Use of Trusts in

New Jersey as an Estate Planning Strategy

Very often, an individual client is reluctant to make substantial outright gifts to a young person, or someone else out of concern about their ability to capably handle their affairs, particularly when there is a long-term purpose for the accumulation of funds for the benefit of that young person. Trusts are a useful tool for wealth accumulation in such situations.

Restrictions and other planning strategies are commonly incorporated into a minors' trust as well as other types of trusts including life insurance trusts to protect children or immature or disabled adults until they are adults.

Understanding the use of Trusts in New Jersey

for your Estate Planning: The Basics

A trust can generally be characterized as taking effect during your lifetime (a living trust) or taking effect upon your death (a testamentary trust). Testamentary trusts are always part of your Last Will and Testament and are always in writing. Living trusts are always put in writing so that the terms of the trust are clearly understood by the creator of the trust, the trustee, and the beneficiary.

Trusts may also be characterized as revocable (capable of being terminated by the grantor at some point in time after the trust is created) or irrevocable (a trust which cannot be revoked by the grantor during his or her lifetime, even in the event of an emergency or some other situation requiring the trust to be terminated). Revocable trusts have the advantage of being flexible, and the terms of the trusts can be amended, altered, or revoked in their entirety by the grantor if the grantor finds that the terms of the trust are not fulfilling the grantor’s estate planning objectives. A revocable trust provides the grantor with greater ease in amending the trust should the grantor become dissatisfied with the way in which the trust is operating. The assets placed into of such a trust are included in the gross estate of the grantor and are subject to federal and New Jersey estate tax liability or income tax liability. This is an important consideration.

An irrevocable trust has as its primary advantage the reduction of the grantor’s estate tax liability. As long as the grantor establishes an irrevocable trust, and retains no incidents of ownership over the property and retains no powers over the assets of the trust that can be considered as ownership, then the assets placed into the trust will escape inclusion in the gross estate of the grantor. With an irrevocable trust the assets are considered a complete gift and the property is ordinarily removed from the grantor’s gross estate. Depending on the value of the gift there may be gift tax liability on the value of this type of trust, but given the recent increase in the gift tax exemption for all Americans, this is unusual.

Certain trusts for young persons, called a minors trust (a minor is a person under a stated age in the trust) can be structured to take advantage of the gift tax annual exclusion. These trusts normally accumulate trust income for the benefit of minor beneficiaries until such time as they reach the age specified in the trust.

Irrevocable Life Insurance Trusts as an Estate Planning Tool in New Jersey

In appropriate estate planning situations, use of an irrevocable life insurance trust can serve as a powerful New Jersey and Federal tax savings tool. Life insurance proceeds that are kept outside of the taxable estate through proper planning can provide liquidity to estate heirs for a host of purposes.

There are two ways that an irrevocable life insurance trust (ILIT) can be effectively implemented: (1) the trust can be established initially and the trustee can subsequently take out and own the life insurance policy on the insured individual, or (2) an existing, or in-force, life insurance policy can be transferred to the trust. However, in the latter case, the insured must survive the policy's transfer to the trust by a period of three years or the insurance proceeds will be included in his or her gross estate for estate-tax purposes (IRC Sec. 2035). 

This is tricky material.  Feel free to contact Fredrick P. Niemann, Esq., an experienced NJ life insurance trust attorney at fniemann@hnlawfirm.com or call him toll-free at (855) 376-5291 for a low cost consultation.

Grantor Trusts for NJ Estate Planning

An individual can also make tax-advantaged lifetime transfers to a loved one through variations of a grantor trust design.

A grantor retained annuity trust (GRAT) can be set up to pay the grantor a fixed annuity for a term of years. Thereafter, the remaining trust principal passes to the trust’s beneficiaries.

Then there is a GRIT (grantor retained interest trust (GRIT)) which differs from a GRAT in that, instead of paying a fixed annuity to the trust grantor, the grantor receives all the trust’s annual accounting income.  At the end of the term, the remainderman receives the remaining trust property.

Charitable Gifts as an Estate Planning Device in New Jersey

Lifetime gifts to charity provide various planning options for single and married individual(s) who are charitably inclined and seek both income and estate tax savings. Depending on the individual donor's needs, charitable gifts may be made outright or through the use of a trust.  Significant income tax benefits can be achieved through use of charitable gifting in NJ.

