The new tax bill that Congress passed at the end of 2010 makes some very important changes to the federal estate and gift tax laws. Although these changes are only temporary (they apply only to the years 2011 and 2012), they provide some excellent estate planning opportunities.

The highlights of the new law are as follows:

• New Gift Tax and Generation Skipping Transfer Tax Exemption: You can now gift up to $5 million during your lifetime without paying any gift tax. Under the new law, for example, a married couple can gift up to $10 million (ideally to trusts) for the benefit of their children, and the initial gift, as well as all future appreciation on such gift, will pass generation to generation completely free from transfer taxes (i.e. no gift taxes, estate taxes, or generation-skipping taxes). In addition, if parents would like to retain some access to these assets, trusts can include one’s spouse as a potential beneficiary, so in a “rainy day” scenario, the spouse can still access income and even principal. If you can afford to take advantage of all or a portion of this lifetime exemption, you should act now since this provision is set to expire at the end of 2012. If you already used your $1 million exemption in a previous year, then you now have a $4 million lifetime exemption to work with.

Please note that the new lifetime exemption is distinct from the “annual exclusion,” which remains at $13,000 per donee. What that means is that in addition to the above $5 million lifetime exemption, you can still gift $13,000 to desired individuals (a married couple can gift $26,000) and such annual gifts will not reduce the $5 million lifetime exemption.

• New Estate Tax Exemption: There is no estate tax (or generation skipping transfer tax) on the first $5 million of assets not passing to a spouse (all assets passing to a surviving spouse who is a US citizen are exempt from estate tax due to the marital deduction). What that means is that a married couple can now shelter the first $10 million of assets passing to desired beneficiaries. Good news, but since most of us are not planning on dying in 2011 and 2012, this provision only provides more uncertainty for the future. Nevertheless, it makes sense to ensure that your current estate planning documents are structured to take advantage of the maximum estate tax exemption.

You should immediately revisit your estate plan in the following circumstances: (1) if you have children from a previous marriage, (2) the funding of certain trusts upon your death is dependent on the allocation of generation skipping transfer tax exemption, (3) your surviving spouse is not a beneficiary of both the credit shelter trust (also known as the by-pass trust) and the marital trust in your Will, or (4) you make certain bequests to charities that are based on formulas or percentages of a taxable estate.

• New Estate Tax Rate: The top federal estate tax rate is 35% (down from its peak rate of 55% in 2001). Again, good news, with the same caveat.

• Step-Up Basis: Estates of individuals who pass away in 2011 and 2012 will be entitled to a full step-up in basis, so no capital gains taxes will be owed on inherited assets. This eliminates 2010’s carry-over basis regime and the “accounting nightmare” of calculating basis on assets purchased decades ago.
• Portability: The $5 million estate tax exemption becomes “portable” so that if estate planning documents are not properly structured on the first spouse’s death (or assets are not properly titled), the surviving spouse will be able to utilize both spouses’ exemptions upon the surviving spouse’s death (if the appropriate box is checked on the first spouse’s estate tax return). Although this is good, it still makes sense to ensure that your assets are properly titled and your Wills at least enable the surviving spouse to set up a credit shelter trust, in order to: (i) avoid excess state estate taxes, (ii) take advantage of the deceased spouse’s exemption from generation skipping transfer tax (which is not portable), and (iii) ensure that all of the growth between the first and surviving spouse’s deaths can be excluded from the surviving spouse’s taxable estate.

• Clarity for 2010 Estates: Individuals who passed away in 2010, have the choice of paying no estate tax and operating under the carry-over basis laws (with the $1.3 million of step-up to allocate) or applying 2011’s new estate tax laws. This provides much needed clarity for 2010 estates.

• 2013 Sunset. Barring future Congressional action, this legislation will expire on January 1, 2013. As a result, the estate, gift and generation skipping transfer tax exemptions will revert to $1 million and the tax rate will revert to 55%.

Of course, each individual’s situation is different. Therefore, this summary of the tax laws should not be relied upon without first consulting an attorney. Please do not hesitate to call me with questions or to schedule a review of your current estate plan. I would be happy to discuss one or more of the opportunities presented above, or any other estate planning or business succession planning issue relevant to you.

