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Estate Planning – Changing as We Age (Part 4)

            Last week I was telling you why the New Jersey probate process can be easy but the tax waiver system designed to protect the State’s ability to collect estate and inheritance tax can tie up your money for years.  That’s because the law requires financial institutions to freeze ½ of your account until the tax is paid – or your estate satisfies the State of New Jersey that it owes no estate or inheritance taxes.

            In many cases, an estate and/or inheritance tax return must be filed even though no taxes are due, simply because the State wants to determine for itself that there are not taxes owing before it will allow the funds to be “unfrozen”. The tax waiver is proof that New Jersey has given it’s “OK”.  The problem is that the State doesn’t work quickly so assets can be frozen for a period of years.  So, how can you avoid this?

             The tax waiver system applies to any accounts that were in the decedent’s (the person who has died) name. That includes probate assets and non-probate assets.  An account which is payable on death to another is a non-probate asset.  Its distribution is not governed by what is in the will.  The account passes directly to the named beneficiary.  It is, however, still subject to the tax waiver process.

             What is not controlled by the tax waivers are assets that were not in the decedent’s name at the time of death, such as assets in a trust. Revocable living trusts – commonly known as living trusts – can be a very useful tool as a tax waiver avoidance strategy.

              By establishing a revocable trust and retitling your assets to that trust, when you pass away those assets can be transferred to your heirs without any of them being frozen by the State. Your heirs will have complete access to them without having to wait for the State to give its blessing.  And you still have complete access to those accounts while you are alive if you designate yourself as the trustee of that trust.

              But, let me be clear. That doesn’t mean there won’t be any estate or inheritance taxes  In some cases there will be taxes owing and other cases not.  Anything in a revocable trust counts when determining the tax just the same as assets in your name.  The same tax laws apply.  The advantage of the trust us, however, is it allows complete access to all the assets without government meddling.

              Another thing to keep in mind is that there are two requirements here. The first is that you need to have the trust established while you are alive.  The second part is that you must retitle the assets so that the trust is the account owner.  I see too many people who tell me they have a trust set up but a closer look reveals that they never funded the trust or over time they moved their assets to different financial institutions and didn’t remember to keep the trust as the account owner.  If the trust exists but everything you own is held outside the trust then you’ve effectively accomplished nothing.

              Finally, another benefit of the trust is that as you age and need assistance with handling your finances, you can designate alternate trustees. Those alternates won’t need to go through the same scrutiny with financial institutions as your agents under power of attorney must when presenting your power of attorney document.

               That’s because the financial institutions will have already reviewed the trust document when it was created and the accounts retitled. This makes for a much smoother transition should, for example, you need your children to step up and begin assisting you in handling your finances, which could occur suddenly.  We see banks and brokerage firms increasingly scrutinize powers of attorney which may not be drafted specifically enough for their liking, causing them to refuse to honor them.  In many cases the parent no longer has capacity to execute a new power of attorney.  The trust avoids this potential problem.

               One final word.  The living trust is an important consideration for any senior estate plan but like any strategy it isn’t a one size fits all solution.  Sitting down with a competent elder and estate planning attorney who is familiar with all the issues faced by seniors – estate and inheritance taxes as well as long term care – can help you to decide if this type of plan is right for you.