A charitable remainder trust (CRT) is an option to consider when a person would like to make a significant charitable gift but is not comfortable relinquishing ownership of the gifted property.  A CRT can make payments to the donor or some other non-charitable beneficiary for life or for a term of up to 20 years and, when the income interest terminates, either distribute the remaining trust assets to a designated charitable organization or retain the property in trust for the charity's use.

The donor receives an income tax deduction for the present value of the charitable remainder interest (subject to the tax law's percentage-of-income restrictions on charitable contribution deductions). Subsequent distributions to the donor or other non-charitable income beneficiary are taxed under the rules of IRC Sec. 664(b).

Which Particular New Jersey Trust Is Appropriate

For You?

With the great numbers of trusts that are available, it is sometimes difficult to determine which trust is the most appropriate. After carefully analyzing your objectives, a qualified New Jersey trust attorney will consider one or more trusts that are appropriate in light of your estate planning goals and your limiting factors (such as dollar size of your gross estate, the financial, legal, and mental competency of beneficiaries, the amount of income needed for your current living needs and for retirement purposes).

After analyzing all relevant client data, the following guidelines should be used to decide which form of trust may be the most appropriate for you.

1. You want to avoid estate tax liability on property while also removing all future appreciation on the value of the property, then an irrevocable living trust is appropriate since it removes the property from your estate (provided, of course, that you retain no incidents of ownership or control over the property, pursuant to the grantor trust rules and you outlive the transfer of a life insurance policy to the trust by more than three years).

2. You want to retain some degree of flexibility and control over the property, or you want the right to alter, amend or vary the terms of the trust after it has been established, then a revocable living trust may be the most appropriate.

3. You want to avoid income tax liability on the value of the income produced by the trust, then you may want to use any trust that is not in violation of the grantor trust rules (e.g., an irrevocable living trust that does not distribute its income to you).

4. If you want to avoid estate tax liability on the value of the income or the corpus placed in the trust, then some form of trust will be required that takes the value of the corpus and the income out of your gross estate (e.g., an irrevocable living trust of some sort, such as an irrevocable living pourover trust or an irrevocable living life insurance trust).

5. If you want to avoid gift tax liability on the value of income or corpus, then some form of trust will be required that results in little or no gift tax liability. A revocable living trust avoids gift tax liability because there is no completed gift, but the value of the trust assets will be included in the grantor’s gross estate.

6. If you want to retain some degree of control over your assets after you die, yet also wish to provide a stream of income to your surviving spouse, then either a nonmarital trust or Q-TIP trust will be appropriate, especially since both trusts allow you to determine who the ultimate beneficiaries of the property will be. In addition, both trusts enable you to provide a stream of income to the surviving spouse. The distinction between the use of the nonmarital trust as opposed to the use of the Q-TIP trust is designed to achieve maximum use of the unlimited marital deduction. If both the unified credit and the marital deductions are used, or if the decedent intends to use both as part of an overall estate plan, then both trusts may be appropriate.

7. If you want to provide your spouse with little or no income produced from a trust, but want your surviving spouse to have control over the corpus of the trust and all undistributed income after her death, then the estate trust may be the most appropriate choice of a trust since the surviving spouse seldom obtains any lifetime income yet has control over the corpus and income upon her death.

8. If the grantor has a relatively modest-sized estate (valued at less than $1 million) and wishes to provide a stream of income to his or her spouse and children, yet leave the remainder of the estate to grandchildren, then the generation-skipping trust may be the most appropriate trust arrangement in terms of accomplishing these objectives.

9. If the grantor wishes to give his or her surviving spouse the option of receiving assets that would otherwise pass to the surviving spouse (and otherwise qualify for the marital deduction) so that the surviving spouse may elect not to receive them and prevent the surviving spouse’s estate from receiving assets that could subject his or her estate to estate tax liability, then a "disclaimer trust” may be the most appropriate trust technique, since it still allows the surviving spouse to receive a stream of income from the disclaimed property, yet it avoids inclusion in the surviving spouse’s gross estate (similar to a nonmarital trust).

Conclusion

A single individual or a married couple who has a taxable estate needs to look beyond the common solutions that are appropriate. The use of various gifting techniques and trusts can help a client accomplish income tax and estate tax savings, while minimizing exposure to transfer taxes. For more detailed information on NJ estate planning, go to www.njestateplanninglawattorney.com (click here).

New Jersey Trust attorney serving these New Jersey Counties:

Monmouth County, Ocean County, Essex County, Cape May County, Mercer

County, Middlesex County, Bergen County, Morris County, Burlington County,

Union County, Somerset County, Hudson County, Passaic County