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ESTATE, TRUST, GUARDIANSHIP

Family Business Changes of Ownership & Estate Planning

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By: Jeffrey D. Urbach, CVA, CPA/ABV/CFF

Business owners have been saving estate taxes by transferring assets in the form of FLPs (Family Limited Partnerships)

Family Business

or outright gifts of company stock to family members.
The tax savings are the result of discounts taken by business appraisers on the value of the gift.

The IRS is proposing to disallow these discounts as of Jan. 1, 2017.
Based on many published surveys, selling a non-controlling interest can result in a 30 to 40% (or more) total discount off the value of the company because of the combination of the following two discounts.
These discounts are commonly called Minority (or Control) Discounts and DLOM (Discounts for Lack of Marketability).
A simple example:
Company A is worth $10,000,000 and 100% of the shares are owned by Mr. Smith. Assume he wants to gift 1/3 of the company to his daughter. The appraiser valued the company at $10,000,000 and in her judgment, the gift would warrant a combined Marketability and Control discount of 40%.
On the face of it, a 1/3 interest of a $10,000,000 is $3.3 Million. After application of the 40% discount ($1.32 Million), the value of the gift becomes $1.98 Million. ($3.3 million less $1.32 Million, or $1.98 million).
In the end, Mr. Smith removes $3.3 of value from his taxable estate and pays a Gift Tax on $1.98 million, say roughly 40% or $790,000. The same 1/3 interest, if left in his estate would have incurred a tax of $1.3 Million ($3.3 Million times 40%).
The gift saved his family $510,000 ($1.3 Million less $790,000).
The new IRS proposals to disallow these discounts may take effect on January 1, 2017. You should consult with your estate attorney and other financial advisors ASAP and to have a strategy in place when and if this change occurs.

Hit by the NJ Exit Tax on Sale of Real Estate? You Can Recoup Your Money

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The New Jersey “Exit Tax”, which became law in 2007, requires the real estate seller to file a GIT/REP form

Exiting NJ?

(Gross Income Tax form) in order to record a Deed for  the transfer of his property.

When a non-resident sells property, New Jersey will withhold this income tax in the amount of either 8.97 percent of the profit or 2 percent of the total selling price, whichever is higher. Therefore, even if the property is sold at a loss, tax must be withheld to fulfill the two percent requirement.

What Can I do?

It’s important to realize that while the Exit Tax requires a substantial withholding, it doesn’t have any impact on the actual tax liability. If the seller files a NJ tax return he is refunded the difference between what was withheld and what is owed. This recovery can be very significant when one factors in the selling costs and original purchase price, both of which reduce the taxable gain.

Estates Should Pay Special Attention

The recovery is often even greater in the case of real estate sold by an estate, as there is a step up in cost basis which would typically minimize a gain on the sale, often resulting in full recovery of the entire withholding. To quickly expedite the recovery of the excess withholding, it would be prudent to timely file Form NJ1040 NR (individual) or NJ1041 (estate/fiduciary).

How do I know if I am considered a “non-resident”?

So who’s considered a “resident” and who’s a “non-resident” with regard to this tax? The law defines a resident taxpayer as one of the following:

  • An individual who is and intends to continue to maintain a permanent place of abode (home, residence) in New Jersey on/after the day of transfer
  • An estate established under the laws of New Jersey
  • A trust established under the laws of New Jersey

A nonresident is simply defined as “any taxpayer that does not meet the definition of resident taxpayer.”

Avoiding a Marriage Commitment? Pay NJ Estate Taxes Instead

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People say that love conquers all, but a decision by the New Jersey Tax Court indicates that doesn’t always hold true.

The issue

In a ruling that’s sure to upset some cohabitating couples, the court earlier this year ruled that, for state tax purposes, the estate of a wealthy Alpine woman could not take a marital deduction for a multimillion-dollar payout to her longtime live-in companion—even though the deduction was permitted for federal purposes. The case presents a clear example of how state tax law does not always follow federal tax law, even though NJ tax positions are, for the most part, based on Federal ones.

