Kenneth Vercammen is a Middlesex County Trial Attorney who has published 130 articles in national and New Jersey publications on Criminal Law, Probate, Estate and litigation topics.

He was awarded the NJ State State Bar Municipal Court Practitioner of the Year.

He lectures and handles criminal cases, Municipal Court, DWI, traffic and other litigation matters.

To schedule a confidential consultation, call us or New clients email us evenings and weekends via contact box

Kenneth Vercammen & Associates, P.C,

2053 Woodbridge Avenue,

Edison, NJ 08817,

(732) 572-0500

Wednesday, October 28, 2015

Boy Scouts of America’s, Middlesex County Toast to Scouting Award. Tuesday, December 1

         Tuesday, December 1 at 6:30pm                                                                       Pines Manor 2085 State Route 27, Edison, New Jersey 08817              
Brendan J. Flynn, Sr.
Flynn and Son Funeral Home

Kenneth Vercammen, Esq.
Attorney at Law
Edison, NJ

Walter H. Deutsch II
Vice President
Unity Bank

Michael Blackwell
Executive Director
The First Tee Raritan Valley

Hon. H. James Polos
Middlesex County

Tuesday, December 1, 2015
Pines Manor
2085 Lincoln Highway
Edison, NJ 08817
6:30 pm Dinner and Program
Given on behalf of the
Boy Scouts of America, Patriots’ Path Council

The event will be very deserving, recognizing the efforts and support, over the years, to so many. The dinner will be held on Tuesday, December 1, at the Pines Manor, Edison, NJ.
    This awards dinner will raise funds to support the Scouting program in Middlesex County, with focus on STEM, Science, Technology, Engineering Math, and program support for Scouting.
This STEM initiative, offers over 80 STEM related merit badges, ranging from robotics, inventing, architecture, and many more. The BSA has partnered with institutions like MIT, Carnegie-Mellon and ExxonMobil, to provide our members with relevant skills and experiences in a constantly evolving global economy. The fund raised, will also assist with registration, insurance cost, programing needs, camp and individual scholarships, and a full-time Program Director for our AT-RISK Scouting program.
Individual Dinner Ticket $150

Tuesday, October 20, 2015

Asset Protection Planning

Asset Protection Planning

Which United States jurisdictions allow for the creation of asset protection trusts?

Domestic asset protection trusts are permitted under the laws of Alaska, Delaware, Hawaii, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia and Wyoming.

What other areas of law should an estate planning attorney be familiar with before practicing asset protection planning?

In addition to a working knowledge of taxation and business entities, an estate planning attorney wishing to engage in asset protection planning should be familiar with general concepts of bankruptcy law and creditor/debtor law. Specifically, knowledge of how applicable fraudulent transfer/conveyance laws apply to proposed planning (either under the UFTA or UFCA) is absolutely essential.

Who should consider establishing an asset protection trust?

Asset protection trusts are typically established by individuals in high risk occupations (i.e., doctors and real estate developers) and very wealthy individuals that realize they are targets for creditors due to their net worth. Asset protection trusts can also be used in lieu of a prenuptial agreement.

Are there any tax reasons to establish an asset protection trust?

In certain situations an asset protection trust can be used to eliminate or reduce the imposition of state income taxes. An asset protection trust may also be used to remove assets from a grantor's estate while still allowing the grantor to potentially benefit from the trust assets.

More issues in estate planning

Same Sex Couples and Other Relationships: Given the ever-changing legal framework governing same-sex couples and unmarried couples, it is important to have updated advice on the manner in which estate planning arrangements can be implemented.  In many States, a same-sex partner or even spouse may not have rights if his partner dies before him, so any rights must be defined in carefully-analyzed estate planning documents.  The same considerations apply to unmarried cohabitants, whose rights, if any, may be very limited without proper planning.
Post Death Planning: Proper estate planning may require prompt consideration of post-death planning options, such as the ability for an heir to “disclaim” property (have the property pass as though the heir died before the person who died).  Those options require the advice of an experienced attorney, but more importantly, individuals who may need to invoke such options need to understand that they must act quickly and should not take custody or control of the assets if they hope to achieve a valid tax-qualified disclaimer under the tax law.
Preparing for Estate Administration: The estate planning attorney often represents the executors or trustees (if any) in the administration of the estate.  This may create significant advantages, since the estate planning attorney is familiar with decedent’s assets, family issues and other factors that may allow for a speedy administration of the estate.
Multi-State and International Issues: Significant differences in law can exist among the various states.  Some estate planning requires consideration of international issues (approximately 20% of the U.S. population is first generation or second generation with at least one foreign-born parent).  This may increase the risk that a Will prepared through a DIY provider will not properly account for laws that govern assets situated in another state or country.[14]

