Blog Posts
Estates and Trusts
The Estate Planning Graveyard: Four Estate Planning Monsters Lurking This Halloween and How to Defeat Them
There is howling in the distance. The light of a full moon cuts through the fog. Suddenly, a blood-curdling scream cuts through the night! Estate plans are designed with the best of intentions. Over time, however, even a well-drafted trust can transform into something unexpected, something…monstrous! This Halloween, four of the most terrifying estate planning creatures lurk in the shadows, waiting to ensnare an unsuspecting client. The Frankenstein's Monster Trust Like Frankenstein's monster, this trust is assembled piece by piece from unrelated parts. The trust is amended repeatedly, adding and removing clauses, changing fiduciaries, and beneficiaries. What may have been beautiful at first has been patched together into something truly horrifying. A marital trust is established under article five, but article three makes a distribution outright to the spouse. The trust protector referenced in article nine does not appear anywhere else in the document. One provision assumes a corporate trustee while another contemplates an individual trustee. If we ever face this monster, we can stop it dead in its tracks. Rather than continuing to tack on amendment after amendment, we can restate the trust in its entirety so that all the provisions work together toward achieving the client’s goals. The Ghost Trust The Ghost Trust sits eerily quiet in a safe. The client sleeps soundly at night, comforted with the peace of mind that their loved ones are provided for and their assets are protected. Then, one night, a spine-tingling chill creeps up their spine; was the trust ever actually funded? The client is in a state of shock. The bank accounts remain in their individual name. The deed to their home remains unchanged from when they first purchased the property. Business interests were never assigned to the trust. The trust technically exists, but only barely. Proper funding can bring this trust back from the dead and end this nightmare. Assets should have been transferred into the trust when it was first established, but it is never too late to fund a trust. As new assets are acquired, they too may need to be transferred to the trust to ensure the client’s estate plan will function as intended. The Zombie Trust The Zombie Trust is not necessarily bad. In fact, many Zombie Trusts were thoughtfully designed when they were created. But as years pass, what was once beneficial can atrophy and warp. The trust was drafted years ago when the grantor's children were minors. Today, those children have their own families. Perhaps the trust was drafted when the federal estate tax exemption amount was a fraction of its current value. Perhaps the client established an irrevocable dynastic trust. This may have been sensible when their business was worth millions of dollars. Now, several of those business ventures have failed, and the client would find themselves in a dramatically better position if they could only access those trust assets. Circumstances change. Assets change. Tax laws change. Unfortunately, an outdated estate plan can create more problems than it was meant to solve. We can defeat this monster through regular maintenance and review. Estate plans should be reviewed every few years, as well as whenever there is a significant change in family circumstances, assets, or the tax law, and, if necessary, revised to ensure that the client’s estate plan remains aligned. Oftentimes, even an irrevocable trust can be undone with the assistance of an attorney. The Mummy Trust Wrapped tightly in layer upon layer of legal jargon, the Mummy Trust is perhaps the most intimidating creature in the estate planning graveyard. The client wants every possible contingency addressed. The drafter wants maximum flexibility. Each provision adds another layer of protective wrapping. The trust may contain multiple classes of beneficiaries, numerous distribution standards, trust protectors, advisory committees, removal provisions, appointment powers, decanting provisions, tax formulas, and administrative procedures. By the time the document is complete, it has become nearly impossible to navigate, even by an experienced fiduciary. The trust will be burdensome and complex to administer. Meanwhile, the trust's assets may only consist of a residence, several bank accounts, and a modest investment portfolio. Complexity has its place. Large estates, blended families, special needs planning, asset protection objectives, and sophisticated tax planning may justify highly technical provisions. The Mummy Trust becomes a monster when the document's complexity exceeds the client’s needs and actual circumstances. The Mummy Trust is defeated through simplification. An estate plan should only be as complex as necessary and should avoid provisions that are not required to accomplish the client's goals. A Final Halloween Warning The most frightening estate planning problems rarely arise because someone failed to create an estate plan. More often, they arise because a trust was never funded, never updated, unnecessarily complicated, or patched together over time until its original purpose becomes difficult to recognize. This Halloween, dust off your estate planning documents and take a closer look. You may discover a trust stitched together from mismatched provisions, a trust that owns no assets, a trust that has not been reviewed in decades, or a trust buried in unnecessary complexity. With a thoughtful review and proper maintenance, even the most terrifying Monster Trust can be laid to rest before it comes back to haunt you.
October 20, 2026
Estates and Trusts
Using Charitable Remainder Trusts to Reduce Income Tax Inefficiency in Retirement Accounts and Give More
The Federal estate and gift tax exemption is at a historically high level. In 2026, only individuals who make taxable gifts during their lifetime, combined with assets that pass through their estate, in excess of $15 million, will be liable for any tax. As such, much of the focus of estate planning has shifted from reducing estate tax liability towards creditor protection and succession planning. However, many individuals with significantly less than $15 million in assets may still leave their beneficiaries with significant tax liability if their assets are held in qualified accounts, such as individual retirement accounts (IRAs) and 401(k) plans. Trillions of dollars are currently accumulated within these tax-advantaged qualified retirement accounts. For many families, their IRA or 401(k) represents their most significant appreciated assets. Retirement Accounts do not receive a “Step-Up” in Basis Most appreciated assets receive a "step-up” in capital tax basis at the owner’s death. The “step-up” means that the decedent’s heirs inherit these assets with a capital gains tax basis reset to the fair market value as of the date of the decedent’s death. For example, if an individual acquires a stock at $100 and later sells it for $1,000, the individual is liable for capital gains tax on the appreciation in the stock. However, if the individual dies owning the stock and his heirs sell it immediately, there will be zero capital gains tax liability. This step-up can effectively wipe out thousands of dollars in capital gains tax liability. Unfortunately, IRAs and 401(k)s are an exception to this rule. They do not receive a “step-up” basis. Instead, every single dollar of appreciation in these assets, once distributed from an inherited IRA to an individual beneficiary, is taxed as ordinary income at the beneficiary’s income tax bracket. Before the enactment of the SECURE Act, beneficiaries of inherited IRAs were permitted to "stretch” these taxable distributions over their lifetime by taking required minimum distributions (RMDs) based on their life expectancy. A beneficiary younger than the original account owner would have much smaller RMDs, allowing inherited IRA assets to appreciate over a long period of time, income tax-deferred. This strategy reduced or eliminated the “income tax bracket creep” that may occur when significant distributions are made from the inherited IRA that would push the beneficiary into a higher income tax bracket and increase the amount of the income taxes that were ultimately paid. The SECURE Act largely eliminated this strategy. Under current law, most non-spousal beneficiaries must liquidate their inherited IRA within ten years of the death of the original account holder. This