TEN IMPORTANT ESTATE PLANNING CONSIDERATIONS – PART 1

by Thomas D. Begley, Jr., Esquire, CELA, and Joellen C. Meckley, Esquire

This is the first in a two-part series on important reasons for Estate Planning. (The second part can be found here.)

In calendar year 2000, the exemption from federal estate tax was $675,000.  Clients who owned a home, had a retirement plan, and even modest other assets, had to consider this tax.  Beginning in 2002, the exemption gradually increased from $1,000,000 to the current level of $11,700,000.  Only 0.07% of decedents dying in 2019 had to pay any federal estate tax.  New Jersey decoupled from the Federal Estate Tax at the $675,000 level.  Many individuals still had to plan to avoid or minimize this tax.  Beginning January 1, 2017, the New Jersey estate tax exemption was increased to $2,000,000, and effective January 1, 2018, the New Jersey estate tax was repealed.  The Estate Planning Bar has seen a significant erosion in clients seeking to do estate tax planning.  However, this does not mean there are no other reasons for clients to plan their estates.

1. Estate, Gift, and Income Tax.  In 2021 the federal estate tax exemption is $11,700,000.  For a married couple, it is essentially double.  The New Jersey estate tax has been repealed, but the New Jersey inheritance tax remains in effect.  It is very possible that in the near future, because of the pandemic, the federal estate tax exemption will be reduced and the New Jersey estate tax may be reinstated.  Income tax planning is always important, but now even more so because of the provisions of the SECURE Act discussed below.
2. Bloodline Trusts.  If a client leaves assets to children, the assets can be subject to claims of creditors, can become entangled in divorce, and if the child dies the inherited assets can be left to the child’s spouse who then may remarry and leave the inherited assets to his or her new spouse effectively disinheriting the client’s grandchildren.  Consideration should be given to leaving significant assets to children in a Bloodline Trust.  The trust protects the assets from claims of creditors, claims of equitable distribution, squandering of assets by children, and preserves the inheritance for grandchildren rather than sons- or daughters-in-law and future spouses of sons- and daughters-in-law.
3. Blended Families.  Blended families present a particularly difficult problem with respect to Estate Planning.  Typically a blended family consists of a second or subsequent marriage where each spouse has children from prior marriages.  The spouses love one another and trust one another and feel they can leave assets to the surviving spouse who will then take care of the client’s children by the prior marriage.  Experience has shown that in a very high percentage of the cases, this is not the outcome.  The better way to plan for a blended family situation is for each spouse to establish a trust for the benefit of the surviving spouse.  The trustee could be a child from each spouse’s family serving as co-trustees.  The surviving spouse could take as much money as is necessary for the surviving spouse’s health, education, maintenance, and support from the trust, but on the death of the surviving spouse the remaining funds would go to the children of the first spouse to die.  If one spouse owns the home in their own name, the surviving spouse could be given the right to use and occupy the home for as long as he or she lives, unless he or she remarries or cohabits, provided the surviving spouse pays all of the bills in connection with the home, such as real estate taxes, insurance, utilities, etc.
4. Disabled Beneficiaries.  Frequently spouses or children who are intended as beneficiaries of an estate are receiving means-tested public benefits, such as Supplemental Security Income (SSI) and Medicaid.  There is an asset limit of $2,000 for eligibility for these programs.  If someone dies and leaves a beneficiary receiving these benefits money, they will lose the benefits.  The solution is to establish a Third Party Special Needs Trust to hold the assets for the benefit of the disabled beneficiary.  Assets in the trust are not counted for SSI and Medicaid eligibility purposes.  A professional trustee should always be considered where there is a disabled beneficiary.  For small trusts (i.e., under $500,000) there are disability organizations that can serve as trustee.  For large trusts the disability organizations or a bank specializing in Special Needs Trusts could be named to serve as trustee.  Family members generally make poor trustees of Special Needs Trusts and have a large target on their backs.  If the family member administers the trust improperly, he or she can be sued by Social Security and/or Medicaid.
5. Grandchildren. Clients frequently want to leave money to their grandchildren.  People often think they’ll leave money to their children who will then take care of the grandchildren.  However, a gift to grandchildren directly, however small, reinforces the special bond between grandparents and grandchildren.  The gift can be a small sum of money and can be held by the parent as custodian until the grandchild reached a certain age (e.g., 18 or 21) or the gift can be large and left in a trust for whatever purpose is desired (e.g., payment of educational expenses).