Estate planning affected by Births, Deaths, Marriage, Divorce and Incapacity

Estate planning affected by Births, Deaths, Marriage, Divorce and Incapacity: Each of these events may profoundly alter a person’s life.  They also may alter the desired disposition of an estate.  For example, in some States that have adopted variations of the Uniform Probate Code, divorce may automatically revoke dispositions to the former spouse.  But who takes the former spouse’s share?  That share might pass to minor children outright such that a court may have to appoint a guardian (possibly the former spouse) to hold and administer the assets.  Or will the court hold those assets itself?  The same types of considerations apply to all other changes in family relationships.  A proper estate plan should address these contingencies.
Special Needs Planning: What if a child suffers from a learning disability, incapacity or is vulnerable to the influence of people seeking to grab his inheritance?  What will happen to inherited funds if a child is disabled and requires governmental assistance such as Medicaid?  For parents with special needs children, or anyone who desires to leave assets to a child with special needs, specialized trust planning may be required to avoid risking a special needs child’s public benefits. In fact, one estate planning attorney noted that when he informed a LegalZoom representative that he had a disabled child, the representative advised him that he needed a supplemental needs trust which LegalZoom did not provide and that he would need to contact an attorney to prepare one for him.[13] It is doubtful that a non-attorney would be aware of the need for such specialized planning but that omission could be costly.

Coordinating Probate and Non-Probate Assets:

Coordinating Probate and Non-Probate Assets: A Will generally governs the disposition of assets held in the decedent’s name alone.  Thus, one can draft a Will only to learn that it will have little impact if most of the assets are governed by beneficiary designations or other arrangements.  Lawyers sometimes call assets governed by a Will “Probate Assets.”  Assets that are governed by a contract, joint ownership, a beneficiary designation or similar arrangement may be called “Non-Probate Assets” (these can include IRAs, 401ks,  joint bank accounts, homes, other real estate and insurance).  For many Americans, most of their assets may fall into these categories (all of which may be included in their “taxable estate” for estate tax purposes).  An experienced estate lawyer can guide the client through this process, helping to ensure that the client’s desired objectives comport with the structure of his assets.

Why Retain an Experienced Estate Planning Lawyer?

Why Retain an Experienced Estate Planning Lawyer?

The Task Force urges those who may engage in DIY estate planning to evaluate the following considerations before taking the leap and drafting his own estate planning documents:
The Role of the Counselor-at-Law: An estate planning lawyer provides more than technical expertise in drafting complicated documents.  Most have extensive experience in counseling clients in these most intimate decisions.  For example, most have helped couples sift through the various possible options in selecting a guardian for the couple’s most-cherished “possession” -- their minor children.  That decision often seems simple, but the “ideal” guardian candidate may have a less than ideal spouse, lack financial experience, or otherwise be unable or unwilling to serve.  Spouses may disagree as to the choice of guardian. They may need advice to understand a guardian’s role.  The Counselor-at-Law plays an important role in these and many other estate planning discussions.
The “Simple Plan”: Consider the elderly woman with a seemingly simple plan: she has two loving, adult children (one who lives with her) and two assets:  a house worth $300,000 and a bank account worth the same.  Her simple solution?  She’ll keep both children happy by dividing things equally.  So she drafts a Will and leaves the house to her son and the account to her daughter.  She tucks the Will in her desk and lives happily ever after.  Her children?  They are not so happy.  After her death, they realize Mom spent down her bank accounts to pay her bills so there is nothing left for the daughter.  One can envision the son (who gets the house) telling the daughter he feels sorry for her, but Mom wanted him to have the house.  The daughter, of course, concludes Mom’s intent was defeated.  She sues the brother.[10]With proper counseling and advice, that suit could have been avoided if Mom’s intentions were properly ascertained and expressed.
The Failure to Properly State Dispositions: A proper Will must clearly state the testamentary intent to dispose of assets.  The language used must be dispositive in nature (a letter of instruction or words stating a person’s general preferences will not suffice).  Those who draft their own Wills run the risk of using words, terms or descriptions that could fail to make effective dispositions.  The failure to use words of “testamentary intention” could void the Will, just as the use of “precatory” language (i.e., “I would like”) could render the dispositions unenforceable.[11]
Who Will Explain Your Intentions? If a dispute arises, the court will often hear a swirl of allegations as to the decedent’s intentions from interested family members.  Who will the court believe?  Divining the intention of the deceased may be among the most difficult tasks conferred upon any judge.  Many may look for the voice of the person who died in a person who had conversations with him while he was alive about what he intended after his death, and does not benefit from the Will -- that, more often than not, is an estate planning lawyer.
Will Your Document Survive Probate? Different states have adopted rules as to the probate of Wills.  Some are more complicated than others, but the person drafting a Will should know them.  For example, New York law creates a presumption of validity of a Will if it was executed under the supervision of an attorney.  New Jersey law imposes a presumption of “undue influence” if a Will benefits a person who stands in a close (“confidential”) relationship with the person who died.  An independent attorney may be the most important witness in rebutting such a presumption (if not rebutted, the Will can be declared invalid).
Who Will Keep Your Will Safe? Many states presume a Will was revoked if the person who died possessed the original Will and it cannot be located at death.[12]Given that presumption, it often makes sense to leave the original Will in the possession of the estate planning lawyer who could document custody and control of it.  With that type of evidence – even if the lawyer loses it – it may be possible to probate a copy of the Will as no presumption of revocation would apply.  An individual may not be aware, much less follow, these arcane rules that might preclude probate.
Tax Guidance: State and federal taxes imposed on estate change often and have become increasingly complicated.  Congress recently increased the federal estate tax exemption to $5 million, but that lasts only through the end of 2012.  Meanwhile many States, looking for revenue to plug budget gaps, have adopted their own estate tax structures with much lower exemptions (ranging from a few hundred thousand to as much as $5 million).  Careful planning needs to be done to realize the potential tax savings that can be achieved through a detailed understanding of numerous options available to reduce estate taxes.

