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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.  

Resolve Your NJ Tax Debt, No Penalties!

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Businesses and individuals facing unpaid New Jersey tax liabilities may be able to get a break on penalties—although not on interest—according to a recent NJ Division of Taxation announcement. But you have to act quickly. From now until November 17, businesses and individuals with liabilities from tax periods 2005 through 2013 may be able to enter into a “closing agreement” with the Division.

And why should I do this now? Because under this limited-time offer (remember, the clock runs out on November 17) the Division of Taxation will accept—in full and final satisfaction of the outstanding tax liability—an amount that reflects reduced or eliminated penalties, with no charge for collection or recovery fees. Better yet, the tax liability will not be subject to further audit.

Not so good: no refund can be claimed by the taxpayer on this matter. You win some, you lose some.

Here are some more details

• Most penalties can be reduced to zero. But an Amnesty Penalty on taxes due on or after 1/1/2002 and before 2/1/2009 will still apply.

• Interest will not be waived, but it will only be calculated on the tax and reduced penalties (and the penalties may drop to zero, anyway).

• Recovery Fees—a 10% fee on each tax liability that was previously forwarded to the Division’s authorized collection agency—may be waived.

• Also, costs of collection may be eliminated. Normally, if the Division has to collect a tax debt by filing a Certificate of Debt (judgment,) a 10% fee is applied to cover legal and collection costs.

Is there a hitch? Sort of. If you don’t pay the balance due by November 17, 2014 or provide sufficient proof that you or your businesses do not owe it, then any and all penalties, interest, costs of collection, and/or recovery fees will remain due. The state may also pursue further collection activity. You may pay the balance due in one lump sum or you may make several payments to satisfy the amount due. But the full amount must be paid by November 17, 2014 in order to take advantage of the reduced penalties, and eliminated costs of collection, and recovery fees.

For assistance please contact our Tax Manager, Steven Citron. You may also visit the NJ Division of Taxation website for more information at Resolve Your Tax Debt – Fall 2014

Click Here

 

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.

  

NJ Alimony Reform Bill Signed Into Law by Governor Christie

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Major changes are here for those currently going through a divorce. On September 10, 2014 Governor Christie signed the NJ Alimony Reform Bill, bill A845, into law.

What does the new law accomplish?

• For marriages less than 20 years, the length of alimony payments cannot exceed the length of the marriage unless a judge determines that there are “exceptional circumstances”.

• Judges would be able to end alimony payments if the recipient cohabits with a partner, even if they don’t get married.

• Judges would have the authority to modify alimony payments if the payer has been unemployed for more than 90 days.

• The term “permanent alimony” would be replaced with the language “open duration alimony”.

While the new law applies primarily to future divorces, it does allow for a “rebuttable presumption” that alimony payments will end once the ex-spouse making the payments reaches the full retirement age for Social Security.

Jeff Urbach, Partner at Urbach and Avraham, CPAs spearheads our litigation support department which specializes in matrimonial accounting. Jeff and his team of valuation analysts and fraud examiners guide couples and their attorneys through the myriad of financial and tax issues of divorce. Please call our office if you or someone you know is going through a divorce to see how we can assist and what effect the new law could have on your situation.

NJ Employers-Reduce Your Unemployment Tax Rates-August Deadline

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Did you check your NJ SUI rates?
In July all New Jersey employers received a Notice of Employer Contribution Rates. This is not a bill, but rather a summary of the manner

in which the NJ Department of Labor calculates your employer contribution rate for unemployment and  disability. This form enables you

to determine whether a voluntary  contribution would save you money in the subsequent year.

Can I reduce the NJ SUI rate?
A voluntary contribution increases the reserve balance and may reduce your contribution rate. Each employer should calculate the amount

of the voluntary contribution required to reduce the rate. The required voluntary payment should be compared to the savings realized from a lower rate.

The unemployment expense is a substantial component of the labor cost of staffing agencies. You should give it careful attention. If you wish to make a

voluntary contribution to your reserve balance you have 30 days from the date of your notice to do so. We recommend that you verify all the NJ DOL

calculations including the amount of the employer contributions and the benefits charged to your account. Report any discrepancies to the NJ Dept. of Labor.

By making a voluntary payment, employers may reduce the NJ SUI rate for the coming year. Please be aware that this payment increases your reserve

balance and helps reduce the NJ SUI rate in future years as well.