U.S. Treasury Circular 230 Notice: Any tax advice provided in this communication is not intended or written to be used or relied upon, and it cannot be used, relied upon, or referred to by any taxpayer: (1) for the purpose of avoiding tax penalties that may be imposed by law upon the taxpayer; or (2) in any marketing or promotion of any tax transaction or planning. Any taxpayer should seek advice based on his/her particular circumstances from an independent tax advisor with respect to any federal tax transaction or matter referenced in this communication. If you wish to contact me via email you can reach me at, nbulbulia@hartmanndoherty.com.

To nearly everyone’s surprise, Congress still has not enacted legislation to cover 2010 estate tax and generation-skipping transfer tax. With every day that passes, the likelihood of Congress passing retro-active legislation decreases.

With that in mind, the following are some opportunities that should be explored for the appropriate family:

• Gifting. It is cheaper to pay gift tax than it is to pay estate tax, so making gifts during life is generally good planning. The low gift tax rates for this year, however, make it particularly attractive. In 2010, the gift tax rate has been reduced to only thirty-five percent (35%)—compared to 2009’s forty-five percent (45%) rate and 2011’s fifty-five percent (55%) rate. Put simply, this thirty-five percent (35%) rate is a bargain. For the individual who has already used his or her $1 million lifetime exemption and can afford to make further gifts, now is an excellent time to gift cash or assets to a trust, ideally for the benefit of your grandchildren and more remote descendants. The downside to this technique is that the gift tax has to be paid now (whereas estate tax will not be paid until death). The analysis here of which results in less tax – paying now or waiting until later – is similar to the considerations for making a Roth IRA conversions; like with paying income tax now with a Roth conversion, there are significant benefits in most cases to paying gift tax now.

• Trust Distributions. For existing trusts that are not exempt from the generation-skipping transfer tax, 2010 is a one-time opportunity to make distributions to grandchildren or more remote descendants of the creator of a trust free from the generation-skipping transfer tax.

• Low Value of Assets. With assets continuing to be at depressed values and interest rates continuing to be so low, 2010 is an excellent time for making loans, creating short term grantor retained annuity trusts and taking advantage of other opportunities.

• Deaths in 2010. There are unique opportunities and challenges for individuals who pass away in 2010. Thus, anyone in poor health should immediately review their existing estate plan.

Of course, the above is oversimplified and should not be relied upon without first consulting an attorney.

Please do not hesitate to contact me if you would like to discuss any of these issues further.

It seems rather certain that Congress is going to raise income tax rates, capital gains tax rates, and estate and gift tax rates in the near future. This expectation creates certain opportunities. You should consider one or more of the following actions:

1. Selling assets to recognize long-term capital gains now in order to take advantage of the current 15% capital gains tax rate.
2. Accelerating the recognition of ordinary income (by exercising stock options) in order to take advantage of the current income tax rates.
3. Delaying the making of large charitable contributions until income tax rates are raised so that you can receive a larger income tax deduction.
4. Converting your IRA to a Roth IRA so that future generations can enjoy your retirement assets free from income taxes.
5. Gifting or otherwise transferring assets to trusts for children and grandchildren. Right now is an excellent time to do this since asset values are depressed, there is no generation skipping transfer tax this year, and Congress is considering eliminating minority interest discounts and taking other actions that may curtail your ability to transfer assets to desired beneficiaries in as tax efficient a manner as you can right now.

Of course, everyone’s situation is different and the details of future legislation cannot be predicted with certainty. You are advised to consult with a tax professional regarding the developments summarized above.**

Please do not hesitate to contact me if you have any questions.

** IRS CIRCULAR 230 NOTICE: Any tax advice provided in this communication is not intended or written to be used or relied upon, and it cannot be used, relied upon, or referred to by any taxpayer: (1) for the purpose of avoiding tax penalties that may be imposed by law upon the taxpayer; or (2) in any marketing or promotion of any tax transaction or planning. Any taxpayer should seek advice based on his/her particular circumstances from an independent tax advisor with respect to any federal tax transaction or matter referenced in this communication.

By Mark A. Berman, Esq.