is commonly referred to as the “ten-year rule.” The compressed time frame reduces the time that the assets within the inherited IRA can continue to grow without the tax drag. It makes it much more likely that the distributions will push the beneficiary into a higher tax bracket. To make matters worse, most beneficiaries of qualified accounts will be in their peak earning years. Distributions from a modest one-million-dollar inherited IRA will be reduced by hundreds of thousands of dollars after the payment of federal and state income taxes. Using a Charitable Remainder Trust to Restore Tax Efficiency Fortunately, there is a solution to replicate the “stretch” and reduce this income tax inefficiency. The account holder can name a charitable remainder trust (CRT) as the designated beneficiary of the IRA. The CRT can be established during the account holder’s lifetime or may be designated under the account holder’s will or revocable trust (a “testamentary CRT”). A CRT is a split-interest, tax-exempt vehicle. One or more income beneficiaries receive an annual payment for a set term of years (a “CRAT”), or an amount based on a percentage of the trust at the end of the year (a “CRUT”). At the end of the term, which could be as long as the income beneficiary's lifetime, the remaining trust assets are distributed to one or more qualified charities. In this way, the original account owner can support their philanthropic goals and ensure their families are provided for. When a CRT is designated as the beneficiary of an IRA, the entire IRA balance is transferred directly to the trust upon the account holder’s death. Because a CRT is a tax-exempt entity, no income tax is recognized or paid upon the liquidation of the IRA. The full, undiminished account remains intact within the trust. The income beneficiary is guaranteed to receive a predictable flow of income. Because the distributions are made slowly over time, it reduces the likelihood that the distributions will push the income beneficiary into a higher tax bracket. As such, the beneficiary is likely to pay less overall income tax liability than if they had been named the outright beneficiary of the IRA. In addition, because the CRT is a tax-exempt trust, the assets in the CRT will continue to appreciate tax-deferred. If the CRT is structured to last for the duration of the income beneficiary’s life, the time horizon from which the distributions must be made from the account has effectively been increased from ten years to as much as several decades or longer. This creates significant potential that the total distributions to the income beneficiary will exceed what they would have received had they been named the outright beneficiary of the account. Finally, the estate of the original account holder benefits from an estate tax deduction equal to the actuarial value of the interest that passes to charity. In states such as New York, Washington, or Oregon, where the state estate tax exemption amount is much less than the federal estate tax exemption amount, this may be a valuable deduction. Key Considerations and Conclusion It is important to note that pursuant to Section 664 of the Internal Revenue Code, a CRT must distribute at least 5% (but no more than 50%) of its value annually to the income beneficiary. In addition, at least 10% of the actuarial value of the account must ultimately pass to the charitable remainder beneficiary. This can mean that naming very young income beneficiaries, such as grandchildren, may not satisfy the actuarial test. Although estate tax concerns have diminished for many individuals, the income tax exposure their heirs will face, with even modestly valued inherited IRAs, remains a significant challenge for wealth transfer. The SECURE Act forces beneficiaries to recognize substantial taxable income in a compressed time frame. For the right client, a charitable remainder trust offers a compelling solution, providing tax-efficient income deferral and reducing overall tax drag while supporting philanthropic goals. A CRT transforms a tax-inefficient asset into a powerful tool for preserving wealth and legacy. In today’s environment, proactive income tax planning is not optional; it is essential.
July 2, 2026
Estates and Trusts
Choosing the Right Fiduciary: Why It Can Make or Break an Estate Plan
Even the most carefully crafted estate plan can unravel if the wrong individuals are appointed to serve as executor or trustee. Executors and trustees are fiduciaries vested with broad authority to administer assets under their custody. They are responsible for asset management, tax compliance, recordkeeping, and the distribution of assets to beneficiaries. Sometimes the fiduciary only serves a matter of months; other times, their appointment can last for years or even decades. Oftentimes, a client will reflexively appoint their spouse as primary fiduciary, followed by one or more of their children as successor fiduciaries. It is certainly understandable that a client would want their closest relatives involved in administering their assets. When the fiduciary is also the primary beneficiary, and there is no need for ongoing administration, even a fiduciary who lacks sophistication may not cause significant issues, as the fiduciary is essentially tasked with administering their own assets. However, when the fiduciary is not the primary beneficiary, or when the administration will be ongoing, the complexity of the role means that appointing the wrong fiduciary may have significant consequences. This is because the fiduciary may be tasked with satisfying claims, paying estate taxes, or even winding down a business. A fiduciary who lacks sophistication or knowledge exposes the assets under their control to significant risk of mismanagement and waste. A fiduciary who lacks the knowledge and experience to navigate their responsibilities may fall into traps that a more seasoned fiduciary would avoid. A fiduciary’s contentious relationship with a beneficiary may make it difficult to maintain neutrality and avoid conflict. Even well-intentioned fiduciaries may have poor communication skills or fail to engage competent professionals to assist them in their duties. The client can take proactive steps to mitigate the risk of appointing the wrong fiduciary and prepare their nominated fiduciaries for success in their roles. Setting the Nominated Fiduciary up for Success While these conversations are often considered taboo, the client should have a candid conversation with their nominated fiduciaries to ensure that they understand the scope of their responsibilities. The fiduciary should be provided with the names and contact information of the client’s accountant, financial advisors, and attorney. The fiduciary should also know where the client’s important documents and records are located. While clients are often (and understandably) uncomfortable revealing the nature and extent of their assets, they should maintain records of their assets, liabilities, and obligations, as well as the passwords to their e-mails and other electronic accounts, along with their other important documents. The client may also wish to discuss with their nominated fiduciary any specific wishes or priorities that they want honored, family dynamics, gifting history, and any other particular issues or concerns the client may have. Taking these proactive steps will ensure that when the time comes for the nominated fiduciary to assume their role, the transition will be smooth. Consider Appointing Co-Fiduciaries with Defined Roles Appointing more than one fiduciary is also a way to balance family involvement with ensuring that a competent fiduciary is appointed to guide the family member in their duties and responsibilities. This may be particularly advantageous when the family fiduciary is young or inexperienced, as having an experienced fiduciary to serve together with them ensures that assets are properly invested, tax returns are timely prepared and filed, and records of their administration are maintained. For states that permit directed trusts, consideration should be given to clearly defining the roles of each co-fiduciary. For example, a client could designate a family member as the fiduciary responsible for making distribution decisions, while an independent trustee is tasked with making decisions concerning investment strategies. A mechanism should also be incorporated to anticipate and resolve deadlocks, avoiding delays or even total inaction. It is important to note that having more than one