Q. How can we avoid probate and reduce the estate tax for our beneficiaries, who are our two adult children? We know about payable on death (POD) bank accounts. Is it better to put our two houses in two separate bloodline generational trusts for them, before death, rather than have a will? One house is in New Jersey where we are residents and the other is in New York.
— Planning
A. There’s a lot to unpack here.
Avoiding probate and minimizing estate taxes are legitimate estate planning goals, but they should not be the sole focus of any estate plan.
Proper estate planning is a much broader discussion that you should have with a qualified estate attorney, but we’re going to offer some items you can further explore with an attorney who can review all the specifics of your situation.
Probate is the legal process for settling the debts of a deceased person and distributing the remaining estate to the deceased person’s heirs, said Andrew Novick, a certified financial planner and estate planning attorney with The Investment Connection and Brookner Law Offices in Bridgewater.
In New Jersey, the process is overseen by the County Surrogate, and disputes are resolved in the Superior Court, Probate Part of the Superior Court.
“The costs and time needed to settle an estate can be burdensome, especially in some states,” he said. “But probate is relatively painless in New Jersey, especially if you prepare for it in advance.”
Additionally, while steps can be taken to significantly limit probate, it may be difficult to avoid it entirely, he said.
Without any special planning, some assets can be transferred outside of probate.
Items owned jointly with rights of survivorship (JTWROS) automatically become the sole property of the survivor at the first joint owner’s death, so probate isn’t needed, he said.
“Of course, unless additional planning was done prior to the survivor’s death, the item will need to go through probate at the survivor’s death,” he said.
Accounts with beneficiary designations, such as retirement accounts like IRAs, Roth IRAs, 401(k)s, 403(b)s, annuities and life insurance policies also generally pass outside probate.
A payable on death (POD) feature basically adds a beneficiary designation to a non-retirement accounts so POD accounts can also be transferred outside of probate, Novick said.
Setting up a living trust and transferring assets into the trust during your lifetime is another way to avoid probate, he said. Every trust has three parties: the grantor, who contributes assets to the trust, the beneficiary, who benefits from the trust, and the trustee who manages the trust.
“It is typical for the same person to serve all three roles in a living trust while also retaining the right to revoke the trust at any time,” Novick said. “As such, a living trust is viewed as a mirror image of the grantor, so it doesn’t require any special tax reporting – everything still gets reported as if it is owned by the grantor.”
Because the trust documents control how assets are distributed upon the death of the grantor rather than the will, probate isn’t needed here either, Novick said.
However, this assumes assets are actually transferred into the trust prior to your death, which will require changing the deed for real estate and retitling financial accounts into the name of the trust, he said.
Ancillary probate is an additional, simultaneous process that’s required when real estate is owned in a state outside the deceased’s state of residence.
Because you are a resident of New Jersey but own a home in New York, this will be an issue for you.
Putting the New York property into a living trust is a useful way to avoid ancillary probate, Novick said.
“Putting the New York property into a Limited Liability Company (LLC) is another common technique for avoiding ancillary probate – the estate owns an interest in an LLC rather than real property, so the entire probate process can be handled in New Jersey,” he said. “You would need to consult with an estate planning attorney to analyze which of these options — or perhaps another option — would be best for your circumstances and goals.”
Other types of trusts, whether created during your lifetime or at your death, can provide creditor protection and ensure that an inheritance stays in the family as well as help minimize estate taxes, Novick said.
Keep in mind that the estate tax laws have changed over the years and most people won’t owe any estate tax today.
“Federal estate tax is only due if your estate — basically net worth plus life insurance proceeds — is worth more than $11.7 million. This amount gets doubled if you are married,” he said. “Additionally, New Jersey currently does not have an estate tax.”
New Jersey does have an inheritance tax, but it doesn’t apply to amounts left to the decedent’s closest relatives, including their children, he said.
Email your questions to Ask@NJMoneyHelp.com.
Karin Price Mueller writes the Bamboozled column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com’s weekly e-newsletter.
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