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IN THIS ISSUE
SAVING FOR COLLEGE
TRUST MODIFICATION
THE FATE OF THE
STANDARD DEDUCTION
ARTICLES OF INTEREST
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Today, there are many Do It Yourself (DIY) resources available to the public allowing people to prepare their own estate planning documents without the direct assistance of an attorney. Websites like LegalZoom.com, WillMaker.com, and LawDepot.com are some of the most common. While all these resources are legal and can arguably save money, the question is whether it is a good idea to prepare your own documents without consulting an attorney to make sure that all your wishes are being addressed properly.
When I see the Trust and Will commercial on television my mind immediately takes me back to 1971 when I was in the Estate and Trust Administration department of Bankers Trust Company in New York City. We had a client who had hired an attorney to prepare new estate planning documents for him. He was single, had three brothers as his only heirs, and had an estate valued at over $750,000. A sizeable estate for 1971. He left his estate to his three brothers equally. However, this gentleman realized that when he made his new Will, he failed to make a provision for a gold ring that was passed down through many generations of his family. It was his intention to leave his youngest brother, who was also his favored brother, the family ring. He decided that since he just paid for new estate planning documents, he would save a few dollars in legal fees by preparing his own Codicil to the new Will leaving his youngest brother the ring.
He died shortly after preparing his Codicil. Unfortunately, when he prepared his Codicil, he left the ring to his youngest brother but inadvertently left the remainder of his estate to his other two brothers accidentally cutting out his youngest brother from sharing in the residue of his estate as was his original intention. Since the brothers did not get along, when they found out that their youngest brother was cut out, they refused to share with him. This is a true story!
If my client had contacted his attorney to prepare the Codicil instead of doing it himself, his estate would have been distributed equally among his three brothers as he originally intended. I have been sharing this cautionary tale with prospective Trust and Estate clients since I began working in New Jersey in 1974. In my years of experience, there are several important reasons that you need the expertise of a Trust and Estate (T&E) attorney when preparing your overall estate plan.
- Estate planning attorneys tailor documents to your specific needs, ensuring they align with your goals, state laws, and unique family situations. DIY templates may not account for nuances like blended families, special needs beneficiaries, or complex assets. A DIY template cannot ask all the important WHAT IF questions that can only be drawn out in conversation.
- There could be tax implications that are not being contemplated by DIY software that could impact your estate. A T&E attorney can plan strategies concerning tax and asset plans to help minimize estate taxes, protect assets from creditors, and structure trusts to provide for your heirs in the most beneficial way.
- The expertise of a T&E attorney helps avoid potential costly drafting errors that may occur in DIY estate documents that can lead to disputes, additional legal fees, probate complications, or unintended distributions of assets.
- A T&E attorney can assist with incapacity planning for your estate, which includes the preparation of powers of attorney and healthcare directives, ensuring your affairs are managed according to your wishes if you become incapacitated.
- Ongoing support and update changes such as marriage, divorce, birth, death, or financial shifts may require updates to your estate plan. A T&E attorney provides ongoing guidance to keep your plan up to date.
Before you meet with your T&E attorney, you are welcome to begin your estate planning journey by meeting with one of our experienced trust officers to discuss your estate planning needs and to explore the many WHAT IF questions given our experience administering trusts and estates. So, when you finally meet with your attorney you will hopefully be ahead of the curve and can have a more productive meeting about your estate planning needs.
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MONTHLY QUESTION & ANSWER | |
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Q. I understand that the $13.99 million exemption from the federal estate and gift tax gets cut in half at the end of this year. Will this really happen? Should I be doing something about my estate plan?
A. Your understanding is correct. Congress has scheduled reductions in the estate tax exemption before, and every time the action has been reversed before it was implemented. This time could be different.
However, with the Republicans holding both the House and Senate, and given that the Senate Majority Leader, John Thune, has in the past advocated the total repeal of the federal estate tax, there is a good chance that the current exemption amount will be renewed, according to many tax observers.
You will get an early clue to the outcome of the tax debate in the coming fight over how the federal budget is to be scored this year. Should the baseline be scored under current policy, or under current law? The difference is that under current law a portion of the 2017 tax reform expires, which constitutes a future tax increase worth an estimated $4.6 trillion. Under current policy analysis, cancelling a future tax increase has no effect on budgets, we just keep doing what we are doing.
If the latter view prevails, it is likely that the larger estate tax exemption will be saved. But either way, you should review your estate plans this year if they are several years old. There are many factors other than taxes that may call for estate plan amendment.
As a wise man once said, predictions are hard, especially about the future.
HAVE A QUESTION ON TRUSTS, WILLS, OR INVESTMENT MANAGEMENT?
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For general informational purposes only. This information does not constitute legal advice. | |
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In one of our Of Interest articles in this Newsletter, Five Reasons Not To Give Your Child A Power Of Attorney from Kiplinger.com, read about why it is not always a good idea to name your children as your attorney in fact under your power of attorney. For example, we often recommend that when someone establishes a Standby Living Trust naming Garden State Trust Company (GSTC) as Trustee, they also execute a limited financial power of attorney naming GSTC as attorney in fact so that we have the necessary authority to move financial assets to the Standby Living Trust upon the settlor's incapacity thereby funding the trust in accordance with the settlor's wishes. A good reason to do this is because your Standby Living Trust spells out how you want your assets managed in case of incapacity and an inexperienced attorney in fact (the individual named as POA) may not understand how to proceed or decide not to fund the Trust. With a professional fiduciary, like GSTC, there is peace of mind in knowing that your wishes will be carried out as intended, leaving no question about how your monies are to be managed.
