9 Things You Should Know When Planning Your Estate

So you’re getting older, maybe recently married, or are starting a family.  Perhaps a loved one passed away or you recently got divorced.  Or maybe you just want to get things in order. As an individual or a couple, you must ask yourself, “When do I need a will?”  or “Do I even need a will at all?”

As human beings, we procrastinate when dealing with things that we are afraid of or cannot decide on.  But this procrastination and avoidance puts our loved ones and our hard-earned assets at risk.  Planning DOES NOT increase our chances of dying or becoming disabled.  Lack of planning, however, increases the amount of uncertainty, bureaucracy and overall strain that your loved ones will eventually face.

Procrastination does not avoid mortality.

            At the end of the day, we need to address these issues.  We MUST address these issues.    This report is intended to provide you with some basic information about estate planning to help you with your decision-making and to avoid common mistakes made by others when designing their estates.

In most cases, if you are a single individual with limited assets, you do not need to have a will.  In New Jersey, probate (the process of admitting your will to the court for transferring your assets, appointing guardians, etc…) is a relatively simple process.  Even without a will, the probate of an individual’s estate with limited assets and no children is generally a quick and easy process.

NJ probate is a relatively simple process.

            If you have more significant assets or you have minor children, you should execute a Last Will and Testament, stating who you would like to get your assets upon your death and who should care for any surviving children. A standard will is one that is written, signed by the testator, and witnessed by two individuals. A standard will also contains an attestation clause that declares it to be the last will of the testator.

Beyond the basics, there are several things you should be aware of when designing your own estate plan.  Here are a few of those pieces of advice:

