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Tax, Trusts & Estates Law Monitor

Updates and Commentary on Business and Individual Tax and Estate Planning

IRS Proposed Regs Redefine the Terms “Husband” and “Wife”

Posted in Articles, Estate Planning, Estate Tax, Gift Tax, Income Tax, International Tax, Legislation

The Supreme Court has recently struck down state bans on same-sex marriage as unconstitutional in Obergefell v. Hodges, 576 US ___ (2015), after previously striking down the federal exclusion of same-sex couples from marriage-related laws in US v. Windsor, 570 US ___ (2013).  The Internal Revenue Service (IRS) has now followed suit to recognize same-sex marriage for all federal tax purposes, including income, estate, gift, generation-skipping, and employment tax.

On October 23, proposed regulations were published in the Federal Register, which redefine the terms “husband” and “wife” under Section 7701(17).  Both terms will now mean an individual lawfully married to another individual, and the term “husband and wife” will mean two individuals lawfully married to each other. These definitions would apply regardless of sex.  Prop Reg § 301.7701-18(a).  The IRS is accepting comments for a limited time.

However, the proposed regulations redefining marriage will not apply to domestic partnerships, civil unions or other relationships. Prop Reg § 301.7701-18(c).  The couples’ choice to remain unmarried is respected by the IRS as deliberate, for example, for purposes of preserving eligibility for government benefits or avoiding the tax marriage penalty.  Preamble to Prop Reg 10/21/2015.  In addition, a marriage conducted in a foreign jurisdiction will be recognized for federal tax purposes only if the marriage would be recognized in at least one state, possession, or territory of the United States.  Preamble to Prop Reg 10/21/2015.

Adults with Special Needs May Soon Be Able to Streamline the Process to Establish First Party Special Needs Trusts on Their Own: A Review of the Special Needs Trust Fairness Act

Posted in Estate Planning, Guardians/Guardianship, Legislation, Medicaid, Special Needs Assistance, Special Needs Trusts

In 1993, Congress enacted Section 1917(d)(4)(A) of the Social Security Act, authorizing the establishment of special needs trusts (also called first-party trusts and self-settled trusts). First-party special needs trusts enable disabled individuals to set aside their funds to pay for supplemental care while enabling those individuals to remain eligible for government benefits. See 42 U.S.C. § 1396p(d)(4)(A). Following suit, the New Jersey Supreme Court has long recognized special needs trusts as effective asset protection tools which can be used “to plan for the future of a disabled minor or adult . . .” See Saccone v. Board of Trustees of Police and Firemen’s Retirement System, 219 N.J. 369, 383 (2014). First-party special needs trusts are used when individuals with disabilities have assets in their own name, (e.g., due to a lawsuit settlement, direct inheritance, savings or gift), yet want to be eligible to receive government benefits such as Supplemental Security Income (SSI) and Medicaid.

Unfortunately, under the current law, individuals with special needs are not authorized to establish their own special needs trusts even if they have the requisite mental capacity and despite the fact that the trust will be funded by assets belonging to them. Rather, a First-party special needs trust can only “be established by a parent, grandparent, legal guardian of the individual, or a court.” See 42 U.S.C. § 1396p(d)(4)(A). Accordingly, if an individual with special needs does not have a parent, grandparent or legal guardian, that individual must petition the Court to establish the first-party special needs trust, even if that individual is competent. This process can be costly and time consuming. A parent, grandparent, or legal guardian, however, can establish a first-party special needs trust for the disabled individual in a relatively short amount of time and is not beholden to the Court’s schedule. While likely a drafting oversight, requiring disabled individuals to have a parent, grandparent, legal guardian or a court to establish their first-party special needs trusts implies that all individuals with disabilities lack the requisite mental capacity to enter into a contract and handle their own affairs. This presumption, however, is unwarranted and offensive.

The Special Needs Trust Fairness Act of 2015 (H.R. 670) introduced in February 2015 by Congressmen Glenn Thompson (R-Pa) and Frank Pallone, Jr. (D-NJ), corrects this problem by adding the individual with special needs to the list of people who can create a first party trust on his or her behalf, giving those individuals the same right to create a trust as a parent, grandparent, guardian, or court. The Special Needs Trust Fairness Act of 2015 proposes to add the words “the individual” to Section 1917(d)(4)(A) of the Social Security Act, permitting disabled individuals to establish their own special needs trusts without a parent, grandparent, legal guardian, or a court. If enacted, persons with disabilities who have no close family would no longer be forced to petition a court and undergo unnecessary legal fees and delays.