fiduciary can increase administrative costs or create the potential for conflict between the co-fiduciaries. Therefore, appointing co-fiduciaries may not be the right decision in every circumstance. Drafting for Flexibility and Ongoing Administration Sometimes the client’s nominated fiduciary may be unable or unwilling to serve for justifiable reasons, or after assuming office, can no longer continue to serve as fiduciary. While the client should evaluate the qualifications of any successor fiduciary that may need to serve, mechanisms should also be incorporated to anticipate and resolve fiduciary succession issues. For example, a trust agreement may provide that the last remaining trustee in office can appoint successor trustees or co-trustees. This provides the primary fiduciary with the opportunity to assess the current administrative landscape, what family members may be willing or available to serve, as well as the costs and benefits of appointing a professional or corporate fiduciary as successor fiduciary. Similarly, the trust agreement can provide that a majority of the beneficiaries may nominate successor fiduciaries if the office becomes vacant. These mechanisms help to avoid a contentious or difficult relationship forming between the fiduciary and the beneficiaries. Fiduciary Removal Taking appropriate steps and precautions during the client’s lifetime to ensure proper administration may still not be enough to avoid conflict or difficulties once the fiduciary is appointed. Therefore, it is just as critical to provide a mechanism to remove an unqualified or recalcitrant fiduciary. Sometimes it is appropriate for the beneficiaries to hold this power. Other times, a trust protector may be appointed to serve in this role. A “trust protector” is a non-fiduciary who is provided with defined, limited powers. Having a trust protector to monitor the activities of a trustee and, if need be, remove a trustee ensures impartiality and neutrality in the decision. Conclusion Nominating an executor or trustee is among the most consequential decisions that a client will make in their estate plan, yet many clients reflexively appoint their spouse or other close relatives. The wrong choice can cause conflict, erode family relationships, increase the cost of administration, and (in the worst of circumstances) invite litigation. By thoughtfully evaluating fiduciary candidates, ensuring fiduciaries are prepared and willing to serve, and incorporating flexibility into the estate planning documents to anticipate changed circumstances, advisors can help clients preserve family harmony and ensure their wealth is preserved for their beneficiaries.
April 2, 2026
Estates and Trusts
Don’t Let Your Plan Fail: Why Reviewing Your Trust is Critical
Revocable trusts are often the centerpiece of a client’s estate plan for the many benefits that they provide. Revocable trusts are private agreements that are easily amendable, and avoid the costs and delays associated with probate. They ensure the management of assets in the event of a client’s incapacity and, at death, a seamless transition of assets to the client’s intended beneficiaries. However, even the most carefully drafted and intricate trust agreement will be ineffective if it is not implemented correctly. A revocable trust is essentially an empty shell until it is funded with assets. Advisors and legal counsel will likely take steps to ensure that all of a client’s non-retirement assets are transferred or retitled into their revocable trust at its inception. When assets are later acquired, they must be transferred into the trust to be effective. In the best circumstances, assets that remain outside the trust will necessitate probate, incurring administrative costs and delays that the client sought to avoid by establishing the revocable trust. At worst, failing to properly title or convey assets into the trust may result in the imposition of avoidable taxes and the wrong beneficiaries receiving assets. Why Proper Trust Funding Matters Many clients presume that listing an asset on a schedule included with their trust is all that is required to transfer assets into their trust. In reality, assets must be formally transferred to the trust, or the trust must be listed as the beneficiary of any assets that remain outside the trust, for it to be effective. Some assets, such as bank or brokerage accounts, can be easily retitled and transferred into a trust. Other assets require the preparation of formal legal documents to effect the transfer. For example, real property can only be transferred to a trust by executing a deed. Corporate interests, such as stocks or shares in a small business, may only be transferred with an assignment and the issuance of a new stock certificate from the corporation. If the client owns shares in a co-op, they must go through a formal approval process before their shares can be retitled into their trust. Because transferring certain assets into the trust can be a hassle or incur additional fees and costs, sometimes clients intentionally keep certain assets outside their trust. A client may opt to forgo the expense and hassle of retitling their residence, presuming that they will one day sell it prior to their death. The client might reasonably conclude that incurring fees and costs to convey an asset into their trust which they intend to sell during their lifetime is unnecessary and wasteful. This is a risky proposition as death or incapacity can occur in an instant, making it difficult or impossible to transfer the property later, undoing the benefits of establishing the trust. Risks of Leaving Assets Outside the Trust Some types of assets, such as retirement accounts, must be left outside a trust, but this can also be a trap for the unwary. The client must always consider the assets that the beneficiary will receive outside their trust as part of their overall estate plan. If a client wishes to change the terms of their trust to provide more or less for their intended beneficiaries, they must be mindful to also update their beneficiary designations accordingly. Changed circumstances may also require a change in beneficiary designation. The client may have divorced their spouse since naming him or her as the primary beneficiary of their life insurance or retirement assets. Perhaps the intended beneficiary has died, become incapacitated, or is now a spendthrift; failing to update beneficiary designations may expose these assets to creditor claims or disqualify the beneficiary from receiving government benefits. Safeguards to Prevent Funding Failures While ideally all assets will be transferred into the revocable trust before death, there are many ways where even well-intentioned individuals will inadvertently fail to transfer assets into their revocable trust. Several safeguards that can be easily implemented to mitigate these risks and ensure that the client’s beneficiaries inherit their assets as intended. When implementing a revocable trust in a client’s estate plan, a “pour-over” will should always be executed. A “pour-over” will directs that any assets left outside the trust at the time of death be distributed or “poured over” into the revocable trust. Without a will in place, assets left outside the trust will pass by intestacy. In addition, clients should consider whether it is appropriate to provide their agents broad powers under a power of attorney to gift their assets, change beneficiary designations, and amend the client’s trust, to conform with the client’s wishes. These powers help to ensure that additional estate planning can be done at any time during the client’s life, even if they become incapacitated. Lastly, the client should consider naming their trust as the primary or contingent beneficiary of any assets left outside their trust. By doing so, it not only ensures that these assets will ultimately pass to the trust, but it also enables the client to change their estate plan by simply amending the terms of their trust. Conclusion: Regular Review Ensures an Effective Plan The reality is that while establishing an estate plan may take as little as a few months, it is not a discrete process; estate planning requires continuous monitoring and occasional updates. Clients should be encouraged to review their estate planning documents at least every four to five years, or at major milestones such as the birth of a new family member, moving to another state, or when there is a significant change in the law, to ensure that their estate plan will function as intended.