Last year, the IRS initiated a special voluntary disclosure program for U.S. taxpayers with undisclosed foreign bank accounts, offshore investment accounts, and other income-producing assets outside the United States. The response was overwhelming. Perhaps spurred by the February 2009 agreement by Swiss bank UBS to admit selling illegal offshore banking services that had enabled U.S. taxpayers to evade U.S. taxes, and its August 2009 agreement to turn over to the IRS the names of thousands of its American clients, almost 15,000 U.S. taxpayers voluntarily disclosed their offshore accounts, seeking both to avoid possible criminal prosecution for tax evasion and to benefit from the program’s reduced civil penalty provisions.

The application period for voluntary disclosure program for offshore accounts is now closed and many U.S. taxpayers who failed to act quickly enough are asking: “Now what?”

From the IRS, the taxpayers can expect increased enforcement:

• The IRS has added revenue agents and tasked them with responsibility for reviewing not only the disclosures the IRS has received also to seek out taxpayers with undisclosed accounts;
• The government will continue to put pressure on UBS and other Swizz banks to compel them to disclose the identities of U.S. taxpayers with Swiss accounts; and
• Enforcement is likely to extend beyond Swiss banks to encompass other countries around the world viewed as tax havens for U.S. taxpayers.

From the taxpayer’s perspective:

• There is a continuing legal obligation to disclose foreign accounts and assets on an annual basis by, among other things, filing an FBAR (IRS Form TD F 90-22.1, “Report of Foreign Bank and Financial Accounts”); and
• There remain incentives to take advantage of the IRS’s general voluntary disclosure program which encompasses disclosure of foreign and off-shore bank accounts.

If you have undisclosed assets overseas, including signature authority over accounts from which you do not personally benefit, you should examine your compliance posture, and the disclosure options available to you, with counsel.

*** IRS CIRCULAR 230 NOTICE: Any tax advice provided in this communication is not intended or written to be used or relied upon, and it cannot be used, relied upon, or referred to by any taxpayer: (1) for the purpose of avoiding tax penalties that may be imposed by law upon the taxpayer; or (2) in any marketing or promotion of any tax transaction or planning. Any taxpayer should seek advice based on his/her particular circumstances from an independent tax advisor with respect to any federal tax transaction or matter referenced in this communication.

Today, the topic of estates and trusts has become essential for those of you who want to avoid paying unnecessary state and federal estate taxes and leave your family with as much of your hard earned assets as possible. But to do this it requires that you plan ahead and take full advantage of the opportunities afforded by the current environment.

In light of the current federal estate tax environment, you should immediately review your documents in order to avoid unintended consequences in the following situations:

1. You have children from a previous marriage.
2. The funding of certain trusts upon your death is dependent on the allocation of generation skipping transfer tax exemption.
3. Your surviving spouse is not a beneficiary of both the credit shelter trust (also known as the by-pass trust) and the marital trust.
4. You make certain bequests to charities that are based on formulas or percentages of a taxable estate.

As many of you are aware, at this moment, there is no federal estate tax for people who pass away in 2010. We are now nearly three months into 2010 and still Congress has taken no action regarding the fate of the federal estate tax. In the current political environment, it is beginning to look more likely that no new legislation will be passed this year-thereby leading to the return of the $1 million federal estate tax exemption and the 55% top federal estate tax rate (as a point of reference, in 2009, the exemption was $3.5 million and the top tax rate was 45%).

However, it is still possible that Congress will act in 2010 and attempt to enact legislation that will be retroactively applied to all of 2010. Whatever the fate of the federal estate tax is for 2010, New York still imposes an estate tax on all assets not passing to a surviving spouse (who is a United States citizen) or to a qualified trust for such spouse’s benefit when assets exceed $1 million; and New Jersey still imposes an estate tax on all such assets when estates exceed $675,000.

On a separate but related note, for those of you who can afford to transfer assets, 2010 represents an excellent time to make gifts or sales of assets to trusts for children and grandchildren due to: (1) the
low gift tax rate (35%), (2) the depressed value of assets (including real estate, closely held businesses, stocks, and alternative investments), and (3) the low interest rates currently available.

If and when Congress acts we will post an updated blog post that explains the new estate tax environment. In the meantime please do not hesitate to call me with your estate related questions 973 218 2599. You can also leave your questions in the form of a comment to this blog post and we will get back to you with an answer.

The purpose of this Estate Planning Blog is to introduce you to a sophisticated estate planning technique that can save you millions of dollars in estate taxes.

