mental capacity? The issue of mental capacity under these circumstances is paramount for at least two reasons: (i) the presence of dementia raises the greater likelihood of a will contest and (ii) current New Jersey law may prevent the probate of a will executed by an individual who is adjudicated incapacitated.

In order to minimize the potential for a will contest, an experienced attorney must determine if the testator has the requisite mental capacity. If mental capacity is in question due to dementia, the attorney and physician must be well-informed of the diagnostic steps and stages of the disease to determine testamentary capacity. Attorneys might seek a written opinion from doctors and other health care workers as to the capacity of an older person. When a doctor is asked for an opinion on mental capacity, the basis for the opinion, whether negative or positive, must always be clearly recorded since the facts upon which he relies may later be challenged during a will contest. It may also be prudent to videotape the will execution as evidence of the testator's mental capacity. In addition to witnesses signing the will, the witnesses may also execute a certification specifying their relationship to the testator and affirming their observations of the testator which support the testator's lucidity during the will execution ceremony. Finally, the attorney may also draft a memorandum to the testator's file concerning the will execution in case there is future litigation.

If you or a loved one is suffering from a form of dementia such as Alzheimer's disease, it is important to evaluate the need and available options for estate planning. While Alzheimer's disease is a progressive dementing illness, persons in the mild or mild to moderate stages may retain the capacity to execute a valid will, power of attorney and/or living will. There are also additional measures necessary to reduce the likelihood of a will contest and/or to support the validity of the will if a contest does in fact, take place.

To learn more, go to http://www.einhornharris.com/articles/EstatePlanningWhenMentalCapacityIsInQuestion/ or contact our office at 973-627-7300.

The New Jersey Inheritance Tax - the lesser known New Jersey death tax

I find that clients often use the terms "estate tax" and "inheritance tax" interchangeably. Usually, that isn't a problem, and I know exactly what they are talking about. However, in New Jersey there really is a distinction between the "estate tax" and the "inheritance tax." This is New Jersey, after all -- so we have two taxes. Go figure!

The New Jersey Estate Tax is the better known of the two taxes. The tax is imposed on estates of over $675,000. However, amounts passing to a surviving spouse are exempt from the tax. While the tax rates imposed in New Jersey are lower than the Federal estate tax rates which most of use are familiar with, they can still be quite significant. In fact, through a strange quirk in the law, the rates start at a rate as high as 37% on the first $52,174 over the exemption, and, thereafter, the rates range from 4.8% to 16%. So, for example, the following taxes will be imposed on New Jersey estates:

• $1,000,000 $ 33,200
• $1,500,000 $ 64,400
• $2,000,000 $ 99,600
• $3,500,000 $ 229,200
• $10,000,000 $1,067,600

The New Jersey Inheritance Tax is less a tax based upon value as it is a tax based upon the relationship between the deceased and the beneficiary. All beneficiaries are assigned to a certain "class." There are four classes of beneficiaries: Class A, Class C, Class D and Class E. I didn't forget Class B -- this Class was eliminated in 1963. Depending upon the Class that a beneficiary falls into, there may or may not be a New Jersey Inheritance Tax.

Class A beneficiaries include the decedent's spouse, civil union partner, children, grandchildren, great-grandchildren, step-child, mother, father or grandparents. Bequests to Class A beneficiaries are wholly exempt from New Jersey Inheritance Taxes.

Class C beneficiaries include the decedent's siblings, half-siblings, son-in-law, daughter-in-law, widow of a deceased son, and widower of a deceased daughter. Bequests to Class C beneficiaries are taxed on amounts in excess of a $25,000 exemption to each. The first $1,075,000 over the exemption, received by a Class C beneficiary, is taxed at 11% and the amount in excess of that figure is taxed at rates from 13% to a maximum of 16%.

Class E beneficiaries include tax exempt entities such as charities and not-for-profit organizations. Bequests to Class E beneficiaries are wholly exempt from the New Jersey Inheritance Tax.

Class D beneficiaries include anyone who is not a Class A, C or E beneficiary. So, for example, a nephew, niece, cousin, fiance, best friend, or non-civil union partner are all Class D beneficiaries. Bequests to Class D beneficiaries are taxed on the first dollar (unless the bequest is less than $500) at rates of 15% up to $700,000 and 16% in excess of that amount.

While an estate will receive a dollar-for-dollar credit against New Jersey Estate Taxes for amounts paid as Inheritance Taxes, the tax can be extremely onerous. While this tax is generally not a concern for most "nuclear families", for individuals without children, it can be the most unkind tax of all.

The Inheritance Tax also proves far more difficult to plan around than estate taxes because, in most cases, clients are more reluctant to embark on a lifetime gifting strategy when the intended beneficiaries are not their spouse or children. However, with some careful planning the effect of the tax can be reduced.

Kay v. Kay - Estate of Divorcing Spouse Has Equitable Claim

In a unanimous decision, the New Jersey Supreme Court recently ruled that the estate of a deceased spouse who died while her divorce matter was pending, was entitled to assert equitable claims against the surviving spouse. The case of Kay v. Kay, 405 N.J. Super 278 (App. Div. 2009), aff’d, ____ N.J. ___ (2010), was a logical extension of the Supreme Court's decision in Carr v. Carr, 120 N.J. 336 (1990) and a rejection of the case of Kruzdlo v. Kruzdlo, 251 N.J. Super. 70 (Ch. Div. 1990).