January 28, 2026
Estates and Trusts
Is Your Will Valid After You Move? How Relocation Affects Your Estate Plan
According to a recent study conducted by Consumer Affairs, the average American moves 11.7 times in their lifetime. While the majority of these moves occur within the same county, or city, millions of Americans move every year from one state to another. When a client executes a will and subsequently moves to another state, an obvious concern arises: Will their will, drafted in one state, be admissible to probate in their new state of residence? The short answer is that most states will admit a will to probate that was validly executed under the laws of another state based on the Full Faith and Credit Clause of the U.S. Constitution and basic principles of comity. New York, in fact, has a statute directly on point; EPTL § 3-5.1 provides that a will executed outside the state is valid within the state if it is in writing, signed by the testator, and otherwise executed in compliance with the laws of New York, the jurisdiction in which the will was executed, or the jurisdiction in which the testator was domiciled, either at the time of execution or at the time of death. New Jersey similarly provides, pursuant to N.J.S.A. § 3B:3-9, that a will executed in compliance with New Jersey law is valid within the state regardless of where it was executed. N.J.S.A. § 3B:3-9 further provides that a will that is not executed in compliance with New Jersey law is nevertheless valid if it is executed in compliance with the state or country where the will was executed, or the state or country where the decedent was residing at the time of the will’s execution or at the time of the decedent’s death. However, there are significant differences in the probate laws of each state that can make executing a new will a prudent decision. Choice of Executor Many states only have minimal requirements for who may serve as executor of an estate. For example, New Jersey law provides that so long as an individual is 18 years old and competent, they may serve as executor of a decedent’s estate. In contrast, New York law provides, pursuant to SCPA § 707, that, a non-citizen, non-domiciliary may not serve solely as executor of an estate; a domiciliary co-executor must be appointed. Further, a person who does not possess the qualifications required of a fiduciary by reason of substance abuse, dishonesty, improvidence, want of understanding, or who is otherwise unfit, is also disqualified from serving as executor. The court may, in its discretion, also disqualify an executor who is illiterate or who has been convicted of a felony. Inheritance Tax An inheritance tax is levied on the assets received by the beneficiary of an estate. This is in contrast to an estate tax, which taxes the entire corpus of the decedent’s estate regardless of the ultimate beneficiaries. While the vast majority of states do not have a state inheritance tax, several states still maintain an inheritance tax, including New Jersey. The inheritance tax applies to bequests to relatives, including brothers, sisters, aunts, uncles, nieces, nephews, and distant relatives, as well as non-related individuals. Suppose a domiciliary of Florida (which does not have an inheritance tax) wishes to provide a bequest to their longtime romantic partner. If the bequest is made under the client’s will and they later move to a state with an inheritance tax, the client may inadvertently subject their romantic partner to a hefty inheritance tax. Thoughtful planning could be employed to avoid this result. For example, rather than leave the bequest under their will, the client may make the same gift during their lifetime. State-Level Estate Tax Another potential concern when changing domiciles is state-level estate taxes. In 2025, the federal estate tax threshold for individuals is $13.99 million. As such, very few individuals have federal estate tax issues. While the majority of states do not impose a state estate tax, a significant number of states still maintain an estate tax. Overwhelmingly, the state estate tax threshold is significantly lower than the federal estate tax threshold. For example, a will drafted in Oregon will likely have been drafted with the $1 million estate tax exemption threshold in mind. As such, married clients with relatively modest assets may employ an estate planning technique called a “credit shelter trust,” a trust designed to fully use the decedent’s remaining estate tax exemption amount at the time of their death. If the client later moves to New York, where the state estate tax threshold is currently $7,160,000, funding a credit shelter trust may no longer be necessary or even advisable. The trustees of the credit shelter trust, typically the surviving spouse and one or more independent trustees, will likely be obligated to administer a trust that may not serve a functional purpose, all the while incurring unnecessary administrative expenses. Statutory Right of Election Another potential concern is that a will drafted based on the spousal rights of one state may lead to unintended consequences if the client later changes their domicile. For example, many states permit the surviving spouse to “elect” against a decedent’s will, taking an inheritance based on a statutory formula as opposed to what is provided to them under the will. The laws of each state vary significantly in how the elective share of the surviving spouse is determined. A client may prefer to transfer the maximum amount of their assets possible to their children or other beneficiaries at their death, especially if their spouse has significant personal assets or if they are in a second marriage and have different beneficiaries than their spouse. As such, they may provide directions that their spouse is only to receive their elective share. If the client later changes their domicile, they may inadvertently provide significantly more (or less) to their surviving spouse than they may have intended, inviting conflict, ambiguity, and potentially subverting the client’s testamentary intent. Conclusion If a client moves from one state to another, they should strongly consider consulting with local counsel. This ensures that their will is valid under the new jurisdiction and continues to align with their estate planning goals. Even if the client’s will is valid and does not need to be re-executed, it is nevertheless essential that advanced directives such as health care proxies, powers of attorney, and appointments of standby guardianship are updated when moving to a different jurisdiction, as many states have statutory forms, and out-of-state forms may be rejected by health care providers and financial agencies.