Don't try Do It Yourself Estate Planning

Don't try Do It Yourself Estate Planning


The phrase “Do it Yourself” evokes images of a weekend trip to the Home Depot, a bruised thumb, and the feeling of satisfaction that comes from a freshly painted room, a repaired deck or a newly-constructed patio planter.  But even the experts at do-it-yourself publications such as This Old House frequently remind us not to delve into projects in the domain of experts such as plumbers, electricians, excavators and the like.  The consequences there -- a broken gas main or electrical shocks -- could have disastrous results.
In recent years, do-it-yourself computer(“DIY”) providers have emerged in many fields ranging from income tax preparation to estate planning.  These services purport to provide, at low cost, the ability to generate computer-drafted documents that may bear some of the hallmarks of professionally-prepared documents.  While these services provide tools to enable the DIY project, as with the home improvement world, they should not be used.
Those who seek to replace proper professional advice with a do-it-yourself online document in complex fields like estate planning should understand the effects of their actions.  One should bear in mind that even those with fairly sophisticated skills think twice before venturing beyond their area of expertise.  Consider eminent Judge Rifkind's observation on the subject of tax law that “after 50 years of practice, I would no more have the audacity to formulate my own tax return than I would engage in open heart surgery.”[1]
These concerns prompted the American Bar Association Section of Real Property Trust & Estate Law (the “Section”) to designate this Task Force to evaluate the use of DIY methods in estate planning.  The Task Force has considered a number of issues, including the reasons why DIY options may be inadequate or incomplete for many individuals.  The Task Force is reviewing much of the commentary on DIY estate planning and will publish a more detailed report in the future.  This Preliminary Commentary identifies some of the many concerns identified by the Task Force.

The Emergence of Internet-Based DIY Tools

DIY providers promote themselves by charging cheap rates for cheap documents that ordinarily would cost much more if produced by an attorney.    Questions have arisen as to whether DIY legal providers are engaged in the unauthorized practice of law.  LegalZoom alone has been sued in at least three states (Missouri, North Carolina and Connecticut) for violating those states’ unauthorized practice of law statutes.[6]
As some attorneys have noted, perhaps the greatest danger of preparing one’s estate plan with LegalZoom or other DIY legal providers is that they lull clients into a false sense of security.[7]

Historically, what we now casually describe as a “Will” carried the more somber label “Last Will and Testament.”  That label accurately conveys the importance that should be afforded such instruments -- a Will is one of the few human acts that survives death.  It carries a legacy that can have lasting financial and emotional consequences on those who matter most -- our loved ones.  Mistakes made in the drafting of such an important document can profoundly alter familial relationships, leaving our family members at best confused or disappointed and at worst locked in hostile litigation.
Consider one example. A New Jersey resident opted to purchase -- surely at a nominal cost -- a Will form kit.  He carefully handwrote his intended dispositions into the form document.  He did not have it properly witnessed.  Undoubtedly believing he had completed his “simple Will” properly, he signed it and then apparently committed suicide.  His heirs, however, eventually paid for his efforts.  In the ensuing lawsuit (Matter of Will of Feree),[8]a New Jersey trial court struggled to find a way to interpret and give effect to his handwritten additions to the form.  Under New Jersey probate law, the language on the pre-printed form was not admissible because the Will was not properly signed by Mr. Feree (most states require a Will to be signed in the presence of two witnesses, a few even require three witnesses).  The Court’s effort to salvage Mr. Feree’s work -- and the ensuing trip to the New Jersey appellate court -- almost certainly cost the family tens of thousands of dollars or more.  At least Mr. Feree never saw that enormous expenditure -- he passed away believing he had saved money.[9]

Will Your DIY Plan Work When You are Gone? Maybe not

A Will must meet requirements for probate, properly make dispositions of the estate, address the payment of debts, taxes and other obligations, appoint fiduciaries to administer the estate and potentially guardians for minor children, and achieve all of that without creating litigation or hostility among the beneficiaries.  A person who drafts his own Will must bear in mind that the critical test of his efforts will occur after his death.  At that point, his voice has been forever silenced.  If he does prepares his Will on his own, it’s likely no one -- or at least no person who is not seen as biased due to his financial interest in the outcome -- will be able to explain his intentions.