I recognize that each of you may be at a different stage in your own estate planning, however, for purposes of this Blog, I am assuming that you already have in place properly structured Wills, health care documents and powers of attorney, and perhaps an Insurance Trust – what I would describe as Phase One estate planning documents. Of course, if you do not have such documents in place, you should complete these Phase One documents before implementing the technique described herein.

Assuming that your net worth is in excess of $3.5 million (or $7 million for a married couple with properly structured Wills), you are facing a federal estate tax problem upon your death (or upon the second to die of you and your spouse). The current federal estate tax rate peaks at 45%. When you combine that with the New Jersey estate tax (imposed on estates over $675,000 not passing to a surviving spouse who is a U.S. citizen), the effective estate tax rate is over 50%. Therefore, under the present estate tax regime, over 50% of the value of your assets over $7 million may pass to the state and federal government if you (and your spouse) pass away.

The following example illustrates one of the techniques that can help you reduce your taxable estate:
Lifetime Gift/ Sale To Dynasty Trust.

You form a trust for the benefit of your children, grandchildren, and more remote descendants (a “Dynasty Trust”). Next (if you do not already hold your real estate in an LLC, partnership or other entity (an “LLC”)), you transfer ownership to an LLC.1 Then you fund the Dynasty Trust with each of your and your spouse’s $1 million lifetime exemption from federal gift tax – in the form of, for example, a 60% fractional interest in a $5 million real estate holding. The value of the 60% if the entire property were sold would be $3 million. However, due to the valuation discounts for lack of marketability and minority interest, you obtain an appraisal that values the 30% interest at a 33% discount, bringing the value of the gift to $2 million for gift tax purposes. In the April of the year following the gift, you and your spouse file a gift tax return (along with the appraisal) to memorialize the gift, but no gift tax will be owed.

At this point, you have removed $3 million of value from your taxable estate. Not only that gift, but the growth of that gift over the course of your lifetime, will pass outside of your estate to your heirs, free from federal and state estate taxes. Assuming that you live another 30 years and the 30% interest grows to $15 million, this represents an estate tax savings of over $7.5 million.
In addition, if you would like to reduce your taxable estate further, you can sell additional assets to the Dynasty Trust in exchange for a promissory note at low interest rate. As of April 2009, you can transfer interests in an investment property to the Dynasty Trust in exchange for a 9 year promissory note at only 2.15% interest without triggering any further gift tax. To the extent that the property actually generates more than 2.15% income and appreciation, you have removed additional assets from your taxable estate.

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This estate planning blog is meant simply as an introduction to one of the advanced estate planning techniques that are available to you. There are several other techniques that can be utilized to reduce your taxable estate and get additional funds to heirs during your lifetime.

In future blogs, I will discuss other estate planning techniques that are appropriate for real estate owners.

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Naim Bulbulia, is the head of Hartmann Doherty’s Trusts & Estates practice. Before joining the firm, he practiced in New York City, at Dewey Ballantine, LLP and Bingham McCutchen, LLC; and most recently, at Skoloff & Wolfe, P.C. in Livingston, New Jersey. Naim is a graduate of Harvard Law School and is licensed to practice in both New York and New Jersey. Naim was recently named a New Jersey SuperLawyers Rising Star in the area of Trusts & Estates. Naim lives in Short Hills, New Jersey with his wife and three children.
This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer.

Traditionally, life insurance trusts were only appropriate if your net worth was in excess of a few million dollars. Due to recent changes in the estate tax laws, however, insurance trusts are now essential to nearly every estate plan. Consider the following:

If you die while you own any life insurance policies (or have control over any such policies), the value of the death benefit is included in your gross estate for estate tax purposes.

This means that if you have $2 million of assets (excluding life insurance) and $2 million of insurance on your life that passes to anyone other than a spouse (if he or she predeceases you or is not otherwise the beneficiary of the insurance), under the present estate tax regime, your estate will owe around $1 million in federal and state estate taxes—completely unnecessarily.

Even if you have no assets other than a $1 million life insurance policy that passes to anyone other than a spouse (if he or she predeceases you or is not otherwise the beneficiary of the insurance), that $1 million of life insurance will generate $33,200 in New York or New Jersey estate taxes—again, completely unnecessarily.