October 21, 2025
Estates and Trusts
Planning for Responsible Inheritance: What "Brewster’s Millions" Can Teach Us About Estate Planning
The plot of the 1985 comedy “Brewster’s Millions,” starring Richard Pryor and John Candy, centers around Montgomery Brewster, a minor league baseball player who stands to inherit $300 million from a previously unknown great-uncle. The catch? To receive his inheritance, he must spend $30 million[1] within 30 days without receiving any assets in return, and without merely giving away all the money. If Brewster does not spend the entire $30 million in 30 days, he will inherit nothing. Hijinks ensue. At its core, the movie is a satire on capitalism and consumerism, playing on the common fantasy of inheriting a life-changing fortune from a wealthy relative. However, the film also explores a common concern that many clients have when making their estate plans. They are worried that their beneficiaries will squander their life’s savings and exhaust their inheritance on luxury items or speculative investments. These clients consider how they can ensure that their beneficiaries will responsibly manage a significant inheritance. Brewster’s great-uncle explains that his contest is not an arbitrary one. He wishes to teach Brewster a lesson, to hate spending money so much that he will learn to manage his inheritance wisely. By forcing Brewster to exhaust a fortune, he teaches Brewster to think very carefully about how he spends his money, making strategic and methodical decisions in pursuit of a singular goal. While the movie’s plot is exaggerated for comedic effect, in reality, there are several well-established estate planning techniques a client may consider to instill fiscal responsibility in a beneficiary without going to such extremes. Staggered Distributions and Trustee Discretion It is common sense that a client would not wish for a minor beneficiary to receive an outright inheritance, and virtually all wills and trusts will provide that a minor’s share will be held in trust until a milestone birthday. This ensures that a beneficiary will not receive their inheritance outright until they attain a mature age. To further mitigate the risk of a beneficiary squandering their inheritance, a client may stagger distributions over a significant period of time. For example, the client may direct that the beneficiary’s inheritance be held in trust until the beneficiary turns 25, at which time one-third of the trust assets will be distributed outright. A second distribution of one-half of the assets may be made at 30, with the assets becoming fully distributable upon the beneficiary's attainment of age 35. This approach enables beneficiaries to mature into their inheritance gradually. While the assets remain in trust, distributions may still be made by an independent trustee pursuant to an ascertainable standard, such as for the beneficiary’s health, education, maintenance and support (the “HEMS” standard). The trustee is empowered to decide if, when, and how much to distribute to the beneficiary. If, like Monty Brewster, the beneficiary appears to be recklessly spending their inheritance, the trustee can act as a stopgap and cease making distributions. Incentives Another common strategy is to incentivize the beneficiary to achieve specific goals to receive distributions. By dangling a “carrot” in front of the beneficiary, the client can guide and influence their beneficiary’s personal development and early career path. For example, the client may direct that the beneficiary will only receive a distribution upon obtaining a bachelor’s degree; if the beneficiary does not obtain a bachelor’s degree, their inheritance could be withheld for a longer period or even redirected to a charity. A client might further direct that distributions be made to the beneficiary for every year that they maintain full-time employment. A client could also include directions requiring a trustee to make distributions provided that they are used toward some productive goal, such as the purchase of a home. The client may encourage a beneficiary to keep a family home or vacation house in the family by providing an annual stipend for every year that the premises are maintained in good order. If the client is uncomfortable with such rigid, dead-hand influence over their beneficiary’s actions, they may still consider imparting some non-binding guidance or wisdom. For example, a client may express a preference for their beneficiary to use a portion of their inheritance for charitable purposes or to support a worthy cause. A client might also suggest, but not require, that their beneficiary employs a trusted family financial manager or accountant to assist them with managing their inheritance. Designating the Beneficiary as a Co-Trustee Another great strategy to foster fiscal responsibility is to name the beneficiary as the co-trustee of their trust fund until it is fully distributable. The client will then name a trusted individual or financial institution to serve as co-trustee together with the beneficiary. The beneficiary may be permitted to make distributions pursuant to the HEMS standard, but would not be permitted to participate in making discretionary distributions. This strategy provides greater flexibility and management over the beneficiary’s inheritance and the timing of distributions, while allowing the beneficiary the opportunity to manage their funds under the guidance and mentorship of a more experienced party. This may be especially valuable when the beneficiary has had little to no financial education or experience managing large sums of money. Conclusion Estate planning is much more than merely transferring assets; it is about preserving the client’s values and ensuring appropriate stewardship of the assets they leave upon their death. Estate planners have a variety of techniques and tools that can be employed to protect beneficiaries from themselves, oftentimes used in conjunction to maximize their effectiveness. The key is thoughtful and deliberate planning, exploring with the client the myriad of methods that can be used to achieve their goals and ensure preservation of their legacy. [1] Adjusted for inflation, this $30 million bequest would be approximately $90 million in today’s dollars.
September 18, 2025
Estates and Trusts
Unintended Inheritance Happens More Than You Think: Ensuring Your Loved Ones Inherit as Intended
Roughly two-thirds of Americans are estimated to die without executing a valid will. As a result, assets in their name will pass under the laws of intestacy of their home state. The laws of intestacy are essentially default rules that typically transfer a decedent’s assets to their closest living relatives, such as a spouse, children, parents, or siblings. Intestacy laws would likely transfer the assets of many decedents to their intended beneficiaries. It would be uncommon for someone to wish to disinherit their spouse or one or more of their children. However, intestacy laws do not operate on “non-probate assets,” such as joint bank accounts with rights of survivorship, life insurance policies, or retirement accounts. As a result, it is likely that a portion of a decedent’s assets will not pass to their intended beneficiaries. Sometimes, this means that one beneficiary receives a larger share of a decedent’s assets than the others. Other times, virtually all of a decedent’s assets pass to someone they had no intention of ever receiving their assets, while their intended heirs are left without any recourse. Thankfully, some states have laws that will override a beneficiary designation of a non-probate asset if it is likely that the decedent, under the circumstances, would not have intended to provide for that person. One such common circumstance is when a decedent fails to update their beneficiary designations after divorce. For New Jersey residents, N.J.S.A. 3B:3-14 automatically revokes non-probate transfers of assets to a divorced individual, returning the assets to the decedent’s estate to be distributed pursuant to the terms of their will or the laws of intestacy. Similarly, for New York residents, EPTL 5-1.4 automatically revokes non-probate transfers of assets to a divorced individual. However, this automatic revocation will not apply in all cases and to all assets. For example, there is no automatic revocation where the assets are specifically disposed of under the terms of a “governing instrument.” A governing instrument includes a will, trust, deed, or securities, such as stocks and bonds. In the Matter of the Estate of Michael D. Jones, a case recently decided by the Supreme Court of New Jersey (the highest state court), the decedent married his ex-spouse in 1990 and named her as the pay-on-death beneficiary of his U.S. savings bonds. The decedent and his ex-spouse divorced in 2016. Their divorce settlement agreement (DSA) allocated certain assets to each individual and provided that all assets not specifically referred to in the DSA would be owned by the person whose name was on the title to the given asset. The DSA did not specifically mention the savings bonds. The ex-spouse also specifically waived her right to inherit from the decedent’s estate. The decedent passed away in 2019, intestate, without having updated the pay-on-death beneficiary of his U.S. savings bonds. His ex-spouse later redeemed the U.S. savings bonds. The decedent’s daughter was appointed the administrator of the decedent’s estate and promptly sought to recapture the proceeds from the U.S. savings bonds. The court ultimately concluded that the ex-spouse was entitled to the proceeds of the U.S. savings bonds, reasoning that the bonds were regulated by the IRS Federal Treasury regulations, the “governing instrument.” Specifically, these regulations provided that when the owner of a bond dies and is survived by the named beneficiary, the named beneficiary is recognized as the sole and absolute owner of the bond. There are a number of takeaways from this case. First, even if the facts of this case were different and the administrator of the decedent’s estate had won, it would have been a pyrrhic victory at best. The decedent’s beneficiaries would face delays in receiving their inheritance, and the estate would incur significant legal fees and costs in reclaiming these assets. Second, while this case only dealt with U.S. savings bonds, there are many types of assets that have “governing instruments” with specific provisions concerning the death of the account owner. For example, in LeBoeuf v. Entergy Corp., the plan participant of a 401(k), who was a widower at the time, named his children as his designated beneficiaries. He later remarried. When the plan participant died, his 401(k) account had a balance of approximately $3,000,000. His children discovered that the plan sponsor had paid the death benefits exclusively to his second wife. It was revealed that under the terms of the plan documents, a subsequent marriage automatically revoked the beneficiary designations in favor of the new spouse. One could argue that the benefit of this provision is that a plan participant would avoid inadvertently disinheriting their spouse. However, in LeBoeuf, it is almost certain that the death benefits were distributed contrary to the plan participant’s intentions. Lastly, it highlights the critical importance of regularly reviewing existing estate planning documents, the titling of assets, and designated beneficiaries, to ensure that they pass to your intended loved ones at the time of death.