On September 9, 2015, the United States Senate passed a companion version of the Special Needs Trust Fairness Act of 2015 by unanimous consent. Hopefully, there will also be swift passage in the House of Representatives.

New Jersey Court Holds Financial Institutions are Not Required to Report Suspected Elder Fraud

Posted in Estate Planning

In a case of first impression, the Superior Court of New Jersey held that financial institutions do not have an affirmative duty to report suspected fraud upon senior citizens or vulnerable individuals. See Lucca v. Wells Fargo Bank, N.A., 441 N.J. Super. 301, 315 (Law Div. 2015). In Lucca, an 82-year old woman received a phone call from a man (who identified himself as a lawyer) inviting her to “participate in an enterprise where she could win some money.” Over the course of six months, he instructed her to make twenty-seven wire transfers totaling $330,000 to individuals in Alabama and Costa Rica. Bank employees at Wells Fargo reported these transfers to their internal elder fraud unit as a potential scam, but never received a response from that unit and did not pursue the matter any further.

N.J.S.A. 17:16T-1 to 4 is a statute that authorizes financial institutions to release customer financial records to law enforcement and adult protective agencies. Relying upon the statute, the woman sued Wells Fargo and asserted that the statute requires financial institutions to report a suspected scam to either adult protective services or the police. N.J.S.A. 17:16T-3 provides that “a financial institution may release” a customer’s financial records to a law enforcement or county adult protective services agency, if the “senior customer” or “vulnerable customer,” as those terms are defined by the statute, has an interest in the account and “the financial institution suspects that illegal activity is, or will be, taking place which involves the account including, but not limited to, defrauding any vulnerable or senior customer . . .” Additionally, N.J.S.A. 17:16T-4(b) provides that a financial institution “which decides in good faith not to disclose information which it is permitted to disclose . . . shall not be liable under any law or regulation or common law of this State for that decision.”

In analyzing whether Wells Fargo had an affirmative duty to report the suspected scam to either the police or adult protective services, the Court looked to both the plain language and the legislative history of the statute and concluded that disclosure is not required. The Court instead found that the statute immunizes the institution from liability whether or not it releases the customer’s information to the authorities. Id. at 311. The use of the word “may” in both the legislative committee statement and the statute itself concerning the decision to release information confirms that interpretation. Id. at 311-312. Accordingly, the Court concluded that plaintiff had no cause of action against Wells Fargo. Id. at 315-316.

The Court’s decision in Lucca is instructive for anyone with family members who may be vulnerable to predatory financial scams, undue influence or deception. It highlights the importance of ensuring that trusted individuals are appointed to protect the assets of such family members through the use of durable powers of attorney or by instituting guardianship proceedings when necessary.

2015/2016 Estate and Gift Tax Update

Posted in Estate Tax, Gift Tax

Experts have started to calculate the inflation adjustments to key estate and gift exemption amounts for 2016. Note that these are not the official figures to be released by the IRS, but should be used as a guide. The IRS will officially release the numbers later this year.

For an estate of any decedent dying during calendar year 2016, the applicable exclusion is increased from $5.43 million to $5.45 million. This change increases not only the applicable exclusion amount available at death, but also a taxpayer’s lifetime gift applicable exclusion amount and generation skipping transfer exclusion amount. This means a husband and wife with proper planning could transfer $10.90 million estate, gift and GST tax free to their children and grandchildren in 2016.

The estate, gift and GST tax rate remains the same at 40% and the gift tax annual exclusion remains at $14,000.

While the New Jersey state exclusion amount remains unchanged at $675,000, the New York exclusion amount was changed as of April 1, 2014. Beginning April 1, 2014, the exclusion is as follows:

• $2.0625 million for decedents dying between April 1, 2014 through March 31, 2015;
• $3.125 million for decedents dying between April 1, 2015 through March 31, 2016;
• $4.1875 million for decedents dying between April 1, 2016 through March 31, 2017;
• $5.25 million for decedents dying between April 1, 2017 through December 31, 2018. Beginning in 2019, the exclusion would be indexed for inflation, and equal to the Federal exclusion.

The gift tax annual exclusion to a non-citizen spouse has been increased from $147,000 to $148,000. While gifts between spouses are unlimited if the donee spouse is a United States citizen, there are restrictions when the donee spouse is not a United States citizen.

Family Limited Partnerships: Are Discounts Disappearing?