Tuesday, October 13, 2015

Closing the Probate Estate

Closing the Probate Estate

Estates may be closed when the executor has paid all debts, expenses, and taxes, has received tax clearances from the IRS and the state, and has distributed all assets on hand. Trusts terminate when an event described in the document, such as the death of a beneficiary, or a date described in the document, such as the date the beneficiary attains a stated age, occurs.  The fiduciary is given a reasonable period of time thereafter to make the actual distributions. Some states require a petition to be filed in court before the assets are distributed and the estate or trust closed. When such a formal proceeding is not required, it is nevertheless good practice to require all beneficiaries to sign a document, prepared by an attorney, in which they approve of your actions as fiduciary and acknowledge receipt of assets due them. This document protects the fiduciary from later claims by a beneficiary. These formalities are recommended even when the other heirs are relatives, as that alone is never an assurance that one of them will not have an issue and pursue a legal claim against you.  Finally, a final income tax return must be filed and a reserve kept back for any due, but unpaid, taxes or estate expenses.

Common Questions

How do I title (own) bank and other accounts?

Each bank, trust company or investment firm may have its own format, but generally you may use, for a trust, "Alice Carroll, Trustee, Lewis Carroll Trust dated January 19, 1998," or, in a shorthand version, "Alice Carroll, Trustee under agreement dated January 19, 1998." For an estate, you should use "Alice Carroll, Executor, Estate of Lewis Carroll, Deceased."

How do I sign my name in a fiduciary capacity?

An executor signs: "Alice Carroll, Executor (or Personal Representative) of the Estate of Lewis Carroll, Deceased". A trustee signs: "Alice Carroll, Trustee"

Where do I hold the estate or trust assets?

You should open an investment account with a bank, trust company, or brokerage company in the name of the estate or trust. All expenses and disbursements must be made from these accounts, and you should receive regular statements.

How (and how much) do I get paid?

Because being a fiduciary is time-consuming and is often difficult, it is appropriate to be paid for your services. The will or trust may set forth the compensation to which you are entitled. If the document does not, many states either provide a fixed schedule of fees or allow "reasonable" compensation, which usually takes into account the size of the estate, the complexity involved, and the time spent by the fiduciary. Executor's or trustee's fees are taxable compensation to you.  Several states do not permit you to pay your own compensation without a court order, so ask your attorney before you write yourself a check. Many fiduciaries in the same family as the decedent are quick to waive fees. Before doing this, however, consult with the attorney for the estate and be certain you understand the full scope of your duties and any ramifications of waiver.

What if a beneficiary complains?

Even professional fiduciaries, such as trust companies, receive complaints from a beneficiary from time to time. The best way to deal with them is to do your best to avoid them in the first place by following the guidelines set forth in these FAQs and consulting with an attorney experienced in estate administration. Many complaints arise because beneficiaries are not kept up to date about the administration of the trust or estate. Frequent communication with beneficiaries is a must. The best approach in all instances is to be proactive by communicating throughout the estate or trust administration process and handling all matters with appropriate formality.  If a complaint involves more than routine issues,  consult with an attorney who specializes in trust and estate matters.

Can I be sued or be held personally liable?

Your errors or mismanagement of a trust or estate can subject you to personal liability. Common pitfalls include not paying taxes or filing returns on time, improper investment choices (whether too conservative, too speculative, or favoring one beneficiary over another), self-dealing (buying assets for yourself or  a family member from the estate or trust, whether at market price), or allowing property or casualty insurance to lapse, resulting in a loss to the estate or trust.  Your best protection is to get good professional advice as early as possible in the process, communicate regularly with the beneficiaries, treat everything with appropriate formalities as if you were not a related party (even if you are), and fully document your actions and decisions.

How am I discharged as fiduciary at the end of the administration? What if I want to resign?

Whether you stop acting as a fiduciary because the estate or trust has terminated or you wish to resign before the conclusion of your administration, you must be discharged, either by the local court or by the beneficiaries. In some states, discharge is a formal process that involves the preparation of an accounting. In other states, you can be discharged with the use of a relatively simple document  signed by the beneficiaries. If you are resigning prior to the conclusion of your administration, check the will or trust document to see who succeeds you as fiduciary. If no successor is named, you may need a court proceeding to appoint a successor before you can be discharged.

Trust Administration

Trust Administration

Trusts are designed to distinguish between income and principal.  Many trusts, especially older ones, provide for income to be distributed to one person at one time and principal to be distributed to that same person a different time or to another person. For example, many trusts for a surviving spouse provide that all income must be paid to the spouse, but provide for payments of principal (corpus) to the spouse only in limited circumstances, such as a medical emergency.  At the surviving spouse's death, the remaining principal may be paid to the decedent's children, to charity, or to other beneficiaries. Income payments and principal distributions can be made in cash, or at the trustee's discretion, by distributing securities as well as cash. Never make assumptions, as the terms of every will and trust differ greatly. There is no such thing as a “standard” distribution provision.
Unless a fiduciary has financial experience, he or she should seek professional advice regarding the investment of trust assets. In addition to investing for good investment results, the fiduciary should invest within the applicable state’s prudent investor rule that governs the trust or estate and with careful consideration of the terms of the will or trust, which may modify the otherwise applicable state law rules.  A skilled investment advisor can help the fiduciary decide how to invest, what assets to sell to produce cash for expenses, taxes or outright gifts of cash, and how to minimize income and capital gains taxes. Simply maintaining the investments that the decedent owned will not be a defense if an heir claims you did not invest wisely or violated the law governing trust investments. In all events, it is important to have a written investment policy statement stating what investment goals are being pursued.
During the period of administration, the fiduciary must provide an annual income tax statement (called a Schedule K-1) to each beneficiary who is taxable on any income earned by the trust. The fiduciary also must file an income tax return for the trust annually. The fiduciary can be held personally liable for interest and penalties if the income tax return is not filed and the tax paid by the due date, generally April 15th.