June 23, 2025
Estates and Trusts
Building Adaptive Trusts: Ensuring Tax Efficiency in an Evolving Tax Landscape
The lifetime estate tax exemption amount is as high as ever. The estate tax exemption amount rose from $1,000,000 in 2002 to $5,000,000 in 2011. Then, Congress doubled the amount of the estate tax exemption in 2018. As of this writing, the current lifetime exemption amount is nearly $14,000,000 per individual. With such high exemption amounts, there are few estates subject to federal estate tax. The focus of estate planning has, therefore, shifted from removing assets from a decedent’s estate to minimize or eliminate estate taxes, to ensuring that assets remain in the estate for estate tax purposes so that the assets receive a step-up in capital tax basis at the time of death. The “step-up” in the capital tax basis of assets means that for capital gains tax purposes, assets in a decedent’s estate will reset to the fair market value of these assets at the time of their death. By way of illustration, if a stock were bought for $100 and appreciated to $1,000 at the time of the account holder’s death, the beneficiary would only pay capital taxes on any further appreciation above $1,000. If the beneficiary sold the stock for exactly $1,000, no taxes would be owed. On the other hand, assets gifted during lifetime or held in an irrevocable trust do not receive a step up in capital tax basis. With the ever-shifting tax landscape, the estate planner must carefully balance the likelihood that their client will have a taxable estate at the time of their death with the desire to include appreciated assets (especially assets with a low capital tax basis) in the Decedent’s estate so that they will enjoy the step-up. But what happens if that calculation seems imprudent or unwise based on facts and circumstances in the future? For example, suppose Peter wishes to provide all his assets to his wife, Mary. Peter’s assets, when combined with Mary’s assets, will be close to or exceed the lifetime estate tax exclusion amount. When Peter passes away, assets received by Mary will not generate any estate tax liability because spouses enjoy an unlimited marital tax deduction. However, it is possible that Mary may now have a taxable estate upon her death, especially if her assets continue to appreciate over her lifetime. Thus, the beneficiaries of Mary’s estate will pay estate taxes on the assets they receive in excess of the lifetime exemption amount in effect at the time of Mary’s death. There are several ways to address these concerns and minimize or eliminate any estate taxes that may be owed in the future. Peter could remove some of his assets from his estate by establishing an irrevocable trust. This trust could be established either during his lifetime or via the use of testamentary trusts (i.e., a trust established at the time of Peter’s death). However, Peter may want to avoid the costs and inconvenience of trust administration if it is possible that he and Mary will never have estate tax issues. Another option is the “wait and see” approach using a “disclaimer trust” that may or may not be funded after Peter’s death. Peter could direct in his will or revocable trust that his assets will pass outright to Mary. Mary may then make a qualified disclaimer, effectively refusing to accept some or all of Peter’s assets. Any disclaimed assets will bypass Mary’s estate and go into the disclaimer trust, which can be used to support Mary for the remainder of her lifetime. The assets that pass to the disclaimer trust, and any subsequent appreciation in these assets, will remain outside of Mary’s estate and will pass estate tax-free to her future beneficiaries. Suppose after funding the disclaimer trust that Mary’s assets are significantly spent down and exhausted during her lifetime. Perhaps a future Congress will increase the estate tax exclusion amount further or completely eliminate the estate tax. In any of these scenarios, the disclaimer trust will serve no tax purpose for Mary. Worse, the assets in the disclaimer trust will not receive the “step-up” in the capital tax basis at the time of Mary’s death. Is there a way to unwind the disclaimer trust and ensure that these assets are includable in Mary’s estate at the time of her death? With careful planning, the answer is “yes”. One powerful technique to resolve this issue is by appointing a trust protector for the disclaimer trust. A “trust protector” is a disinterested party with specific enumerated powers. The trust protector could be given the power to confer upon Mary a general power of appointment to choose any beneficiary she wishes to receive her estate assets, even her own estate. Pursuant to IRC § 2041, assets subject to a general power of appointment are includable in the power holder’s estate for estate tax purposes. Now, whether Mary exercises her general power of appointment or not, the assets will be included in her taxable estate and receive a step-up in capital tax basis. While this planning technique can provide significant tax benefits, it is not always the right choice in every situation. For instance, if Mary were to face creditor issues, granting her a general power of appointment would subject the entire disclaimer trust’s assets to creditor claims. However, when implemented thoughtfully, incorporating a trust protector with the ability to grant a general power of appointment adds valuable flexibility, allowing the estate plan to adapt to the ever-evolving tax laws and optimize tax outcomes.
