Use of Trusts in New Jersey as an

Estate Planning Strategy

 

Very often, an individual client will be 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.

 

By creating a limited window of time during which a trust beneficiary may request the right to withdraw contributed trust funds to a trust, a present interest is created that qualifies for the gift-tax annual exclusion. Similar restrictions are commonly incorporated into a minors' trust as well as other types of trusts including life insurance trusts.

 

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Irrevocable Life Insurance Trusts as an Estate Planning Tool

 

In appropriate estate planning situations, use of an irrevocable 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. at fniemann@hnlawfirm.com or call him at (888) 800-7442 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 a single individual who is charitably inclined and seeks both income- and transfer-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).

 

Conclusion

A single individual who has a taxable estate needs to look beyond the common solutions that are appropriate for a married person. The use of various gifting techniques can help a client accomplish estate goals, while minimizing exposure to transfer taxes.  If you should have additional questions, contact Fredrick P. Niemann, Esq. at fniemann@hnlawfirm.com or call him at (888) 800-7442.