THE BASICS OF ESTATE PLANNING AUGUST 18, 2016

CLASS MATERIALS

CHRISTOPHER S. PORRINO Attorney General of New Jersey

MARGARET A. COTOIA Director, AGAI

TABLE OF CONTENTS Page 1

Faculty Biography.......................................................................................................................... -iOutline of Presentation ....................................................................................................................1 PowerPoint Presentation ................................................................................................................24

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These numbers correspond to the numbers in right hand corner of each page.

FACULTY BIOGRAPHY Jennifer L. Zegel is a partner in the Philadelphia Office of Reger Rizzo & Darnall LLP. She represents clients in the areas of estates and trusts, business law, real estate, and employment law. Ms. Zegel handles a wide range of estate and trust matters, including drafting wills, trusts, special needs trusts, powers of attorney, and health care powers of attorney documents. She also assists clients in estate, trust, and guardianship administration, business succession planning, and estate planning. Ms. Zegel holds a B.A. from Temple University, a J.D. from Rutgers University School of Law, Camden and an LL.M. in Taxation from Temple University Beasley School of Law.

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The Basics of Estate Planning Presented By:

Jennifer L. Zegel, Esquire, LL.M. [email protected]

Copyright © 2016, Reger Rizzo & Darnall LLP. All rights reserved. These materials may not be reproduced without permission from Reger Rizzo & Darnall LLP. Additional copies may be obtained by writing Reger Rizzo & Darnall LLP at the below address. WARNING: This publication is designed to provide GENERAL information prepared by professionals in regard to subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. Although prepared by professionals, this publication should NOT be utilized as a substitute for professional service in specific situations. If legal advice or other assistance is required, the services of a professional should be sought. PENNSYLVANIA

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DELAWARE

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NE W JERSEY

Cira Centre, 13th Floor, 2929 Arch Street, Philadelphia, PA 19104

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MARYLAND

T: 215.495.6500

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NE W YORK

www.regerlaw.com

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INTRODUCTION

This course will provide an overview on the basics of the estate planning process and will provide key takeaways needed in order to formulate and implement a thorough and customized estate plan. The following information will be covered:

II.



What is an estate, and a basic estate plan?

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What happens if someone dies without a Will?

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What are the benefits of having a Will?

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Discussion of digital assets.

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Understanding the importance and purposes of financial and healthcare Powers of Attorney and Advanced Medical Directives.

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Gifting strategies to reduce or eliminate inheritance and estate tax. WHAT IS AN ESTATE AND A BASIC ESTATE PLAN?

A. An Estate is comprised of all of the assets a person owns at death wherever they are located. Not all assets in an estate may be subject to an inheritance or estate tax at State or Federal levels. Some assets in an estate may be transferred by operation of law or may have to pass through a probate or intestacy proceeding in order to be transferred. In 2016, the majority of estates are not subject to a Federal Estate Tax, unless the gross value of the estate exceeds $5,450,000; in which case the tax rate will be 40% on the amounts in excess. New Jersey Inheritance and New Jersey Estate taxes will be discussed later. 1. Probate assets are assets in an Estate that pass through the decedent’s Will and the estate is considered “testate”, which means to have a Will. An intestate estate is an estate where the decedent died without a Will, in which case the assets pass to the heirs in accordance with the intestacy statute and through an intestate proceeding. Each state has their own probate/intestacy process. Some states have higher fees and more cumbersome procedures than others. In Pennsylvania and New Jersey, the process is relatively straightforward and the fees are minimal. Whereas, in Delaware or Florida, the fees are higher and the process is more complicated. a. When contemplating estate planning, it is important to ascertain whether one is planning on moving to another state in the near future, as even a basic estate plan could be affected if the residency is going to be changed. If relocation is likely, it is important to ascertain whether the new state will have arduous probate procedures, since this could

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necessitate the need to have a more complex estate plan. The transfer tax consequences from state to state can be dramatically different. 2. Non-probate assets are assets that do not pass through a Will, since they have a beneficiary designation or are jointly owned assets and transfer by operation of law. a. Assets with beneficiary designations are typically retirement accounts and plans, POD accounts, property passing by contract, life insurance policies, etc. b. Assets that transfer by operation of law are real estate with rights of survivorship and jointly owned bank accounts, and stocks and bonds with a or/and designation. c. Even if assets pass outside a probate estate, transfer taxes can still be assessed. A Will can direct that all transfer taxes on assets passing under or outside of the Will be paid by the residuary estate. If Will does not have a tax clause or in an intestate proceeding, in most states, the transfer tax assessed on the asset is payable by the beneficiary or a portion thereof is assessed between the beneficiary and the estate. B. A basic estate plan includes a Will, a Power of Attorney (“POA”), a Health Care Power of Attorney, and an Advanced Health Care Directive. 1. Typically, a basic Will memorializes the decedent’s wishes with respect to the disposition of his or her property, appoints guardians for minor children, and designates who is in charge of overseeing the disposition of assets and paying all taxes, debts, and expenses. A Will is not effective until a person dies. As part of an estate plan, it is also very important to review and update beneficiary designations to make sure the plan is comprehensive, as discussed below. 2. There are several different types of Powers of Attorney. A financial Power of Attorney is generally effective upon signing and it gives the person named as the agent for the principal broad powers over his or her financial affairs. POA’s are very important documents and in some cases can be as important or more important than a Will. POA’s are only applicable during the principal’s lifetime and as soon as the principal dies the document is invalid. In Pennsylvania, the laws governing financial Powers of Attorney were revised in 2015, and now set forth certain requirements and provisions in order for the agent to hold certain powers, which will be discussed below more fully. 3. A Health Care Power of Attorney allows the person named as the agent to make medical decisions for the principal if they cannot communicate their wishes or if    