Here’s the detail on the background

The decedent Lillian Garis Booth died testate on November 22, 2007 at age 92, leaving an estate worth some $200 million. Although fellow New Jersey resident Misha (Michael) Dabich and Booth cohabited together for approximately 51 years, he was not named as a beneficiary in her will. About two years later, however, the Estate reached a $9.9 million settlement with Dabich.

Trouble began brewing, however, when the Estate filed an amended NJ IT–Estate and a second amended IT–R in March 2010, seeking, among other changes, a net refund of previously paid taxes totaling $1.5 million. The amended items reflected, among other things, a deduction for the $9.9 million paid to Dabich, under the theory that their lengthy cohabitation period constituted a “common-law” marriage.

In April 2011, the NJ Dept. of Taxation issued a Notice of Assessment based on the amended IT–Estate. Among other adjustments, the Notice denied the $9.9 million marital deduction. The Court’s reasoning, according to the Notice, was that “[t]he common-law marriage claim of  Dabich is not recognized by” New Jersey, thus, the estate’s claim for marital deduction was being “disallowed for NJ estate tax and inheritance tax” purposes.

The Court added that it was “not bound by the IRS determination to recognize Misha Dabich as a common-law spouse” pursuant to a September 2008 settlement with Dabich and a subsequent 2009 amendment.

In July 2011, the Estate filed a timely administrative protest, maintaining that NJ Dept. of Taxation could not use the Inheritance Tax laws to disallow estate expenses, since the NJ estate tax is the federal “State death tax credit amount;” therefore, expenses allowed by the IRS must be allowed by NJ.

But after another denial, the Estate filed a lawsuit challenging, among other issues, the disallowance of the marital deduction.

In its response, the Tax Court noted that “The burden is upon the executor of an estate to prove facts establishing that “[t]he decedent was survived by a spouse” and “[t]he property interest passed from the decedent to the spouse.” For federal purposes, it reported, the IRS recognized “common-law” marriages “for over 50 years, despite the refusal of some states to give full faith and credit to common-law marriages established in other states” since “uniform nationwide rules are essential for efficient and fair tax administration.”

The reasoning

But, pursuant to state amendments made in 2002, the New Jersey estate tax was decoupled from the federal estate tax, and “was imposed independently of the federal estate tax and of the federal credit for state death taxes.”

Additionally, according to the Tax Court, the NJ Legislature specifically rejected the concept of common-law marriage, and “Although it is the federal estate tax law which provides for a marital deduction, it is State law that determines whether an individual is a spouse for purposes of application and allowance of that marital deduction.”

The decision could reportedly cost the estate some $1.5 million in net NJ Estate & Inheritance Taxes.

Should you be concerned?

The ruling appears to break new ground. Although it only addresses an allowable estate deduction, it also illustrates the way that common misperceptions can result in a costly tax bill. That’s one more reason to speak with your tax, accounting or legal advisor before committing yourself to any kind of significant activity.

 

Provide for Your Loved Ones with Prudent Estate Planning

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The recent, tragic passing of Robin Williams reminds us of just how fleeting life can be. The void in his loved ones’ hearts may never be filled, but the popular entertainer did take steps to care for them financially by engaging in effective estate planning. Among other acts, Williams reportedly created a revocable trust before he died. 

Revocable Trusts

Sometimes known as “living trusts,” a revocable trust refers to a fiduciary arrangement that you (the grantor) create during your lifetime. A living trust can help a grantor manage his or her assets, and protect the individual if he becomes ill, disabled or challenged as he ages.  

During your lifetime, you (the grantor) may transfer property to the “living trust,” which will be administered by a trustee you have selected; and during that time he or she is generally responsible for managing the property as you direct, for your benefit.  

Once you pass away, the trustee is generally obligated to distribute the trust property to your beneficiaries, or to continue to hold it and manage it for the benefit of the beneficiaries.  

How Do Wills and Trusts Differ?