One option for removing the insurance proceeds from your estate, thereby enabling 100% of the proceeds to pass estate tax free to the beneficiaries of the policy, is to form an irrevocable life insurance trust for the benefit of your spouse and children (or other desired beneficiaries) and to purchase policies of life insurance through such a trust.

When insurance trusts are structured properly, the surviving spouse still has access to the insurance proceeds, but the proceeds are not taxed on your death or your spouse’s death. Another benefit of the insurance trust is that, if you wish, the proceeds can be held in trust for your children’s (or other desired beneficiaries’) benefit after you and your spouse are gone, thereby safeguarding the proceeds from creditors, future ex-spouses and even from immature beneficiaries themselves.

If you already own life insurance policies, the policies can be transferred to such an insurance trust (the only caveat is that you have to survive three years in order for the insurance proceeds to be excluded from your estate).

Of course, when proceeds are payable to your spouse no federal or state estate tax is due anyway so long as the spouse is a United States citizen (due to the marital deduction). However, the amount of the proceeds not expended during the surviving spouse’s lifetime will be includible in his or her estate, which may generate significant estate taxes. And, if your spouse predeceases you (or if you die together), and the insurance ends up passing to children or other beneficiaries, both state and federal estate tax may be owed on the value of the proceeds if you own the policy at the time of your death.

Further, in the case of untimely deaths, failure to place insurance policies in an insurance trust could lead to children receiving large amounts of money at too young an age. In addition, this failure to place the assets in an insurance trust also makes the insurance proceeds subject to your children’s creditors and predators.

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This estate planning blog is meant simply as an introduction to one of the advanced estate planning techniques that are available to you. There are several other techniques that can be utilized to reduce your taxable estate and get additional funds to heirs during your lifetime.

In future blogs, I will discuss other estate planning techniques that are appropriate for real estate owners.

* * *
Naim Bulbulia, is the head of Hartmann Doherty’s Trusts & Estates practice. Before joining the firm, he practiced in New York City, at Dewey Ballantine, LLP and Bingham McCutchen, LLC; and most recently, at Skoloff & Wolfe, P.C. in Livingston, New Jersey. Naim is a graduate of Harvard Law School and is licensed to practice in both New York and New Jersey. Naim was recently named a New Jersey SuperLawyers Rising Star in the area of Trusts & Estates. Naim lives in Short Hills, New Jersey with his wife and three children.

When people first come to see me to discuss preparing their Wills they often have a specific plan for the ages which they want their children or other heirs to receive assets. Some people plan to leave their assets outright to their heirs immediately upon their death. Others have thought of a distribution schedule where their heirs receive property outright at a certain age e.g., 21, or staggered distributions of principal at certain ages, e.g. one-half at age 25 and the remainder at age 30. Still others want their heirs to receive all income but to be forbidden from accessing principal. Lastly, there are people who develop an incentive plan that rewards heirs with matching distributions for employment earnings or directs distributions of specific amounts based on the professions they choose to enter.

The common problem with most of these plans is their lack of flexibility. If life teaches us anything, it is that we can never be too prepared for its twists and turns. For this reason, I generally steer clients toward fully discretionary trusts. These trusts grant the trustee(s) flexibility to distribute trust property for an heir’s health, education, support and maintenance, or for any other reason that the trustee deems appropriate. Trustees are, of course, forbidden from making any distributions to themselves and are bound to carry out the provisions of the trust—only making distributions for the trust’s beneficiaries pursuant to the trust’s authority.

There are three primary protections that such a trust affords to your children and other heirs; the trust protects heirs from: (1) themselves; (2) potential creditors and (3) future ex-spouses.

First, should you and your spouse pass away while one or more heirs are young, a discretionary trust makes sure that the heir (perhaps a sophomore in college) does not have unfettered access to several hundred thousand dollars (or even millions of dollars) that such heir might squander. With a discretionary trust, the trustee is the gatekeeper and can make a distribution to enable a child to buy a car, or live in a nicer apartment, but is there to make sure that the trust funds are not wasted. Basically, the trustee’s job is to protect your child or other heir from himself or herself. In some cases, 25 year olds have excellent business ideas that will necessitate a large distribution; whereas in other cases 25 year olds have not yet sufficiently matured to the level at which a large distribution of assets is appropriate.