Guidelines for Individual Executors & Trustees

Guidelines for Individual Executors & Trustees 


After an individual's death, his or her assets will be gathered, business affairs settled, debts paid, necessary tax returns filed, and assets distributed as the deceased individual (generally referred to as the "decedent") directed. These activities generally will be conducted on behalf of the decedent by a person acting in a fiduciary capacity, either as executor (in some states called a personal representative) or as trustee, depending upon how the decedent held his or her property.
As a first step, it is helpful to know the meaning of a few common terms:
  • Fiduciary - An individual or bank or trust company that acts for the benefit of another. Trustees, executors, and personal representatives are all fiduciaries.
  • Grantor - (Also called "settlor" or "trustor") An individual who transfers property to a trustee to hold or own subject to the terms of the trust agreement setting forth your wishes. For income tax purposes the same term is used to mean the person who is taxed on the income from the trust. Confusing, but different concepts.
  • Testator - A person who has made a valid will (a woman is sometimes called a "testatrix").
  • Beneficiary - A person for whose benefit a will or trust was made; the person who is to receive property, either outright or in trust, now or later.
  • Trustee - An individual or bank or trust company that holds legal title to property for the benefit of another and acts according to the terms of the trust. This can be confusing in that you can sometimes be both a trustee and a beneficiary of the same lifetime (inter-vivos) trust you established or a trust established by someone else for you at their death (testamentary trust).
  • Executor - (Also called "personal representative;” a woman is sometimes called an "executrix"). An individual or bank or trust company that settles the estate of a testator according to the terms of the will, or if there is no will in accordance with the laws of the decedent’s estate (intestacy), although a person acting in intestacy may be called by a different name, such as administrator.
  • Principal and Income - Respectively, the property or capital of an estate or trust and the returns from the property, such as interest, dividends, rents, etc. In some cases, gain resulting from appreciation in value may also be income.
Other defined terms may be found in our Glossary.
As a general rule, the administration of an estate or trust after an individual has died requires the fiduciary to address certain routine issues and follow several standard steps to distribute the decedent's assets in accordance with his or her wishes. These guidelines focus on activities that occur in an estate or trust immediately after the individual has died.

Understanding the Will

It is very important to read and understand the will or trust so that you will know who the beneficiaries are, what they are to receive and when, and who, if any, your co-fiduciaries are.
Does the will give everything outright, or does it create new trusts that may continue for several years? Does a trust mandate certain distributions ("All income earned each year is to be paid to my wife, Nancy") or does it leave this to the trustee's discretion ("My trustee shall distribute such income as she believes is necessary for the education and support of my son, Alan, until he reaches age 25")? The document often imparts important directions to the fiduciary, such as which assets should be used to pay taxes and expenses. The document will usually list the fiduciary's powers in some detail.

Most fiduciaries retain an attorney who specializes in the area of trusts and estates to assist them in performing their duties properly. An attorney's advice is very helpful in ensuring that you understand what the will or trust and applicable state law provide. For example, at an initial meeting it is common for the attorney to review step by step many of the key provisions of the will or trust (or both) so that you will understand your role. Be mindful that if you accept the appointment to serve as an executor or trustee, you will be held responsible for understanding and implementing the terms of the trust or will.

Managing Estate Assets

It is the fiduciary's responsibility to take control of (marshal) all assets comprising an estate or trust. Especially when a fiduciary assumes office at the grantor's or testator's death, it is crucial to secure and value all assets as soon as possible. Some assets, such as brokerage accounts, may be accessed immediately once certain prerequisites are met.  Typical prerequisites are an executor obtaining formal authorization, sometimes referred to as Letters Testamentary, from the court and producing a death certificate.  Other assets, such as insurance, may have to be applied for by filing a claim. The usual practice is to engage a professional appraiser to value the decedent's tangible property, such as household furniture, automobiles, jewelry, artwork, and collectibles. Depending on the nature and value of the property, this may be a routine activity, but you may need the services of a specialist appraiser if, for example, the decedent had rare or unusual items or was a serious collector. Real estate, whether residential  or commercial, and any business interests also must be valued. Besides providing a valuation for assets that may be reported on a court-required inventory or on the state or federal estate tax return, the appraisal can help the fiduciary gauge whether the decedent's insurance coverage on the assets is sufficient. Appropriate insurance should be maintained throughout the fiduciary's tenure. The fiduciary also must value financial assets, including bank and securities accounts. Bear in mind that for federal estate tax returns for estates that do not owe any federal estate tax, certain estimates are permitted. This might lessen the appraisal costs that must be incurred.

