Estate Planning The Legal and Tax Aspects of “Finishing Strong” As Presented By: David K. Whitlock, Esq. Law Office of David K. Whitlock E. 80 Route 4 – Suite 170 Paramus, NJ (201) davidkwhitlock.com

The Basic Three Legal Documents  Will  Power of Attorney  Medical Directive

Reasons for Having a Valid Will  If there is no Will, State Intestacy Statutes will decide who inherits your assets  Avoids cost and delay of posting a surety bond  Names Executor to settle your Estate  Names Guardians for minor children  Control ages heirs will inherit assets

Power of Attorney  Effective during life  Name person to handle financial matters on your behalf  “Durable “or “Springing Power” of Attorney  Important to choose proper “gift clause”

Medical Directives  Also known as Living Wills, Advance Health Care Proxies and Directives  Names person to make medical decisions if you cannot make your own decisions  Makes wishes known in advance concerning a terminal illness or permanent coma  Include HIPAA Privacy clauses

What is a Revocable Trust?  Revocable Trust (or Living Trust) is a Trust you control yourself while you are alive and acts as a Will on your death  Typically uses your social security number, so no separate income tax return required while you are alive  Trust can be funded while you are alive

Do I need a Revocable Trust?  Not absolutely necessary in New Jersey – probate is relatively easy  Some benefit of using Revocable Trust Privacy: not a public record NJ Tax Waivers not required on death Good for holding out-of-state real estate Estate is easier to administer Useful is there is a disability

Federal Estate Tax Law  No tax on assets left to citizen spouse  New Legislation expected soon  45% tax on amount over exemption  Exemption depends on year of death: 2008 = $2 million 2009 = $3.5 million 2010 = Repealed – no federal estate tax 2011= $1 million

New Jersey Estate Tax  No tax on assets left to citizen spouse  Exemption = $675,000  Tax rate is 37% between $675,000 and $727,000 (“bubble”)  Progressive rate between 5% -16%  Tax on $1 million = $33,200  Tax on $1.5 million = $66,400  Tax on $2 million = $99,600  Death Bed Gifts Avoids New Jersey Estate Tax (but watch loss of step-up in cost basis)

New Jersey Inheritance Tax  Tax is Based on Relationship of Decedent to Beneficiary  Spouses, Children, Grandchildren and parents are Exempt (“Class A”)  Brothers and Sisters are exempt on first $25,000; 11% on next $1,075,000; 13% on the next $300,000; 14% on next $300,000 and 16% on any amount over $1,700,000 (“Class C”)  All others are taxed at 15% on first $700,000 and 16% on excess (“Class D”)  Tax is collected on the greater of the New Jersey Estate Tax or New Jersey Inheritance Tax (not both)

Federal Gift Tax  Unlimited gifts to citizen spouses  $13,000 exclusion per year to each recipient (“annual exclusion”)  If annual exclusion is exceeded, there is a $1 million lifetime exemption and gift tax returns need to be filed  45% tax rate if $1 million exemption exceeded  Gift tax exemption used reduces estate tax exemption remaining at death  Spouses can “split” gifts

State Gift Tax  No New Jersey gift tax

Attention to Non-Probate Assets  Many Assets Don’t pass under a Will or Revocable Trust: Life Insurance Annuities Joint Accounts (convenience or inheritance?) IRA, 401k and other retirement accounts

Credit Shelter Trusts  On first spouse’s death, Trust is created to shelter assets from tax in second spouse’s estate  Geared to State amount ($675,000) or federal amount ($3.5 million – causes NJ tax on first death) – Credit shelter trust created prior to 2002 most likely have federal amount and will cause NJ estate tax on death of first spouse  Sometimes structured as a Disclaimer Trust – only if spouse files a disclaimer within 9 months of death is Trust funded

Life Insurance Trusts  Avoids estate tax on life insurance proceeds in both spouses’ estates

Medicaid Planning  Long Term Care Insurance important – recover premiums in first year of illness  5 year rule for gifts  Prepaid funerals allowed  Gift of house to caretaker child living in house for 2 years  Gifts to disabled child are exempt  Spouse allowed to keep house and between $20,000 and $100,000 of assets  Gift clause in Power of Attorney document