Second, if your child or heir is sued for any reason, the assets of a discretionary trust are not reachable by a creditor. Thus, if your heir is in a car accident or is sued for any reason, your hard earned assets will not be used to pay a creditor.

Third, a discretionary trust protects your assets from an heir’s soon-to-be ex-spouse. If your child or other heir receives assets outright (whether upon your death or upon reaching a certain age) and puts them into a joint account with his or her spouse or otherwise commingles the assets, they will become marital assets—subject to equitable distribution in the event of a divorce. In other words, your money may end up in your child’s ex-spouse’s hands. With a discretionary trust, the trustee is again free to exercise his or her discretion in a manner so as to protect your assets (or at least a large portion of them) from this scenario.

In addition, in the event that your children or other heirs are successful enough that they never need the money you are leaving them, the first $3.5 million that your estate passes in trust for your heirs ($7 million total from you and your spouse) can pass to their children free from estate tax (by reason of the generation skipping tax exemption). If you leave them the assets outright, however, they cannot take advantage of this exemption.

The most important factor in setting up a discretionary trust is naming the appropriate trustee(s). You are trusting one or more individuals (or corporate fiduciaries) to step in and act in many ways like a financial guardian for each of your children or other heirs. You should thoughtfully select people who are: (1) close with your heirs, (2) financially savvy, and (3) likely to outlive you. Care should also be taken to name successor trustee(s) or put in place a mechanism for making sure there is always a reliable trustee in place.

Trustees are entitled to receive commissions for their services. Many trustees who are relatives or friends, however, will waive their right to commissions. In addition, you are free to limit the commissions received or to specify that trustees serve without compensation. In such an event, trustees are free to resign if they do not agree to the financial stipulations you have put in the trust instrument.

Lastly, if you are concerned with your children or other heirs never having free and full access to assets, you can designate an age at which each heir can obtain the power to remove the trustee. In this way, by age 40 (for example) if an heir does not get along with the trustee, or believes that he or she is not being fairly treated, your heir is free to remove the trustee and appoint whomever he or she wishes (subject to a few restrictions) as successor trustee. In this manner, your heirs will gain de facto control of the assets but will still have the option of keeping the trust in place in order to take advantage of its benefits.

In future blogs I will address other actions that you can take (and that are often overlooked) to reduce the impact of estate taxes and to avoid unintended and unwelcome consequences for you and your family.

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Naim Bulbulia, is the head of Hartmann Doherty’s Trusts & Estates practice. Before joining the firm, he practiced in New York City, at Dewey Ballantine, LLP and Bingham McCutchen, LLC; and most recently, at Skoloff & Wolfe, P.C. in Livingston, New Jersey. Naim is a graduate of Harvard Law School and is licensed to practice in both New York and New Jersey. Naim was recently named a New Jersey SuperLawyers Rising Star in the area of Trusts & Estates. Naim lives in Short Hills, New Jersey with his wife and three children.
This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer.

Estate planning involves more than trying to reduce or eliminate estate taxes upon your death. If you do not protect your assets from the claims of creditors during your lifetime, you could end up having no estate left to plan. There are certain steps that you can take right now to better insulate your assets from creditors and lawsuits.

Asset protection is largely misunderstood—it is not about avoiding responsibility and accountability for legitimately incurred debts. Rather, it is a process by which you can work to avoid assets being tied up in lawsuits and maintain better control over your assets before a debt is incurred or before a claim is foreseeable. Once a potential debt or obligation is foreseeable, it is typically too late to take any steps to insulate assets—any such action taken at that point is typically a “fraudulent conveyance” that a court can later unwind. Thus, it is important to engage in asset protection planning before a potential liability becomes evident.

The most fundamental form of asset protection is liability insurance—both personal and professional. Having the proper insurance helps to reduce the risk that personal and professional assets are ever reached by a lawsuit.
Titling a residential property jointly is another simple way of providing asset protection if you are married. Holding property in this manner insulates the property from creditors of only one of you. The only way that the property can be successfully attacked is when there is a claim against both owners. Therefore, if one of you or your spouse is a doctor or other high-risk professional, the re-titling of real estate can provide protection.