Mrs. and Mrs. Kay were married in 1973. It was a second marriage for both of them and each had children from their first marriages. There were no children born of this marriage. Mrs. Kay filed a complaint for divorce in July 2006, when she was 70 years old. Mr. Kay was 83 years old. In August 2007, Mr. Kay died leaving a will with specific bequests to his grandchildren and a nephew, with the remainder of his estate devised to his brother. After Mr. Kay's death, Mrs. Kay withdrew assets from joint accounts which she owned with Mr. Kay, leaving Mr. Kay's estate with insufficient assets to pay for his burial or attorney's fees.

The executor of Mr. Kay's estate sought a constructive trust to prevent the unjust enrichment that would allegedly occur if Mrs. Kay retained marital property beneficially belonging to Mr. Kay. The trial court denied the estate leave to substitute for Mr. Kay and file amended pleadings, and it dismissed the divorce action. The trial court determined that the result of Mr. Kay's death required the divorce action to terminate and left his estate with no recourse, under a strict reading of the law. On appeal, Mr. Kay's estate successfully argued that the trial court should have accepted the pleadings and considered whether the equities arising from the facts alleged warranted relief. The Appellate Division relied upon the reasoning in Carr, infra, where the Supreme Court held that a surviving spouse could continue divorce litigation for the limited purpose of proving that the deceased spouse had diverted marital assets, because equity demanded that the innocent spouse have a forum through which to recover those assets for equitable distribution. The Supreme Court, in Kay, also rejected the holding of Kruzdlo, where it was held that the estate of a deceased spouse was not entitled to assert equitable claims against the marital estate sounding in constructive trust or unjust enrichment

The Kay case was, basically, a reverse-Carr case. In Carr, the surviving spouse sought equitable relief. In Kay, the estate of the deceased spouse sought similar relief. Just as in Carr, the Court commented on the anomalous results that might occur when the statutes governing equitable distribution and divorce collide with the probate statutes. The two separate statutory schemes sometimes leave one party with no statutory remedy through no fault of his or her own. In those cases, the Courts may fashion an equitable remedy.

Roth IRA Conversion

Lost among all of the talk about Federal estate tax repeal, is one of the greatest opportunities that Congress has given to many of my clients in years -- the uncapped Roth IRA conversion opportunity. Until 2010, a Traditional IRA could only be converted to a Roth IRA by a taxpayer with adjusted gross income of less than $100,000. However, starting this year, anyone can convert a Traditional IRA to a Roth IRA, regardless of the amount of adjusted gross income earned in the year. In analyzing the benefits of a Roth IRA conversion, I have found that most of my clients will achieve significant benefits from converting. Among the benefits achieved are:

(i) no required minimum distribution rules for the original owner of the Roth IRA;
(ii) the ability to pay income taxes from non-tax-deferred assets which, in effect, results in increased deferral opportunities; and
(iii) paying income taxes with dollars that might otherwise have been subject to estate taxes (effectively paying your kids future income tax liability with pre-estate tax dollars).

Of course, a Roth IRA conversion may not be right for everyone, but everyone should, at a minimum, consider whether it is right for their individual situation.

Please Hold Your Applause

So the day that we thought would never get here, is here. On January 1, 2010, the Federal estate tax was repealed. Yes, you heard me right. There is no longer a Federal estate tax. So let's assume that when Bill Gates gets a look at the new Apple tablet computing device, he is so overcome with fear that he drops dead. Even though in real life he is an extremely philanthropic guy, assume that he has a will that leaves his entire fortune to his children. So the kids inherit $50,000,000,000 tax free in 2010, and the IRS receives nothing. If Bill had the same plan and died in 2009, the IRS would have received over $22,000,000,000 (all those zeroes mean we are talking about billions of dollars). If Bill dies in 2011, anything over $1,000,000 (these zeroes mean one million dollars) will be subject to Federal estate taxes at rates as high as 55%. Yes, you read that correctly, the Federal estate tax repeal is temporary -- it comes back in 2011. But wait -- there's more -- there is a very real possibility that the Federal estate tax could come back in 2010 and may even be made effective retroactively back to January 1, 2010. Of course, you and I know how insane this is. But Congress has only known about this for eight years. Certainly, they could not have been expected to deal with these issues over that short a period of time. What this means is that it is a very interesting time to be practicing in the area of estate planning. It also means that everyone should revisit their estate plan to determine whether or not changes are necessary. You might also think of writing to your member of Congress and suggest they get off their "keisters" and figure this thing out.

Estate Planning for You

I would like to welcome you to my estate planning law blog. I am a Trusts and Estates Attorney practicing in Denville, New Jersey. I am a partner in the law firm of Einhorn, Harris, Ascher, Barbarito & Frost, P.C. I intend to use this blog as a means of communicating important ideas and changes in the law to my clients and the general public. You should feel free to comment and/or submit questions to me and I will do my best to respond. Of course, the information contained herein is intended for informational purposes only and should not be construed as legal advice. You should seek competent legal counsel for advice on any legal matter. Anyone to whom this communication is not expressly addressed should seek advice based on their particular circumstances from their legal advisor.

Please feel free to visit my website at www.estateplanningnj.com or www.einhornharris.com.