Posted in Estate Planning, Estate Tax, Gift Tax, Legislation

“Family limited partnerships” – that is, family investment entities usually structured as LLCs or limited partnerships – have been a popular estate planning technique for years. Generally speaking, a client can transfer non-voting, non-marketable interests in these types of entities to children or a trust, and claim a valuation discount due to the restrictions that apply to the interest transferred. It appears, however, that the IRS will soon release proposed regulations under Code §2704 that are expected to limit the use of valuation discounts in these situations.

Code §2704 governs certain “applicable restrictions” that may apply to ownership interests in family entities. The law provides that certain restrictions are disregarded for valuation purposes. The law also permits the IRS to issue regulations providing for other restrictions (as determined by the IRS) to be disregarded in determining the value of a transfer to a family member, if a restriction has the effect of reducing the value of the transferred interest but does not ultimately reduce the value of such interest to the transferee.

After including new Code §2704 regulations on its list of priority guidance for the past 11 years, it appears (based on comments made by an IRS spokesperson to the ABA Tax Section) that the IRS will soon issue these regulations. While the scope and specifics of the regulations are unknown, it is expected that the proposed regulations will restrict the use of discounting by defining new restrictions that are to be disregarded when valuing a transfer of an interest in a family entity. The effective date of the proposed regulations and possible “grandfathering” opportunities are also currently unknown.

Accordingly, if you have been considering this type of estate planning transaction, it would be prudent to contact us and discuss with one of the attorneys in our group.

Court Warns That Marriage Does Not Render A Spouse Automatically Entitled To Preexisting Life Insurance Policies

Posted in Estate Planning

In a recent unpublished decision, the New Jersey Appellate Division has again stressed the importance of complying with the beneficiary designation requirements contained in life insurance policies. See Fox v. Lincoln Financial Group, et al., A-3189-13T4 (2015).

In Fox, the decedent purchased a life insurance policy in 1992, at which time he designated his first wife as the primary beneficiary. Following their divorce, he executed a form making his sister the beneficiary of his life insurance. Years later, the decedent married the plaintiff and subsequently died without transferring the policy benefit to her. The plaintiff subsequently filed a declaratory judgment action and requested the court to create a “bright-line” rule holding that marriage presumptively revokes all prior life insurance beneficiary designations, leaving the spouse as sole beneficiary. The trial court declined to adopt that approach, and the Appellate Division affirmed.

On appeal, the court noted the general rule that the owner of a life insurance policy must comply—at least substantially—with the policy’s provisions to effect a change in beneficiary designation. “Substantial compliance” requires an insured to make every reasonable effort to change his or her beneficiary designation in accordance with the policy provisions. The court indicated that mere oral expressions of a desire to change a beneficiary designation are ineffective. See DeCeglia v. Estate of Colletti, 265 N.J. Super. 128 (App. Div. 1993). While noting that a different rule applies in the context of divorcing spouses, the court concluded that rule did not apply in a situation where a marriage is claimed to have resulted in a change of beneficiary. See Vasconi v. Guardian Life Ins. Co. of Am., 124 N.J. 338 (1991) (ex-spouse denied life insurance proceeds because all rights were waived to the insurance proceeds under the terms of a property settlement agreement); N.J.S.A. 3B:1-1 and 3B:3-14 (statutory provisions that revoke an ex-spouse’s right to receive, among other things, proceeds from life insurance policies owned by the other former spouse).

The court ultimately declined the invitation to create a new rule whereby marriage, in and of itself, operates to alter life insurance beneficiary designations. Accordingly, it denied plaintiff’s claim on the basis that the decedent failed to substantially comply with the insurance company’s “change of designation” policies.

This case once again illustrates the importance of keeping beneficiary designations up to date and complying with all policy requirements.

Defending Against a Motion to Dismiss New Jersey State Lottery Claims

Posted in Estate Planning, Income Tax

The Presiding Judge of the New Jersey Tax Court held in favor of Melvin and Kimberly-Lawton Milligan last week, ruling that they can proceed with their claims against the State of New Jersey, Division of Lottery challenging the retroactive taxation of their lottery winnings.

On June 9, 2000, Melvin Milligan won the top prize in the Big Game Drawing totaling approximately $46 million. When Mr. Milligan won and claimed his New Jersey Lottery prize, winnings from the New Jersey Lottery were specifically excluded by statute from taxable income under the New Jersey Gross Income Tax Act, N.J.S.A. § 54A:l-l, et seq. After consulting with counsel, and in reliance on the State tax laws in existence at that time, Mr. Milligan opted to receive his prize in 26 annual installments of approximately $1,769,000 each.