Gifting assets to family members (or to one or more trusts for their benefit) is another excellent way to protect assets. Of course, when you gift the assets, you generally lose (i) control over them, and (ii) the ability to use them. Certain trusts can be structured, however, to retain some degree of control over the assets while still providing the desired asset protection.
The above gifts, however, involve giving up the asset itself. There are now certain states that permit domestic asset protection trusts. These are trusts that you can create for your own benefit, by transferring the asset to an independent trustee, and retaining the right to be a discretionary beneficiary of the trust. Although you do not have unrestricted access to the trust property, you are still eligible to receive distributions from the trust. It should be noted that domestic asset protection trusts have not yet been tested in many U.S. courts, so their efficacy is still uncertain.

Offshore trusts can also be established in certain jurisdictions—and generally provide excellent protection. These trusts are not for everyone since they are often complicated and expensive to set up and maintain.

Qualified retirement plans (i.e. 401(k) and 403(b) plans, are excellent places to protect assets. In most cases, these plans are entirely exempt from creditor claims until the benefits are distributed to you. Individual retirement accounts (IRAs) and other non-qualified plans often offer more limited credit protection.

Another way to protect your assets from creditors is by forming a family LLC or family Partnership. You contribute assets to the entity in exchange for interests in the entity. If a creditor successfully attacks such an asset, creditors can only obtain the right to receive distributions from the entity when they are paid out—which is in the sole discretion of a general partner. This makes the assets unattractive for creditors to pursue. Family LLCs and family partnerships can also be structured to provide significant estate tax savings to you and your family.

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The above is just a general introduction to some of the asset protection strategies that you can employ. Of course, any asset protection plan that you put in place should be tailored to suit your unique circumstances. In future blogs, I will discuss other estate planning techniques that are appropriate for real estate owners.

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Naim Bulbulia, is the head of Hartmann Doherty’s Trusts & Estates practice. Before joining the firm, he practiced in New York City, at Dewey Ballantine, LLP and Bingham McCutchen, LLC; and most recently, at Skoloff & Wolfe, P.C. in Livingston, New Jersey. Naim is a graduate of Harvard Law School and is licensed to practice in both New York and New Jersey. Naim was recently named a New Jersey SuperLawyers Rising Star in the area of Trusts & Estates. Naim lives in Short Hills, New Jersey with his wife and three children.

This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer.

your Will is not properly structured, your estate could end up paying tens of thousands of dollars, hundreds of thousands of dollars, or even millions of dollars of unnecessary state and federal estate taxes.

Insurance Policies As Part of Your Estate

You may not realize that your taxable estate includes any life insurance policies that you own or control. The total value of any such policies raises your taxable estate dollar for dollar.

Estate Tax Exemptions and Estate Taxes
New Jersey’s exemption from estate tax is only $675,000 and New York’s exemption from estate tax is only $1 million. If you die with an estate in excess of your state’s exemption (that does not pass to your spouse or to certain qualifying trusts for his or her benefit), these states will collect estate taxes at rates of between 4% and 16%, respectively.1

In addition, there is a $3.5 million exemption from federal estate tax (the “applicable exclusion amount”). Once your estate exceeds $3.5 million, the combined federal and state estate tax rates rise steeply, peaking at 45%.

Consider the following examples:
If your Wills are not properly structured and you and your spouse pass away in close succession with a net worth of $1.5 million, although no federal estate tax will be owed, on the surviving spouse’s death his or her estate will unnecessarily owe around $65,000 in state estate tax. Thus, if you are married with $500,000 of assets and $1 million of life insurance, properly structuring your Wills can save $65,000.

On the upper end, if your Wills are not properly structured and you and your spouse pass away, as described above, with a $7 million net worth, around $1,455,800 of completely unnecessary federal estate tax will be owed. If the Wills were properly structured, no federal estate tax would have been owed upon the surviving spouse’s death—so the failure to properly structure the Wills results in the unnecessary payment of $1,455,800 of federal estate tax. Thus, for the married couple with $3.5 million of assets and $3.5 million of life insurance, approximately $1.5 million dollars of unnecessary federal estate taxes may be due if Wills are not properly structured.

Let us explore why this happens.
The Marital Deduction
There is no estate tax on property passing between you and your spouse. As a result, often many Wills drafted prior to 2001’s changes in the tax laws leave all property to a surviving spouse. Although these Wills result in no estate taxes being paid on the first spouse’s death, as the above examples illustrate, they can prove very costly for your family on the surviving spouse’s death.
Leaving all property to a surviving spouse wastes the deceased spouse’s exclusion from federal estate tax, resulting in unnecessary estate taxes being due upon the surviving spouse’s death.