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they are mentally incapacitated. Most documents also allow the agent to have access to medical records and speak with health care providers. 4. An Advanced Health Care Directive is only effective if a person has an end-stage medical condition or is in an irreversible coma with no realistic chance of regaining consciousness, and it sets forth their wishes as to what medical treatments they would or would not want that would only serve to prolong their life in the event they cannot communicate their wishes or if they are mentally incapacitated. III. WHAT HAPPENS IF YOU DO NOT HAVE A WILL AND THE BENEFITS OF HAVING A WILL A. All states have an Intestate Succession statute that governs how a person’s assets are distributed if they do not have a Will. New Jersey’s intestacy statutes are N.J.S.A. 3B:5-3 – N.J.S.A. 3B 5-14, N.J.S.A. 3B: 5-2(a) and Pennsylvania’s intestacy statues are set forth in 20 Pa.C.S.A. § 2101-2110. Under the intestacy rules in both States, the property may not go to whom the decedent intended. For example, most people who are married are under the misconception that all assets they own will pass to his or spouse at death; however, this is not often the case. B. Overview of New Jersey Intestacy Statute: 1. To the surviving spouse or civil union partner: a.

If have spouse and no children or parents, then 100% to spouse.

b.

If have spouse and all of the decedent’s surviving descendants are also descendants of the surviving spouse and there is no other descendant of the surviving spouse who survives the decedent, then the first 25% of estate, but not less than $50,000 nor more than $200,000, plus threefourths (3/4) of any balance of the intestate estate.

c.

If have spouse and all of the decedent’s surviving descendants are also descendants of the surviving spouse or if the surviving spouse has one or more surviving descendants who are not descendants of the decedent, or if the decedent has one or more descendants who are not descendants of the surviving spouse, then the surviving spouse would receive the first 25% of the estate, but not less than $50,000 nor more than $200,000, plus one-half of the balance of the residue of the estate.

d.

If the total value of the estate does not exceed $20,000, the surviving spouse shall be entitled to the entire estate, and the assets of up to $5,000 shall be free of the debts of the decedent.

   

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2. Balance of estate not passing to surviving spouse or civil union partner, or the entire estate if there is no surviving spouse or civil union partner: a.

To the decedent’s descendants by representation.

b.

If there are no surviving descendants, to the decedent’s parent’s equally, if they are both living, or to the survivor.

c.

If there are no surviving descendants or parents, to the descendants of the decedent’s parents or either of them by representation.

d.

If there is no descendant, parent or descendant of a parent but the decedent is survived by one or more grandparents, half of the estate passes to the decedent’s paternal grandparents equally if both survive, or to the survivor, or if both deceased, the descendants take by representation; and the other half to the decedent’s maternal relatives by the same method; but if there is no surviving grandparent, or descendant of a grandparent on either the paternal or maternal side, the entire estate passes to the decedent’s relatives on the other side in the same way.

e.

If there is no surviving descendant, parent, descendant of a parent, or grandparent, but the decedent is survived by one or more descendants of grandparents, the descendants take equally if they are all of the same degree of kinship to the decedent, but if of unequal degree those of more remote degree take by representation.

f.

If there are no surviving descendants of grandparents, then the decedent’s step-children or their descendants take by representation. If there are no stepchildren or descendants of stepchildren then to the New Jersey State Treasury.

 

C. Overview of PA Intestacy Statute: 1. If have spouse and no children or parents, then 100% to spouse. 2. If have spouse and parents but no children, then spouse gets first $30k and onehalf balance remaining in estate, and other one-half is equally divided between the parents, if both living, or to the survivor.  

   

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3. If have spouse and children (with spouse) then spouse gets first $30k and one-half balance remaining in estate and children receive one-half, in equal shares, by representation. 4. If have spouse and children (not all with spouse) then spouse gets one-half and children receive one-half in equal shares, by representation. 5. If no spouse than all to children, if no children than all to parents, if no parents than all to siblings, than to nieces and nephews, than to aunts/uncles, than cousins, then second cousins…then to the Pennsylvania Department of Revenue. D. Not having a Will can Create Many Unforeseen Distribution Issues. 1. Potential family discord over property distribution (spouse, children, parents, or siblings fighting over assets, and property, etc.). 2. Issue with timing of distribution; may not want beneficiary to receive all of the assets in a lump-sum. If minor is beneficiary, court will have to appoint custodian to control assets and then child will receive remaining assets outright at age 18 in New Jersey; can be up to 21 in Pennsylvania. 3. Missed opportunities to minimize (estate/inheritance) taxes on asset distributions. 4. May not be able to access and gain control over digital assets, or may have longer and more expensive process in order to do so. 5. Family has to deal with aftermath. A person can make a difficult time more manageable and reduce unnecessary stress with simple planning.  