  1. Avoid “I love you” Wills. Years ago, many attorneys would create simple wills for younger couples, leaving all property out right to each other.  So called “I love you” wills, termed as such saying “I love you, so I leave you all my property”, are rarely the best design for a will.  Even for young couples with relatively few assets.  Simple wills should include “disclaimer” provisions, giving a surviving spouse at least the option of putting property in trust to avoid creditors or to take advantage of existing tax laws.
  2. For specific gifts, be aware how taxes are deducted. If you leave property or stated sums of money to specific individuals in your will, any taxes imposed will be deducted from the amount of the gift (actually called a “bequest” at death).  If the property is an item(s) other than cash, your beneficiary might have to come out of pocket to pay taxes.  Depending on your wishes, you may choose to include a provision in your will to pay taxes from your residuary estate rather than having taxes netted from these gifts.
  3. Use a Precatory Letter for personal property such as jewelry or collectibles. Don’t list specific items in your will.  They get sold, get given away, lost or you may change your mind as to who should have them.  Reference a list in your will and create a separate, hand-written letter stating what items you would like to leave to which individuals, charities, etc…  Although such letters, called “precatory” letters because they express a wish or intention) are not mandatory for courts and judges to follow, in New Jersey judges will generally adhere to wishes stated in precatory letters.
  4. Use Discretionary Trusts to hold property for your beneficiaries. Since the repeal of the “rule against perpetuities” in New Jersey (and other states), decedents can create trusts that hold property for their beneficiaries in perpetuity (forever).  Creating ages or time frames to distribute trust property is completely optional and flexible.  You have no way of knowing when your children will need money for health reasons, marriage, education, etc.  It is also likely that you want to protect the assets you have saved for your children from being drained through potential divorces, personal debts or even lawsuits.   Discretionary trusts (also called “dynasty” or “perpetual” trusts) provide this kind of protection and may be created during your life (living trusts) or at your death (testamentary trusts).
  5. Avoid using Revocable Living Trusts to avoid probate. In New Jersey (and in other states where probate is a relatively simple process), setting up your estate plan to avoid probate is a bit of a wasted exercise both in time and in money.  In many states (NY and FL, for example), the probate process is time consuming and costly, tying up assets for beneficiaries and may cost tens of thousands of dollars in legal fees. As stated before, New Jersey probate is generally simple and less expensive.  Many less scrupulous attorneys (yes, there are still some out there!) try to convince people (particularly retirees and those nearing retirement) to create “living trusts” to own assets during their lifetime which would all avoid the probate process.  Then they create a simplified will that “pours over” any remaining assets at death into the trust (thus, called “pour over wills”).  The legal work is costly, with attorneys charging two or three times what they would charge for a more appropriate will arrangement and the setup is complicated, requiring clients to open new bank accounts in the name of the trust (sometimes 2 for spouses) and changing ownership of all their assets into trust name.  Clients have to be careful to put all future income and assets into the trust (which we’ve found is rarely is done correctly).
  6. If you don’t have time to have a will created by a lawyer, create a Holographic will. If you need to create a quick will, perhaps before leaving on a trip or having surgery, consider writing your own.  You will need to hand-write the will and sign it, however, you will not need witnesses or a notary.  A holographic will can be admitted to probate only by filing in Superior Court.  This type of will is more vulnerable to challenge and will cost more to probate given the formal filing requirement and court appearances that will be required of your lawyer.  For these reasons, and because the holographic will most likely will not necessarily envision all situations that may arise down the road, we suggest writing a holographic will only as a last resort.
  7. Consider a Springing power of attorney, instead of general durable powers. A power of attorney (POA) is a document you use to appoint a person to act, as your “attorney-in-fact”, on your behalf.  A general power would allow a person, such as a spouse, business partner, or trusted friend, to take any actions in your place other than making medical decisions (an advanced directive is needed for this) or executing a new will.  While a general, active POA may be appropriate in some situations, at times you might be uncomfortable granting such broad power to another while you are healthy and of sound mind.  Consider a “springing” power of attorney, which would only empower your attorney-in-fact to act if you are faced with a disability as determined by your physician.  Other types of powers, including nondurable powers (ones that empower someone to act for you until you become disabled) and limited powers (ones that empower someone for a limited, specific time and purpose) may be appropriate in other situations.
  8. Be aware of both New Jersey Estate taxes and New Jersey Inheritance taxes. In addition to the estate tax that an estate might have to pay to the federal government, the State of New Jersey imposes an additional tax on assets of an estate:  inheritance tax.  Before we delve into this misunderstood tax, you should know that no federal or state taxes are imposed on assets passing to surviving spouses who are U.S, citizens (taxes may be imposed if the survivor is not a U.S. citizen).  Also, for estates of $11,200,000 or less ($22,400,000 for married couples), no federal estate tax will be imposed.

Even with the elimination of the New Jersey state estate tax, New Jersey still imposes an inheritance tax on certain types of beneficiaries.  If you leave assets to beneficiaries who are not your lineal ancestors or descendants (not parents, children, grandchildren, etc…), New Jersey imposes an inheritance tax of approximately 15%.  Some proper planning may help to reduce or minimize these taxes.

  1. Consider Irrevocable trusts to reduce your potential estate tax. While “revocable” living trusts may not make much sense to avoid probate, using “irrevocable” trusts (a trust you cannot cancel or “revoke”) makes sense for larger estates that face higher potential tax liabilities.  There are some situations where you (the giver of the assets) must live for at least 3 years for the gift to be completed.  For example, many persons transfer their life insurance policies to an “ILIT” (irrevocable life insurance trust”) later in life to avoid policy proceeds from being subject to estate tax.  Inclusion of these policies in your estate is based upon who “owns” the policy, not who is it payable to (i.e., the beneficiary(ies)).  But you must live at least 3 years from the date of this transfer for it to become effective.  If not, everyone who was sick and dying would gift their insurance policies just before they died to avoid tax.  New Jersey also imposes a “3-year rule” on all gifts of assets.

The basic message to you is to work with a skilled attorney and get good legal advice.  Do it yourself websites such as Legal Zoom are not the best way to protect and provide for your loved ones.

 

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