Lastly, in Punxsutawney, Pennsylvania before a huge crowd filled with excitement and anticipation, and bundled up against temperatures in the 20s, the groundhog known as Punxsutawney Phil saw his shadow Sunday morning February 2, 2025. That means we could see six more weeks of winter, at least according to Groundhog Day lore.
Hoping Phil is wrong!
Sincerely,
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Parents who are building a college fund for their child or children have two tax-advantaged alternatives, the 529 plan and the Coverdell Education Savings Account (CESA). Contributions to 529 plans and CESAs are not tax deductible, but there is no tax as the income builds up in the account. Distributions from the plans are tax free if they are used for qualified education expenses. The definition of what qualifies is not the same for the two approaches.
CESAs have one advantage over 529 plans. Where 529 plans are typically limited to just a few investment choices, with the money managed by the plan sponsor, there are no similar limitations for CESAs.
However, there are CESA disadvantages to consider also, where the 529 plan is superior. Most importantly, no more than $2,000 per year per student may be contributed to an ESA. Second, contributions must end when the beneficiary reaches age 18. Therefore, no more than $36,000 total may be set aside for one student, which almost certainly will fall far short of the financial need. Still, having a dedicated capital source that is growing tax free as one begins higher education is nothing to sneeze at.
A third problem is that contributions to CESAs are not permitted for those whose income is too high--modified adjusted gross income of $110,000 for singles, $220,000 for a married couple. No similar limitation applies to the 529 plan.
Successor Beneficiaries
What if the beneficiary decides against college? The CESA accumulation may be rolled into another CESA for a family member of a beneficiary, or a new beneficiary may be designated for the 529 plan. The new beneficiary must be of the same or higher generation as the original beneficiary. Alternatively, subject to a variety of rules, unused 529 plan money may be rolled into a Roth IRA for the beneficiary.
The CESA must be distributed by the time the beneficiary reaches age 30, or within 30 days after that date. The distribution may be in the form of a rollover to another family member. Amounts not rolled over and not used for qualified expenses are included in taxable income, and a 10% tax penalty applies. No such age limits apply to the 529 plan.
Start Early
As valuable as the tax advantages of CESAs and 529 plans may be, the biggest advantage is starting early. The sooner one begins setting aside funds for a college education, the more time that capital has to grow into something significant.
(February 2025)
© 2025 M.A. Co. All rights reserved.
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Sometimes a sound estate plan may need to be modified after it is put into effect. One such situation was recently outlined in Private Letter Ruling 202504006 from the IRS.
Decedent's estate plan called for the creation of two trusts, a Marital Trust for the surviving spouse and a Decedent's Trust. Although the Ruling doesn't mention it, the Decedent's Trust was likely funded so as to fully consume the Decedent's federal estate tax exemption while avoiding being included in the taxable estate of the surviving spouse. With the unlimited marital deduction, there was probably no federal estate tax due at Decedent's death.
The Marital Trust was a Qualified Terminable Interest Property (QTIP) trust, which meant that the surviving spouse could not change the final disposition of the trust assets. The trust beneficiaries arranged under state law to divide the QTIP trust into two nearly identical trusts, leaving all income and remainder interests intact. The difference was that Trust 1 would be funded to take full advantage of the surviving spouse's federal estate tax exemption, and Trust 2 would hold the balance of the assets.
The next step was for the surviving spouse to disclaim her entire interest in the newly created Trust 1. This was a transfer subject to the federal gift tax. By doing so, the surviving spouse consumed her entire federal estate and gift tax exemption--she "locked in" the exemption, and will not lose should Congress decide to lower the exempt amount in the future.
The questions presented to the IRS were whether these actions required the recognition of gain or loss for income taxes, whether Trust 2 continued as a valid QTIP trust, whether the spouse would be treated as having made a transfer to Trust 2, and what the tax effects will be when the spouse dies. Happily, for this estate, there were no adverse tax determinations.
No numbers were presented in the Ruling, but it seems likely that this estate saved millions of dollars in estate tax obligations with this modification.
(February 2025)
© 2025 M.A. Co. All rights reserved.
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The Fate of the Standard Deduction | |
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In 2017 the standard deduction for married couples filing jointly was $12,700, and was used by 68% of taxpayers. It was set to grow to $13,000 in 2018. Instead, under the Tax Cuts and Jobs Act of 2017, the standard deduction for couples was lifted to $24,000. This was not as significant a tax break as it first appears, because the personal exemption, worth $4,050 per dependent, was eliminated at the same time. Nevertheless, the change was simplifying for many taxpayers, because by 2023 91% of taxpayers took the standard deduction instead of itemizing.
Due to inflation, the standard deduction for couples has grown to $30,000 this year. However, that change is scheduled to expire at the end of the year.
Writing for the American Association of Individual Investors, Charles Rotblut observes that the old standard deduction would have been adjusted for inflation just as the current one has been. According to his calculations, the smaller standard deduction would have grown to $16,200 by this year. If Congress does not act, next year's standard deduction will be something in that neighborhood.
If you have the feeling that the inflation adjustments to the standard deduction seem low, you are not wrong. The 2017 tax reform adopted the chained consumer price index instead of the traditional CPI for determining the inflation adjustments to the tax code. This change does not expire at the end of the year. The chained CPI accounts for the way consumer behavior is altered as prices change, with the result that inflation adjustments are lower.
(February 2025)
© 2025 M.A. Co. All rights reserved.
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Because of the rapidly changing nature of tax, legal or accounting rules and our reliance on outside sources, Garden State Trust Company makes no warranty or guarantee of the accuracy or reliability of information contained herein nor do we take responsibility for any decision made or action taken by you in reliance upon information provided here or at other sites to which we link. ©2025. All rights reserved. | | | | |