Handling Debts and Expenses

It is the fiduciary's duty to determine when bills unpaid at death, and expenses incurred in the administration of the estate, should be paid, and then pay them or notify creditors of temporary delay. In some cases the estate may be harmed if certain bills, such as property or casualty insurance bills or real estate taxes, are not paid promptly. Most states require a written notice to any known or reasonably ascertainable creditors. While most bills will present no problem, it is wise to consult an attorney in unusual circumstances, as the fiduciary can be held personally liable for improperly spending estate or trust assets or for failing to protect the estate assets properly, such as by maintaining adequate insurance coverage.
The fiduciary may be responsible for filing a number of tax returns. These tax returns include the final income tax return for the year of the decedent's death, a gift or generation-skipping tax return for the current year, if needed, and prior years' returns that may be on extension. It is not uncommon for a decedent who was ill for the last year or years of his or her life to have missed filing returns. The only way to be certain is to investigate. In addition, if the value of the estate (whether under a will or trust) before deductions exceeds the amount sheltered by the estate tax exemption amount, which is $5 million inflation adjusted ($5.25 million in 2013), a federal estate tax return will need to be filed.  Even if the value of the estate does not exceed the estate tax exemption amount, a federal estate tax return still may need to be filed.  Under the concept of portability, if the decedent is survived by a spouse and he or she intends to use any estate tax exemption the deceased spouse did not use, an estate tax return must be filed.
Since the estate or trust is a taxpayer in its own right, a new tax identification number must be obtained and a fiduciary income tax return must be filed for the estate or trust.  A tax identification number can be obtained online from the IRS website. You cannot use the decedent’s social security number for the estate or any trusts that exist following the decedent’s death.
It is important to note for income tax planning that the estate or trust and its beneficiaries may not be in the same income tax brackets. Thus, timing of certain distributions can save money for all concerned. Caution also should be exercised because trusts and estates are subject to different rules that can be quite complex and can reach the highest tax rates at very low levels of income. Some tax return preparers and accountants specialize in preparing such fiduciary income tax returns and can be very helpful. They are familiar with the filing deadlines, will be able to determine whether the estate or trust must pay estimated taxes quarterly, and may be able to help you plan distributions or other steps to reduce tax costs.
Most expenses that a fiduciary incurs in the administration of the estate or trust are properly payable from the decedent's assets. These include funeral expenses, appraisal fees, attorney's and accountant's fees, and insurance premiums.  Careful records should be kept, and receipts should always be obtained. If any expenses are payable to you or someone related to you, consult with an attorney about any special precautions that should be taken.

Funding the Bequests

Wills and trusts often provide for specific gifts of cash ("I give my niece $50,000 if she survives me") or property ("I give my grandfather clock to my granddaughter, Nina") before the balance of the property, or residue, is distributed. The residue may be distributed outright or in further trust, such as a trust for a surviving spouse or a trust for minor children. Be sure that all debts, taxes, and expenses are paid or provided for before distributing any property to beneficiaries because   you may be held personally liable if insufficient assets do not remain to meet estate expenses.  Although it is usual to obtain a receipt and refunding agreement from the beneficiary that states that he or she agrees to refund any excess distribution made in error by the fiduciary, as a practical matter it is often difficult to retrieve such funds. In some states, you will need court approval before any distributions may be made. Where distributions are made to ongoing trusts or according to a formula described in the will or trust, it is best to consult an attorney to be sure the funding is completed properly. Tax consequences of a distribution sometimes can be surprising, so careful planning is important.

Friday, October 9, 2015

Planning with Retirement Benefits

Planning with Retirement Benefits

More and more people are holding the bulk of their wealth in qualified plans and individual retirement accounts (IRAs).  Although most plan participants know that these vehicles provide income tax-free growth for assets held in them, few participants understand the rules for plan distributions.  With proper planning, participants can make the most of this income tax benefit and even pass some of that benefit on to their beneficiaries.