Credit Shelter Trusts
Simply including what is often referred to as a “credit shelter trust” in your Will, or drafting your Will to permit your surviving spouse to disclaim property into a credit shelter trust (or “disclaimer trust”) for his or her own benefit (and often also for your children’s benefit) safeguards the decedent spouse’s applicable exclusion amount. This enables both your exemption and your spouse’s exemption to pass estate tax free to the next generation, effectively doubling the amount of assets that pass to your children estate tax free. The surviving spouse can still have access to the property in the credit shelter trust, but upon said spouse’s death, the property will not be included in his or her estate, and such property will pass estate tax-free to your descendants or to the other beneficiaries of the trust.

By giving your spouse the power to disclaim assets into a credit shelter trust, you preserve maximum flexibility in deciding whether to fully fund the credit shelter trust with the applicable exclusion amount, or whether to partially fund the trust with only the maximum state exemption from estate taxes (either $1 million or $675,000 in New York and New Jersey, respectively).
Of course, this same tax savings can be achieved by leaving the applicable exclusion amount directly to your descendants or other beneficiaries (who are not your spouse). This is generally advisable when your spouse will have sufficient assets to live on after your death.

The Necessity of Re-Titling Assets
Often, credit shelter trusts are put in Wills but assets are not re-titled in a manner that enables the credit shelter trusts to be funded upon death. Are your (and your spouse’s) assets titled such that a credit shelter trust can be funded?
In order to achieve the maximum tax savings when the first spouse dies, you and your spouse should have sufficient assets in each of your own individual names to fund a credit shelter trust ($3.5 million in each of your own names, if assets are sufficient to do so—or if assets are not sufficient to do so, the assets should be split such that each of you own one-half of them). This is because jointly owned property, retirement accounts (with designated beneficiaries) and insurance proceeds (that are not payable to your estate) typically cannot be used to fund a credit shelter trust since such assets pass outside of your Will.
Therefore, adjustments with respect to how your assets are titled (e.g. splitting of brokerage accounts or re-titling a home) may be advisable to ensure that a credit shelter trust or a disclaimer trust can be funded upon your and your spouse’s deaths.

Trusts For Children
Once you and your spouse are both deceased it is important to protect assets for your children. I
generally steer clients toward fully discretionary trusts. These trusts grant the trustee(s) flexibility to distribute trust property for a child’s health, education, support and maintenance, or for any other reason that the trustee deems appropriate. Trustees are, of course, forbidden from making any distributions to themselves and are bound to carry out the provisions of the trust—only making distributions for the trust’s beneficiaries pursuant to the trust’s authority, which grants broad discretion to the trustee.
There are three primary protections that such a trust affords to your children and other heirs, the trust protects heirs from: (1) themselves; (2) potential creditors and (3) future ex-spouses.

In addition, in the event that your children or other heirs are successful enough that they never need the money you are leaving them, certain assets can pass to their children free from estate tax (by reason of the generation skipping tax exemption). If you leave them the assets outright, however, they cannot take advantage of this exemption.
Periodically Update Estate Planning
Many people also fail to update estate planning documents to reflect life changing events such as a divorce, remarriage or birth of a child or additional children. It is important for you to ensure that your current estate planning documents (including life insurance beneficiary designations and 401(k) and IRA beneficiary designations) still embody your present wishes.

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In future blogs I will address other simple actions that you can take (and that are often overlooked) to reduce the impact of estate taxes and to avoid unintended and unwelcome consequences for you and your family.

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Naim Bulbulia, is the head of Hartmann Doherty’s Trusts & Estates practice. Before joining the firm, he practiced in New York City, at Dewey Ballantine, LLP and Bingham McCutchen, LLC; and most recently, at Skoloff & Wolfe, P.C. in Livingston, New Jersey. Naim is a graduate of Harvard Law School and is licensed to practice in both New York and New Jersey. Naim was recently named a New Jersey SuperLawyers Rising Star in the area of Trusts & Estates. Naim lives in Short Hills, New Jersey with his wife and three children.

This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer.