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Trust & Estate and Elder Law Considerations on Capacity if New Jersey Legalizes Recreational Marijuana Use

New Jersey’s 56th Governor, Phil Murphy, has indicated his intent to sign into law sensible regulation of non-medical marijuana when it crosses his desk.  It may only be a matter of time before New Jersey will join the trend toward legalizing the recreational use of marijuana for people 21 years of age and older.  Therefore, it is important for New Jersey’s trust & estate and elder law attorneys to be conscious of the issues they may face in their practices if and when such legislation becomes law.

Issues to be considered by trust & estate and elder law attorneys include: the potential impact of marijuana use on capacity; trust administration considerations (i.e. when the trust contains a provision regarding the use of “illegal” drugs); estate administration considerations (i.e. when a decedent owned marijuana-related assets, such as business interests, at the time of death); tax implications; and the potential impact on life insurance as a planning tool.  This article will focus on the considerations relating to capacity and marijuana use.

One of the biggest challenges faced by trust & estate and elder law attorneys alike revolve around whether the client has the requisite capacity to accomplish his or her legal goals.  Generally, a person signing a legal document must understand what they are signing when they are signing it.  However, when determining whether a client has capacity, there are different thresholds that may apply depending on your state and what your client is trying to accomplish.  For instance, the capacity required to enter into a contract is a higher standard than that needed to sign a Will.  Generally, in order to execute a valid Will, an individual must understand:

  • The nature of his or her assets;
  • The natural objects of his or her bounty; and
  • That he or she is making a Will and the effect of that Will (even if they forgot they signed it the next day).

While there are many grounds for contesting a Will, lack of testamentary capacity is one of the most popular.  New Jersey courts have yet to address whether a Will can be invalidated for lack of capacity due to marijuana use.  Absent such guidance from the Court, practitioners should be guided by parallel case law that addresses the creation of a Will while an individual is under the influence of intoxicants, chemical dependents, or other mind-altering substances.

Generally, the Courts tend to focus on the circumstances surrounding the execution of the Will when determining whether capacity was present, and, absent evidence to the contrary at the time of execution, Courts do not find that habitual drunkenness and/or drug use impairs an individual’s capacity as a matter of course.  For instance, the court in Bannister et al. v. Jackson held that despite evidence of the decedent’s “habitually excessive indulgence in strong drink [it] had not produced a fixed mental disease sufficient to destroy his testamentary capacity and that at the very time of the execution of that document he was not so intoxicated that the act in which he was engaged was vitiated.”  45 N.J. Eq. 702 (1889).

Diminished capacity might not always be evident.  An individual’s capacity can be impacted by many different factors, and capacity might vary depending on the day, and, for some, the time of day.  If you determine that a client’s capacity is diminished, then you must take the steps necessary to determine whether the client has the capacity required to proceed with his or her specific goal.  Whether or not New Jersey legalizes the recreational use of marijuana for people 21 years of age and older, it is imperative for trust & estate and elder law attorneys to continue to be vigilant to ensure that their client in fact has capacity that is appropriate for his or her stated objective.

Pashman Stein Walder Hayden is carefully monitoring developments in New Jersey and federally with respect to marijuana legislation and will be available to help its clients navigate the sure-to-be complex regulatory framework of this potential business frontier.

Please contact Naomi Becker Collier at ncollier@pashmanstein.com or 201.639.2011 for further information.

Major Changes to the Estate & Gift Tax Laws Make Review of Your Estate Plan Documents Imperative in 2018

Each year, as a new year begins, we encourage you to review your estate plan and your estate plan documents (Will, Power of Attorney, Health Care Directive/Proxy, Trusts) to ensure that they reflect changes to the tax law and/or changes to your family or financial situation since your documents were executed.  This year, as 2018 begins, recent significant changes to the estate and gift tax laws make that review imperative.

With the enactment of The 2017 Tax Cuts and Jobs Act only a few weeks ago, the federal estate and gift tax exemption that was scheduled to increase to $5,600,000 has doubled (to approximately $11,200,000) and portability remains in place.  This means that a married couple (who have not previously used any of their unified credit) can now have combined assets of approximately $22,400,000 without incurring federal estate tax.

For individuals domiciled in New Jersey, the estate tax exemption has been eliminated as of January 1, 2018 (although with Governor-Elect Phil Murphy soon to take office, this could soon change).  The New York estate tax exemption is currently $5,250,000 and is scheduled to equal the federal exemption on April 1, 2019.

On account of these changes, individuals may wish to revise an existing Will, particularly if it contains a “credit shelter” provision based on a formula calling for funding up to the amount of the available exemption, even if only the state exemption.  Such a Will may now cause an individual’s entire estate to be left in trust instead of having a significant portion passing outright to the surviving spouse.  Furthermore, older individuals in various stages of relocating to Florida may now wish to reconsider whether a change in domicile is advisable.

Periodic review of an estate plan and related documents is always a good idea.  This year, on account of dramatic tax law changes, a review of your estate plan is especially important.

We would be pleased to discuss your estate plan with you.  If you would like to set up an appointment, please contact Joseph L. Goldman (jgoldman@pashmanstein.com) or Naomi Becker Collier (ncollier@pashmanstein.com).