Income Taxation of Qualified Plans and IRAs

When are participants taxed on retirement plan contributions?
Assets held in qualified plans ("plans") and IRAs generate no current income tax liability.  The distribution of those assets to a participant or a participant's beneficiaries in a future tax year, however, generally triggers income tax liability at ordinary income tax rates.
Is there a penalty for requesting a distribution from the plan before retirement?
The IRS imposes a tax penalty on withdrawals made either too soon or not soon enough.  For example, if a participant withdraws assets from a plan before reaching age 59-1/2, the participant will be responsible for paying ordinary income tax on the distribution, plus the 10% tax penalty on early distributions (unless a limited exception applies), plus state income tax if the participant lives in a state with an income tax. 
Are there any options for accessing the plan account balance before retirement?
The tax rules allow plans to adopt certain features to allow participants to use their retirement plan account balances before reaching retirement.  For example, a Plan may allow participants to request hardship withdrawals in the event of an immediate and heavy financial need.  The tax rules also allow plans to make loans available so that participants can borrow against their account balances (up to a certain statutory limit) and make repayments directly to their plan accounts with interest added.  Hardship withdrawals are taxed as early distributions, as previously mentioned, but plan loans generally have no income tax consequence unless the loans are not repaid to the plan as agreed.  Two other distribution options in the Internal Revenue Code (Code) that a plan may elect to offer participants include are in-service distributions for participants who are age 59-1/2 and disability distributions.  Participants should consult their plan administrators, official plan documents, and summary plan descriptions for additional details about whether their plans offer these and other distribution features. 
What happens if to the retirement plan account balance if a participant moves to a different employer?
Plan terms generally govern when distributions may occur for a terminated participant, although the tax rules require tax-qualified retirement plans to permit terminated participants to roll over their vested account balances to an eligible retirement plan, such as another employer's plan or an individual retirement account (IRA).  Direct rollovers from one plan to another plan generally are tax-free rollovers.  If a participant elects to receive the rollover check instead of conducting a "direct" rollover to an eligible retirement plan, mandatory 20% withholding normally applies.  For small account balances totaling up to $1,000, many plans require participants to accept a lump sum distribution of the entire account balance.  For balances between $1,000 and $5,000, most plans include the Code's automatic IRA rollover rule that requires the plan to roll over the participant's account balance to IRA established by the plan on behalf of the participant.  Plans generally permit participants to retain in the plan any account balance that exceeds $5,000.  Again, these distribution rules are plan-specific, so it is important to consult the official plan documents or the summary plan description for additional details about plan offerings.
What happens if a participant does not start receiving plan benefits at retirement?
More onerous than the early distribution tax penalty is an additional penalty tax imposed if a participant does not begin receiving certain minimum withdrawals, called "required minimum distributions" ("RMDs"), after the "required beginning date" ("RBD").  The tax rules require that participants begin receiving RMDs as of the RBD.  The RBD generally is April 1 of the year after the year that the participant reaches age 70-1/2.  (Separate RBD rules may apply to participants who remain employed after reaching age 70-1/2 or who are owner-employees.)  If a participant elects to delay RMDs until April 1, instead of electing to receive the first RMD in the year that the participant reached age 70-1/2, the participant will be required to accept two RMD payments– one for the year that the participant reached age 70-1/2 and another for the year that includes the April 1 date.  In other words, if the participant postpones RMDs until April 1 (generally, the latest date that the participant may postpone RMDs) the participant will be required to accept two RMDs for the first year of retirement.  If a participant does not begin receiving RMDs, a 50% tax penalty is imposed on the amount that should have been distributed to the participant on top of the federal income (and, if applicable, state) taxes that ordinarily apply to plan distributions.  For good cause, however, the IRS may waive the 50% penalty if the participant follows the guidelines explained in IRS Instructions to Form 5329(Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts) and submits Form 5329. 
What happens if a participant receives more than one RMD (i.e., duplicate checks) for the same year?
If a participant receives more than one RMD payment, the participant should contact the plan (and/or the plan's recordkeeper) as soon as possible.  Plan rules may allow participants to elect partial withdrawals so that, if desired, the plan may allow the participant to keep the second check.  For participants who prefer to redeposit the funds back into the plan, options may be limited if the participant cashes the check.  Under all circumstances, however, the participant should contact the plan for additional instructions. 
As you can see, there is a potential tension between a participant who may not want to receive any plan withdrawals even after the RBD and the IRS which monitors the statutorily-mandated withdrawals (i.e., the RMDs).  The good news is that, with proper planning, a participant can decrease the size of the RMD and increase the plan's income tax benefit.  Note that RMDs provide a floor, not a ceiling.  Participants generally are free to withdraw more than the minimum amount if needed for living and health expenses after retirement.

Distribution of Plan Assets to the Participant

How are plan benefits distributed after retirement?
Generally, participants are provided with distribution forms on the participant's "normal retirement date," as defined in the controlling plan document.  Although optional forms of distribution might be offered, if the plan is a defined benefit plan (such as a traditional pension plan), then the normal form of benefit is usually a life annuity for a single participant and a joint and survivor annuity if the participant is married.  If the plan is a defined contribution plan (such as a 401(k) plan or a profit sharing plan), then the normal form of benefit generally is a single distribution of the entire account balance which can be transferred (or "rolled") into an IRA within 60 days after the distribution.  These elections are irrevocable, and these options should be discussed as part of the retirement planning sessions before any decision are made by the participant.
How are required minimum distributions (RMDs) determined?
In most cases, the RMD is determined using the uniform lifetime table contained in Treasury Department Regulations.  (RMD regulations appear in the Code of Federal Regulations ("C.F.R."), beginning at 26 C.F.R. section 1.401(a)(9).)  The uniform lifetime table is based on the joint life expectancy of the participant and a beneficiary 10 years younger than the participant.  However, if the participant named a spouse as the sole beneficiary and the spouse is more than 10 years younger than the participant, the actual joint life expectancy of the participant and the participant's spouse, calculated each year, is used. 
As previously mentioned, participants generally should not withdraw plan contributions before reaching age 59-1/2 to avoid the 10% tax penalty.  Participants, however, should withdraw required minimum distributions after reaching the required beginning date to avoid the 50% tax penalty.