Mr. Milligan received the agreed-upon installments without issue until 2009, when the State of New Jersey amended the law to subject New Jersey Lottery winnings over $10,000 to the New Jersey Gross Income Tax. This amendment was enacted on June 29, 2009, but made effective retroactively as of January 1, 2009. As a result, beginning tax period 2009, and every year thereafter, Mr. Milligan and his wife, Kimberly-Lawton Milligan, began reporting the New Jersey Lottery winnings as income and paying the applicable tax in excess of $133,000 each year. The Milligans dispute New Jersey’s right to collect income tax on their prize money – a prize won over nine years before the change in the law – and have filed a lawsuit against the State of New Jersey, Division of Taxation and State of New Jersey, Division of Lottery. The Milligans allege breach of contract, violations of both the United States Constitution and New Jersey State Constitution, as well violations of the common-law “manifest injustice” doctrine based on the retroactive application of the tax.

On February 24, 2015, the Honorable Patrick DeAlmeida, Presiding Judge of the Tax Court in Trenton, New Jersey, ruled that the Milligans can proceed with their lawsuit against the Division of Lottery who sought to dismiss the Millgans’ action for failure to state a claim. In his opinion, Judge DeAlmeida held that “[a]n inference can be drawn” that the Milligans were induced to play the lottery and that “the Division of State Lottery breach[ed] the resulting contract when in 2009 it paid [the Milligans] less than the contractually agreed upon sum certain.” Rejecting the Division of Lottery’s arguments, the Court further held that “[t]he Complaint without question suggests a contract claim against the Division of State Lottery … based on legal precedents recognizing a contractual relationship between the bearer of a winning lottery ticket for the June 9, 2000 drawing and the Division of State Lottery.” A copy of the full opinion can be found 

Cole Schotz represents the Milligans as well as over two dozen other plaintiffs who are similarly challenging the State’s retroactive taxation on their lottery winnings. The Court’s ruling in Milligan applies across the board. For more information, please contact Steven Klein, Lauren Manduke, Jeffrey Schechter, or Geoffrey Weinstein at (201) 489-3000.

Florida Becomes the 36th State to Allow Same-Sex Marriage

Posted in Estate Planning

On August 21st, 2014, U.S. District Court Judge, Robert L. Hinkle, in the case of Brenner v. Scott, ruled that Florida’s constitutional and statutory bans on same-sex marriage were unconstitutional.  Same-sex couples were able to marry across the State of Florida beginning yesterday, the day that Judge Hinkle’s stay was lifted.  The case is now on appeal with the 11th Circuit Court of Appeals, which presides over Alabama, Florida, and Georgia.  To the extent the 11th Circuit hears this case and rules in favor of Judge Hinkle’s holding, same-sex marriage could become legal in both Alabama and Georgia, two of the 14 states that still do not recognize same-sex marriage.  The 4th, 7th, 9th, and 10th Circuits have already ruled that any bans on same-sex marriage are unconstitutional, thereby legalizing same-sex marriage in the states that each of these Circuit Courts preside over.

This case is a huge win for same-sex couples, especially for the many same-sex spouses that live in New York and wish to relocate to Florida.  Prior to this ruling, these couples faced many legal challenges, including, but not limited to, legal issues with intestacy, parenting, and adoption.  These couples can now have peace of mind as they move forward to become “snowbirds.”

ABLE Accounts for Disabled Individuals – Senate is now ABLE to Act

Posted in Estate Tax, Legislation

On December 3, 2014, the House of Representatives passed legislation that would allow qualifying disabled persons to establish tax-free savings accounts similar to 529 plans to pay for a host of expenses, including, but not limited to, housing, transportation, and medical expenses.  The Achieving a Better Life Experience (ABLE) Act of 2014 is expected to be approved by the Senate, and would be effective for tax years beginning after December 31, 2014.

Similar to 529 Plans, each state could elect to establish an “ABLE” program.  Contributions to the ABLE account could be made by any person.  Such contributions would not be tax deductible and would be limited to $14,000 annually.  Income earned by the account that is either reinvested or distributed to an eligible disabled individual would not be subject to income tax.  The account could hold a balance of up to $100,000 without being considered an asset for eligibility under means-based benefits programs, such as Social Security Income (SSI) and Medicaid.

Similar to 529 Plans, the law would contain provisions dealing with distributions for non-qualified expenses and provisions dealing with what happens to the ABLE account funds on the disabled individual’s death.

This legislation presents an invaluable planning opportunity for families with disabled children, as parents would be able to establish a tax-exempt ABLE account for their disabled child without such an account being considered for SSI and Medicaid.  Under current law, people with disabilities are generally disqualified from eligibility for SSI and Medicaid if they have more than $2,000 in assets.