New Jersey Passes Law Repealing Estate Tax By 2018

On October 14, 2016 Governor Christie signed into law the much discussed gas tax hike bill, ultimately repealing the New Jersey estate tax in its entirety.  Beginning on January 1, 2017, a decedent will not be subject to New Jersey estate tax unless his or her taxable estates are greater than $2,000,000 (a significant increase from the current $675,000 New Jersey estate tax exemption).  For individuals dying on or after January 1, 2018, the New Jersey estate tax is repealed entirely.  A decedent domiciled in New Jersey and dying in 2016, however, will remain subject to New Jersey estate tax if the value of his or her taxable estate exceeds $675,000.

Despite the imminent repeal of the New Jersey estate tax, New Jersey will continue to impose an inheritance tax on transfers after death.  Unlike the estate tax, which is based on the size an estate, this tax is based on the relationship between the decedent and the beneficiary receiving the assets.  There is no inheritance tax imposed on Class A beneficiaries (spouse or civil union or domestic partner, lineal ancestors, descendants, and stepchildren) and qualifying charities.  The rate of inheritance tax imposed on transfers and exemptions available to other individuals depends on the Class that they fall under.  The New Jersey inheritance tax rates range from 11% to 16% (the applicable rate depends on the transfer amount and the class of beneficiary).  The inheritance tax excludes the transfer of certain assets, including retirement benefits and life insurance paid directly to a beneficiary or trust.  However, the inheritance tax is imposed on transfers for less than fair market value (gifts) that occur within three years of death to beneficiaries who are not Class A or qualified charities.

In light of the elimination of the New Jersey estate tax, you should consider reviewing your estate plan to ensure that it achieves your objectives.  The repeal of New Jersey’s estate tax does not negate the need for estate planning.  There are many issues to consider during the planning process that have nothing to do with New Jersey estate tax planning.  The federal estate tax exemption remains at $5.45 million, indexed for annual inflation, and inheritance planning might still be relevant, depending on your individual circumstances.  A well thought out estate plan will let you decide for yourself what is best for you and for your family, both during your life (in the event of incapacity) and after your death.

If you have any questions about how the phase-out and elimination of the New Jersey estate tax impacts your specific planning, please contact us.  We are happy to assist you in achieving your estate planning goals.

If you would like to discuss these issues further, please do not hesitate to contact Joseph L. Goldman, Esq., or Naomi B. Collier, Esq., at 201-488-8200.

Joe Goldman Interviewed by NJ1015 Radio

Partner Joe Goldman is interviewed by NJ1015 radio. See link for full article: http://nj1015.com/survey-majority-of-american-parents-have-a-will/

IRS Releases Draft of Streamlined Application for Tax-Exempt Status

By Joseph L. Goldman, Esq.
jgoldman@pashmanstein.com

IRS has released Draft Form 1023-EZ (Streamlined Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code) and its draft instructions.  The 2-page Form 1023-EZ is a shorter version of the regular Form 1023 that may be used if an organization meets specific criteria (determined by completing the Form 1023-EZ Eligibility Worksheet).

The new form has been created as a method for smaller organizations to apply for exemption under Code Sec. 501(c)(3).  Form 1023-EZ (like Form 1023) provides IRS with information to determine the applicant’s exempt status and private foundation status.  Upon acceptance of the form, IRS will issue a letter that provides written assurance about the organization’s tax-exempt status and its qualification to receive tax-deductible charitable contributions.

Organizations that would normally file Form 1023 will be able to file Form 1023-EZ if they meet the following requirements:  no more than $200,000 of projected annual gross receipts in any of the next three years; annual gross receipts of not more than $200,000 in any of the past two years; total assets not in excess of $500,000.

An organization is a tax-exempt organization under Code Sec. 501(c)(3) if it is organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals.  With limited exceptions, an organization must notify IRS that it is applying for Code Sec. 501(c)(3) status.  To obtain recognition of exemption from federal income tax under Code Sec. 501(c)(3), an organization must generally file the 26-page Form 1023 (Application of Exemption Under Section 501(c)(3) of the Internal Revenue Code).

The Form 1023-EZ Instructions remind taxpayers about key requirements for an organization to be exempt from federal income tax under Code Sec. 501(c)(3).  It must be organized and operated exclusively for one or more exempt purposes.  Further, an organization doesn’t qualify for Code Sec. 501(c)(3) status if a substantial part of its activities is attempting to influence legislation.  In addition, all Code Sect. 501(c)(3) organizations are absolutely prohibited from directly or indirectly participating or intervening in any political campaign on behalf of (or in opposition to) any candidate for elective public office; although non-partisan voter education activities (including public forums and voter education guides) are allowed.

IRA Rollovers to be Limited

A law limits the number of IRA rollovers that can be made in any 1-year period to one.  Recently, the Tax Court held that the limit applies not to each separate IRA an individual may own, but to all of his or her IRAs.  It reached this result even though the  IRS had indicated in proposed regulations and tax publications that the limit applies to each IRA.  Thus, an individual with three IRAs could make three rollovers in a 1-year period under the IRS guidance but only one under the Tax Court decision.

After considering the matter, the IRS has announced that it will adopt the more restrictive view of the Tax Court.  However, the new rule won’t apply to any rollover that involves a distribution occurring before 2015.

The IRS emphasized that an IRA owner will continue to be able to transfer funds from one IRA trustee directly to another as frequently desired.  Such transfers are not rollovers and thus are not subject to the limit.