Distribution of Plan Assets After the Participant's Death

How are plan benefits distributed after a participant's death?
Upon a participant's death, plan assets are distributed to the participant's beneficiaries in accordance with the participant's written beneficiary designation submitted to the plan or IRA.  For RMD purposes, the participant's designated beneficiary is especially important as the RMD rules change depending on the beneficiary's identity and the participant's date of death.
Who is considered a "designated beneficiary" under the RMD rules?
A designated beneficiary is the individual designated as the beneficiary under the participant's plan.  Plans generally permit participants to file formal designations specifying particular persons as beneficiaries, although a participant need not file a formal designation for RMD purposes as long as the official plan document identifies a beneficiary in the absence of the participant's affirmative designation (e.g., the participant's spouse).
Can a participant list a trust or an estate as designated beneficiary?
A participant's estate generally will not be considered as a designated beneficiary under the RMD rules.  A trust, however, can be named as a designated beneficiary only if drafted and communicated in accordance with the strict provisions in the Treasury Regulations.  If a trust complies with the RMD rules for trusts, the trust beneficiaries generally become eligible to receive the participant's benefit after death.
Are there any special distribution options for designated beneficiaries who are spouses?    
If the participant's spouse is the sole designated beneficiary, the spouse can roll over the plan benefit to a new IRA, giving the spouse the ability to use the spouse's own life expectancy and name a new designated beneficiary, thereby achieving even greater deferral.  If the participant died before the participant's RBD (and the participant's spouse is the sole designated beneficiary), the spouse also may be able to delay the start of RMDs until the later of (i) the end of the year after the year that the participant died or (ii) the end of the year that the participant would have reached age 70-1/2.
What are the distribution options for designated beneficiaries who are not spouses?
If the participant's sole designated beneficiary is not the participant's spouse, the distribution options will depend on whether the participant dies before or after the RBD.  Assuming the beneficiary is a designated beneficiary, the beneficiary can withdraw the plan benefit over the beneficiary's life expectancy if the participant dies before the RBD.  If the participant dies after the RBD, the designated beneficiary must withdraw the plan benefit over the longer of (i) the beneficiary's life expectancy or (ii) the deceased participant's remaining life expectancy.  As an alternative to these two, new tax rules allow non-spouse beneficiaries to roll over a deceased participant's plan benefit to an IRA.  Note, however, that if a designated beneficiary fails to take the RMD by December 31 of the year after the year the participant dies, the tax rules require the designated beneficiary to receive a total distribution of the participant's entire plan benefit within 5 years after the participant's death.
What happens if the participant does not have a designated beneficiary?
If the participant dies before the RBD and the participant does not have a beneficiary or the beneficiary is not a "designated beneficiary" (for example, an estate), the tax rules require a total distribution of the participant's entire plan benefit within 5 years after the participant's death.  If the participant dies after the RBD, the beneficiary must withdraw the plan benefit over the participant's remaining life expectancy.  IRS and Department of Labor rules generally require plans to make diligent efforts to locate missing participants and plan beneficiaries. 
The naming of a designated beneficiary is a complicated procedure.  Different plans will require different processes, and different estate planning clients normally require different advice.  You should consult a competent estate planning attorney for additional details.

Estate Tax Considerations

In addition to the income tax concerns described above, a participant's assets in a plan generally are included in the participant's estate when the participant dies and will be used to determine estate tax liability.  The plan assets could be subject to federal and state estate taxes, unless the participant's beneficiary is the participant's spouse or a charity (so that the marital or charitable deduction applies.  If assets are withdrawn from the plan to pay this tax, the plan withdrawal generally will generate income tax liability on top of the estate tax liability.

Planning Considerations

You should consult a competent tax accountant or tax attorney for tax and estate planning advice.  Considering the information above, following are some items that may be helpful to review with your tax and estate planning advisor(s):
  • Beneficiary Designation Form Governs
Participants routinely (and wrongly) assume that their wills govern the distribution of plan assets.  Plan assets are distributed to the beneficiary named on the applicable plan form, or according to the default method specified in the plan document, regardless of the provisions in a participant's will.  Be sure to review your beneficiary designations, at least annually, or when there is a major life event (such as the death of a spouse).  Note, however, that a qualified domestic relations order (QDRO) may prohibit changing the beneficiary for your plan account.  Consult your advisor for additional details concerning this.
  • Always Name a Designated Beneficiary
As noted above, without a designated beneficiary, the ability to defer withdrawals from a plan by beneficiaries may be limited.
  • Review the Plan Periodically, and Always Just Before the Required Beginning Date
As previously mentioned, the beneficiary designation should be reviewed at regular intervals, and after a major life event such as divorce or a death in the family.
  • Advanced Planning
If a participant has a large plan account balance or a complicated estate plan that involves, for example, distributing plan assets to trusts for minor children or partially to charity and partially to children, the participant should consider working with an expert in this area to obtain the best tax planning advice.