Although both a will and a revocable trust can provide for the distribution of property upon your demise, a revocable trust can also provide you with a way to manage your property during your lifetime. A revocable,

or “living” trust may also enable the trustee to manage the property and use it for your benefit, and your family’s benefit, if you become incapacitated. Of course, the trust must be adequately funded when you are mentally competent to be useful. If the revocable trust is properly funded and structured, it can help avoid the need for a court-appointed guardian, if you become mentally incapacitated.

Most revocable trusts will not help a grantor avoid estate tax, but they may help you avoid probate, which is generally not expensive in New Jersey but may still expose the will to public scrutiny.

Talk To Your Trusted Advisor First

In some circumstances, particularly when a special needs individual is involved, it may be advisable to establish a kind of irrevocable trust called a “Special Needs Trust.” An SNT may enable the grantor to ensure that his or her assets will enhance the lifestyle of the special needs person without impairing his or her ability to receive government benefits. 

There are many issues to consider regarding the establishment of a trust, so before making a decision about setting up either a living trust, a will or another approach, it may be advisable to consult with your account and/or attorney, who can help you to consider the tax and other implications and the costs and benefits.  

Special Needs Trusts Win Big in NJ Supreme Court

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A recent NJ Supreme Court decision could have a major impact on firefighters and police officers who are concerned about providing for their special-needs children.

The Case, Saccone v. Board of Trustees, was filed on behalf of Thomas Saccone, a retired Newark firefighter whose son, Anthony, suffers from a “severe mental disability.” The elder Saccone receives pension payments from the NJ Police & Firemen’s Retirement System (PFRS); and his wife and son are entitled to receive pension death benefits if Saccone predeceases them.

But Anthony receives public assistance, such as Supplemental Security Income and Medicaid, that are subject to income limitations. The survivors’ benefits could put Anthony over the income cap, possibly eliminating his eligibility for public assistance.

Thomas wanted to name a special needs trust (SNT) as the beneficiary of Anthony’s PFRS benefits. The trust funds would supplement Anthony’s needs, but would be shielded from the income test, and he would continue to be eligible for public assistance benefits. The PFRS rules did not permit Thomas Saccone to change the individual he originally named as beneficiary and the retirement fund’s board rejected Thomas’ request to name the SNT as the beneficiary. The NJ Appellate Division upheld the board’s decision.

The Court’s decision:Finally, in mid-September, the NJ Supreme Court ruled that the disabled child of a retired member of the PFRS may have his survivors’ benefits paid into a first-party SNT created for him. The Court cited strong public policy favoring special needs trusts..[1]

[1] As reflected in NJ Statutes 3B:11-36 & 37, which were authored by Lawrence Friedman on behalf of the NJ State Bar Association.

 

The Court’s ruling makes it easier for certain individuals to ensure that their special-needs children continue to receive public assistance with a SNT. But to qualify a special needs trust should be carefully structured by a competent attorney. 

Three amici, among them, the Guardianship Association of NJ (GANJI), argued in support of Saccone.  Urbach & Avraham Partner, Pamela Avraham, has been on the Board of GANJI for many years. We commend the tremendous work of GANJI, and of three GANJI members; Daniel Jurkovic who argued the cause for GANJI, Donald Vanarelli, Saccone’s attorney and Shirley Whitenack who was counsel for amicus Special Needs Alliance.

  

Domestic Partners: Do it New Jersey’s way or NJ says, “No Way”

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The Tax Court ruled against a plaintiff that claimed she was a domestic partner of the decedents and exempt from Inheritance Tax as a Class A beneficiary. The Story:
Claudette Lugano and Armin Lovi lived together from at least 2003 until his death in 2011. They had filed a Declaration of Domestic Partnership with the Federal Reserve Bank (FRB) but not an Affidavit of Domestic Partnership with any local registrar as required by NJ law per the provisions of the Domestic Partnership Act.
Because they had filed with the FRB, she was entitled to benefits under their retirement plan. However, NJ refused to treat her as a Class A beneficiary and to exempt her from NJ Inheritance Tax.

Bottom line; She’s a domestic partner as far as the Federal Reserve Bank is concerned but not for NJ purposes.

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