April 3, 2025
Estates and Trusts
Equal Shares, Unequal Outcomes: Estate Planning Strategies for Parents and their Qualified Retirement Accounts
Typically, a parent wishes to treat their children equally in their estate plan and presumes they will achieve this goal by dividing all their assets into equal shares upon their death. Accordingly, they will designate their children as equal beneficiaries of their qualified retirement accounts, such as traditional IRAs and Roth IRAs. However, doing so without considering the individual circumstances of their children may be less tax efficient and may ultimately result in one child receiving more assets after the payment of taxes than their siblings. Traditional IRAs vs. Roth IRAs: Key Differences A traditional IRA is funded on a pre-tax basis, with the income taxes on any appreciation deferred until assets are withdrawn from the account. Traditional IRAs are subject to requirement minimum distributions (RMDs) when the account holder attains the age of 73. A RMD is the minimum amount that must be withdrawn from the IRA each year. Contributions to a Roth IRA, on the other hand, are made with after-tax dollars, and the distributions are withdrawn tax-free. In addition, there is no RMD requirement for a Roth IRA during the lifetime of the account holder. The Ten-Year Rule When the account holder dies, most beneficiaries must take distributions pursuant to the “ten-year rule,” which requires that the beneficiary withdraw the account assets in full within ten years from the date of death of the original account holder. During this withdrawal period, the beneficiary must take RMDs in each year that the inherited account is open. As these withdrawals are made, the beneficiary must pay the deferred taxes based on their individual income tax bracket. Notably, withdrawals from a Roth IRA account remain income-tax free to the beneficiary, and are not subject to the RMD requirement. Tax Benefits for Eligible Designated Beneficiaries (EDBs) A beneficiary that is deemed an “eligible designated beneficiary” (“EDB”) is not subject to the ten-year rule and may take distributions from the inherited account over their lifetime. Thus, the account assets may continue to appreciate tax deferred over a significantly longer period of time. EDBs include beneficiaries that are not more than ten years younger than the original account holder, surviving spouses, beneficiaries that are deemed disabled or chronically ill, and minor beneficiaries.[1]. It will be inherently more tax efficient for a parent to name an EDB as a beneficiary of their qualified account because of the extended withdrawal period the beneficiary will have to take distributions from the account. Therefore, if a parent has two or more children, one of whom is deemed an EDB, and names each of them as an equal beneficiary of their IRA account, the child who is an EDB will ultimately receive significantly more assets than their siblings because the assets in the account will have significantly more time to appreciate tax-deferred. In addition, because of the extended withdrawal period, the beneficiary has more flexibility in choosing when to take distributions from the account to avoid getting bumped into a higher marginal income tax bracket. Accordingly, if the parent wishes that each of their children receive as nearly equal shares of their assets as possible, and one or more of their children are deemed EDBs, it may be better to provide a greater share of their qualified accounts to the EDB beneficiaries, and the non-EDB beneficiaries with a greater share of their other estate assets. Case Study: Tax Efficiency and Equalizing Shares What if the account holder does not have any beneficiaries who will be deemed an EDB? Even then, the account holder should still consider their children's individual income tax circumstances. Suppose the account holder is single with a Roth IRA with $1,000,000 in assets and a traditional IRA with $2,000,000 in assets. The account holder has two children: Alex, who is a stockbroker, and Jamie, who is a public school teacher. We can presume that Alex has more taxable income than Jamie and that Alex has a higher earning potential in their career. If Alex and Jamie were named equal beneficiaries of the traditional IRA, it is likely that the distributions from the account would bump Jamie into a higher income tax bracket in the years that they are received, thus generating more income tax liability. Alex’s distributions are almost certain to be taxed at a higher marginal rate than Jamie's. If Alex and Jamie are named equal designated beneficiaries of the Roth IRA, the distributions would be tax-free in the year that they are received, leaving their respective income tax brackets unaffected. Therefore, naming Jamie as a primary beneficiary of the traditional IRA, where distributions will be taxed at a lower tax bracket, and designating Alex as the primary beneficiary of the Roth IRA is likely more tax efficient and most likely to ultimately result in each child receiving equal shares of the assets after payment of income taxes. As this example illustrates, naming each child as an equal beneficiary of a qualified account may not result in equal distributions after the payment of taxes, frustrating the intentions of a well-meaning parent. Therefore, careful consideration must always be given to the individual circumstances of an account holder’s intended beneficiaries. [1] Minor beneficiaries become subject to the ten-year rule once they attain the age of 18.
January 23, 2025
Estates and Trusts
Inheritance Rights of Domestic Partners: A Comparison Between New York and New Jersey Laws
Domestic partnerships are legal arrangements between two individuals that grant some of the same rights and benefits as marriage. While domestic partnerships are recognized in many states, inheritance rights can differ greatly depending on the jurisdiction. This article explores the critical differences in inheritance rights for domestic partners under the laws of New York and New Jersey. Qualifying for Domestic Partnerships The qualifications for entering into a domestic partnership in New York and New Jersey are largely similar. Generally, both partners must: Be residents of the county or city where they are applying. Be at least 18 years old. Be unmarried and unrelated by blood. Be in a close, committed personal relationship for at least six months. Not have been in another domestic partnership within the six months prior to applying. Inheritance Rights in New Jersey In New Jersey, domestic partners are granted specific inheritance rights if their partner dies intestate (without a valid will). The surviving partner’s share of the estate depends on several factors: If the deceased partner has no children or parents, the surviving partner inherits 100% of the estate. If the deceased partner is survived by children who are also the children of the surviving partner, the surviving partner inherits 100% of the estate. If the deceased partner has a surviving parent, the surviving partner is entitled to the first 25% of the estate (with a minimum of $50,000 and a maximum of $200,000) plus 75% of the remaining estate. If either the deceased partner or the surviving partner has a child from another relationship, the surviving partner is entitled to the first 25% of the estate (with the same minimum and maximum) plus 50% of the remaining estate. Additionally, New Jersey law grants the surviving domestic partner priority to serve as the legal representative (administrator) of the deceased partner’s estate. Inheritance Rights in New York In contrast, New York does not grant inheritance rights to surviving domestic partners if their partner dies intestate. Without a will, the deceased partner’s assets will be distributed as follows: The deceased partner’s assets will go to their children, not their partner. If there are no children, the assets go to the deceased’s partner’s surviving parents. If they are not survived by children or parents, the assets pass to the deceased partner’s siblings. In the absence of children, parents, or siblings, the deceased partner’s assets may pass to distant relatives, such as nephews or cousins, leaving the surviving partner no share of the estate. Moreover, a surviving partner in New York does not have the right to serve as the legal representative (administrator) of the deceased partner’s estate. For couples in domestic partnerships in New York, comprehensive estate planning is essential. Without a will or other legal instruments, the surviving partner has no legal claim to the deceased partner’s assets and no right to act on behalf of the estate. The Federal Landscape: Domestic Partnerships and Estate Taxes It is also important to note that the federal government does not recognize domestic partnerships. Unlike married couples, domestic partners do not benefit from the federal estate tax exemption for spouses. As a result, a surviving partner may face estate taxes on any assets they inherit from their deceased partner. Additionally, if a partner inherits a qualified retirement account (such as a 401(k) or IRA), they cannot roll over the account into their own retirement account. This limitation can result in significant additional income tax liabilities on inherited retirement funds. Conclusion The inheritance rights and legal benefits for domestic partners vary significantly from state to state. In New Jersey, domestic partners are granted certain inheritance rights and legal privileges, including the ability to serve as the estate representative. In contrast, New York provides no automatic inheritance rights or authority over a deceased partner’s estate for surviving domestic partners. Due to these significant differences, domestic partners—especially those in states like New York—should prioritize estate planning. Careful planning ensures that a domestic partner’s wishes are clearly outlined, and their surviving partner is appropriately protected. Consulting with an attorney experienced in estate planning and domestic partnerships is essential for navigating these complex legal issues.
