By Donald D. Vanarelli, Esq.
A Last Will and Testament is the cornerstone of your estate plan. Without a will, property that is not otherwise disposed of upon death passes by the laws of intestacy.
A will enables the testator to direct who will receive his estate, and in what manner. It also affords the testator the opportunity to appoint fiduciaries, such as executors, trustees and guardians.
Will Execution Requirements:
- Any competent person over the age of 18 may make a will. N.J.S.A. 3B:3-1.
- With the exception of a holographic will, every will must be in writing, signed by the testator (or in his name by another person at his direction and in his presence) and witnessed by at least two people. N.J.S.A. 3B:3-2.
- A will that does not comply with N.J.S.A. 3B:3-2 is nevertheless valid as a holographic will, whether or not it is witnessed, if (1) the signature and (2) the material provisions are in the testator’s handwriting. N.J.S.A. 3B:3-3..
Estate Tax Considerations:
Federal Gift Tax:
A tax on gifts made during the donor’s lifetime, taxable on the donor, and subject to a $10,000 annual exclusion per donee. The annual exclusion applies to each donor separately; therefore, if a Husband and Wife have a Child, cumulatively they can give the Child up to $20,000 per year, tax-free.
Federal Estate Tax:
A tax on the decedent’s estate for assets owned or passing from the estate at death, plus the value of adjusted taxable gifts (Both the gift and estate taxes use a unified rate schedule).
A unified credit of $220,550 is allowed in computing estate and gift taxes in the year 2000. This translates to an “exemption” equivalent of $675,000 (thus, the estate tax on an estate of $675,000 or less is zero).
There is an unlimited deduction allowed in computing estate taxes for transfers made from the decedent’s estate to the decedent’s spouse.
Planning Tip: Despite the unlimited marital deduction, each spouse should take full advantage of the unified credit to minimize aggregate estate taxes.
Husband and Wife each own assets of $675,000. Under the Husband’s will, he leaves his entire estate to his spouse. The Husband dies first, leaving his entire estate to his wife.
Because of the unlimited marital deduction, no estate tax results upon the Husband’s death. However, upon the death of the Wife, her estate is now $1,350,000 and, after the $675,000 exemption, the remaining $675,000 of her estate is subject to estate tax.
Husband and Wife each own assets of $675,000. Under the husband’s will, he leaves his entire estate in trust to his Wife during her lifetime, and the remainder in trust to their Children. The Husband dies first.
Again, because of the unlimited marital deduction, no estate tax results upon the Husband’s death. However, upon the death of the Wife, there is no estate tax on the trust established by the Husband, because the Wife only had a life estate in the trust. The Wife’s $675,000 is exempted from taxation, because of the $675,000 exemption.
Tax Planning Tools:
To maximize estate planning options, the following tools should be considered:
- Unlimited Marital Deductio
(See discussion above)
- Credit Shelter/Bypass Trust
To combine the benefits of the Unified Credit and the unlimited marital deduction for a married couple, the first spouse to die can transfer to a trust that is ineligible for the marital deduction an amount equal to the then-applicable exemption amount. The trust will escape taxation at the death of both spouses.
- Gift Program: $10,000 Annual Exclusion
(See discussion above)
- Irrevocable Life Insurance Trust
If the insured possesses “incidents of ownership” over the life insurance policy, the proceeds are includable in the gross estate. To avoid this result, the life insurance policy can be transferred to an irrevocable trust (naming someone other than the insured as the trustee).
- Personal Residence Trusts
A residence can be transferred to an irrevocable trust, in which the transferor has the right to continue residence for the term of the trust (i.e., 10 years), after which the trust terminates and the residence passes to the remainderman. If the transferor survives the term of the trust, the residence is excluded from the gross estate, and the taxable gift of the residence to the remainderman is reduced by the value of the term retained by the transferor.
- Charitable Gifts/Trusts
Inter vivos gifts to qualified charities are subject to an unlimited gift tax charitable deduction; transfers upon death, or through a will, to a qualified charity are subject to an unlimited deduction from the gross estate.
See J. Regan, R. Morgan and D. English, Tax, Estate & Financial Planning for the Elderly (Matthew Bender 1999) at §17.
Many devices may allow an individual to designate a beneficiary of the individual’s assets upon death, so that the property passes outside the will and probate is avoided. These devised include:
Multiple-Party Bank Accounts
- Joint Tenancies in Land
- Revocable Inter Vivos Trusts (probate is avoided because the title of the trust property is changed to the trustee while the settlor is alive)
- Inter Vivos Gifts
For additional information regarding Wills, call us at 908-232-7400 or click here to contact us online.