November 13, 2024
Estates and Trusts
The Estate Planning Benefits of Marriage: What Unmarried Couples Need to Know
It is becoming increasingly commonplace for people to enter long-term romantic relationships without legally marrying. While there are no exact statistics on how many Americans fall into this growing category, a 2019 Pew Research Center study estimated that 12% of Millennials were living with an unmarried partner, compared to 8% of Gen Xers—an increase of 50% from one generation to the next. While this trend is influenced by various social and political factors, many of these couples may not fully appreciate the extensive economic and legal benefits they forgo by remaining unmarried to their partner. In fact, over 1,000 federal laws provide legal benefits and privileges to married couples. It is beyond this article's scope to discuss every way in which the law favors married couples. Rather, this article will highlight just a few of the many estate planning benefits and opportunities that are conferred on married couples that are not shared by unmarried couples. As I will illustrate, often with little planning, married couples can defer, reduce, or completely eliminate taxes. Unlimited Marital Deduction - Lifetime Gifting Any gift exceeding the annual gift tax exclusion amount, which in 2024 is $18,000 per donor per recipient, is a taxable gift that must be reported by filing a gift tax return (IRS Form 709). However, there is a very significant exception to this rule. One spouse may convey to the other spouse an unlimited amount of assets at any time and as often as desired without incurring any gift tax liability. This creates many estate planning opportunities. As just one example, married couples can strategically retitle assets between each other to maximize the “step-up” in the capital tax basis that these assets receive at death. The “step-up” means that any appreciation in an asset from when the decedent first acquired it gets wiped away at death, and the recipient receives the asset with an adjusted capital tax basis as of the decedent’s date of death. Thus, married couples can convey assets to each other so that upon the death of the first spouse, the surviving spouse receives highly appreciated assets with a one-half or even full step-up, saving significant capital gains taxes when the asset is later sold. Unlimited Marital Deduction – Inheritance The unlimited marital deduction also applies to transfers between spouses at death, shielding the surviving spouse’s inheritance from any estate taxes. This powerful tool allows the surviving spouse to defer the payment of any estate taxes resulting from the first spouse's death for their entire lifetime. This gives the surviving spouse time to spend down or gift these assets to minimize or eliminate estate tax liability for their future heirs at the time of their death. The unlimited marital deduction is also key to “by-pass” trust planning, a technique that ensures that no estate taxes are owed at the death of the first spouse while maximizing the use of their estate tax exemption. By-pass trust planning works as follows: upon the first spouse’s death, two trusts are established for the surviving spouse’s benefit. One trust is funded with assets up to the estate tax exemption amount, allowing these assets to continue to appreciate outside the surviving spouse’s estate. When the surviving spouse passes away, this trust terminates, and the assets are distributed to the ultimate beneficiaries free of estate tax. The second trust is funded with the remaining estate assets and is structured to take advantage of the unlimited marital deduction. Portability A spouse may claim the deceased spouse’s unused exemption (DSUE) for their later use via a concept known as portability. To claim the DSUE of the deceased spouse, the surviving spouse must timely file a federal estate tax return (IRS Form 706). Unlike a “bypass” trust plan, portability requires no advanced estate planning and incurs no administrative costs or inconvenience. Regardless of any subsequent changes in the law, the DSUE will be available for the surviving spouse to benefit from in their estate. With the current estate tax exemption amount at a historical high, it is a particularly advantageous time to file an estate tax return solely for portability purposes. Those intending to rely on portability planning should be cautious, as the surviving spouse cannot claim any unused state estate tax exemption amount. Therefore, portability planning may be sufficient for residents of New Jersey, which abolished its estate tax in 2018, but it may not be adequate for residents of New York, which has an estate tax. Unused generation-skipping transfer tax exemption amounts are also not portable between spouses. Inheritance Tax For New Jersey residents, an inheritance tax is imposed on certain classes of recipients of a decedent’s estate assets. The surviving spouse, a Class “A” beneficiary, is wholly exempt from inheritance tax liability. For those married clients who wish to provide an inheritance for beneficiaries in a class that would be subject to the inheritance tax, making lifetime gifts outright or in an irrevocable trust remains a valid strategy for avoiding the inheritance tax. Inherited IRAs Before the enactment of the SECURE Act, beneficiaries of inherited IRAs were permitted to take required minimum distributions (RMDs) based on their life expectancy. A beneficiary younger than the original account owner would have much smaller RMDs, allowing the IRA assets to appreciate over a long period of time income tax deferred. The SECURE Act largely eliminated this strategy. Under current law, most beneficiaries must liquidate their inherited IRA within ten (10) years of the death of the original account holder. The SECURE Act carved out an exception to this rule; it allowed those deemed an “eligible designated beneficiary” (“EDB”) to take RMDs based on their life expectancy. Among the limited categories of EDBs, you guessed it, the surviving spouse is deemed an EDB. A husband or wife who outlives their spouse for many years could see these assets significantly appreciate over their lifetime. Moreover, the surviving spouse has significantly more flexibility in taking withdrawals above the RMD in years when the assets will be taxed at lower marginal income tax rates. Challenges for Unmarried Couples The flip side to all the planning opportunities available to the married couple is that the unmarried couple cannot benefit from any of them. Any gifts between the unmarried couple above the annual exclusion amount would be taxable. Unmarried couples who receive the inheritance of their deceased partner’s estate may be subject to estate taxes, significantly reducing the assets that the surviving partner would otherwise have available for their support. In New Jersey, in addition to any estate tax liability, a non-married surviving partner may be subject to inheritance tax liability. Lastly, the surviving partner may not be an EDB; thus, they will need to withdraw the entire amount of the IRA within ten years, potentially losing out on years of further appreciation. Of course, the unmarried couple still needs estate planning. Indeed, if an unmarried person were to die without preparing a will or trust, the intestacy laws of most states would direct their assets automatically to children, parents, or siblings. There are also tax planning techniques available for the unmarried couple to reduce estate taxes, such as the establishment of one or more lifetime irrevocable trusts. This kind of planning, however, is more expensive, and the administration is costly and burdensome. State legislatures have taken some meaningful steps to protect the rights of unmarried couples in recent years. For example, both New York and New Jersey recognize domestic partnerships, a legal arrangement that confers some of the benefits afforded to married couples on unmarried couples. For example, a domestic partner in New Jersey is a Class “A” beneficiary, exempt from inheritance tax. However, most tax planning opportunities available to married couples remain unavailable to domestic partners. I am hopeful that future legislatures will address some of these disparities, particularly as the unmarried share of the population continues to grow. However, until that legislative fix occurs, sometimes the best planning advice for an unmarried couple in a long-term relationship is to change their marital status.
September 24, 2024