E. No Control Over Estate Administration without a Will 1. The Administrator is responsible for legally raising an estate, collecting assets, paying funeral expenses, debts, illness, taxes, and distributing property in accordance with intestate statute. The surviving spouse is generally the first person in line to administer an estate in both New Jersey and Pennsylvania. 2. The person who is allowed to qualify as the Administrator is governed by statute. The person entitled to administer an intestate estate might not be who you think; it could also be multiple people, if there is no surviving spouse. 3. For example, in Pennsylvania, if a parent dies without a spouse and that parent has four adult children, in theory all four children have the right to serve together to administer the estate, which could be very cumbersome and time consuming. If there are disagreements among the children it could result in a protracted estate    

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administration. If there is no surviving spouse, children, or parent, then the person entitled to take would be the next in line to administer the estate. 4. In New Jersey, if there is no surviving spouse, the heirs have the right to administer the estate. 5. If a person has significant debt, a creditor can apply to be the estate administrator. 6. A person can renounce their right to administer an Estate by filing a Renunciation. F. Not Having a Will Can Create Issues with Designating Guardians for Minor Children. 1. Children could become wards of the State if both parents are gone, or one is gone and the other is unfit because no guardians were designated (example: car accident with both parents in the car). 2. Family would have to institute guardianship/adoption proceedings to have custody in the above situation, which can be costly and time-consuming. Could easily be avoided with proper planning. 3. Potential for inter-family guardianship contests for minor children (i.e. grandparents/siblings on both sides cannot agree on who is the proper guardian). 4. May not have financial protections in place for your children, or could be in situation where child is receiving a lot of cash/assets outright; which could be squandered/misused/abused. G. Designation of Guardians in Will - Protects Minor Children 1. Two types of Guardianships: a. Guardian of the Person: physical custody of child, responsible for child’s daily needs, makes decisions on school, day-to-day activities, etc. b. Guardian of the Estate: controls child’s assets (this is different from a trustee appointed under a testamentary trust, but often the same person fills both roles). Guardian of the Estate would control other assets of the child passing outside of the Will/estate or from other sources. 2. Can choose the same person to be Guardian of the Person and Guardian of the Estate or different people (i.e. person names sister to be guardian of the person because she is closer to children, but names brother to be trustee/guardian of the estate because he is better with finances).    

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3. Appointing Guardians typically eliminates need to go to court or have lengthy court proceedings if both parents are deceased, or if one parent is deceased and other is incapacitated/unfit. Saves time, money, and provides peace of mind. Most importantly it PROTECTS CHILDREN. 4. Eliminates or reduces potential for inter-family disputes. 5. Allows for the appointment of a successor or alternate guardians if initial people appointed cannot serve. a. Does child have special needs? If so, additional planning may be warranted. H. Disposition of Property With a Will 1. Control who receives personal property and when, allows the ability to leave property to individuals and/or charities that may not receive property under intestacy laws. 2. Ability to appoint Personal Representative and alternates to carry out provisions of the Will, ability to appoint Trustees of Testamentary Trusts, and ability to appoint Guardians for minor beneficiaries. 3. Ability to designate contingent beneficiaries; ability to give discretion to sell personal property if unsuitable for minor beneficiary and place proceeds in testamentary trust created under Will (i.e. sports car unsuitable for eight year old, so discretion to have it sold) (testamentary trusts are discussed later) I. Ability to Create a Testamentary Trust 1. A trust created under a will is called a testamentary trust. It is irrevocable at death and places barriers and protections between a beneficiary and assets in the trust. 2. There are many different types of trusts that can be created outside a Will, such as: a Revocable Trust (can be changed by the Grantor), Irrevocable Trusts, Life Insurance Trusts, Dynasty Trusts, Special Needs Trusts, Grantor Retained Annuity Trusts, Charitable Trusts, etc. These types of trusts can be complicated and serve various purposes and are beyond the scope of this course. 3. All trusts typically restrict access to the trust funds and allow the testator/grantor to control the purpose, timing and amounts of distributions. 4. A Trust also protects the assets from most creditors of the beneficiary. For instance, only the IRS or a State taxing authority could invade the trust for    

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satisfaction of a beneficiary’s outstanding tax obligations. A Qualified Domestic Relations Order (QDRO) could also invade the trust corpus. In general, trust assets are not subject to equitable distribution claims. 5. A Will could have several testamentary trusts for different beneficiaries: spouse, children, parents, animals, etc. Spousal trusts can be especially useful in second marriages if there are children from the previous marriage. a. Reasons for a trust: PROTECTION b. Protect assets from outright distribution if beneficiary is a minor, or a spendthrift, or has a drug, alcohol or gambling addiction; protects assets from creditors; protects assets if beneficiary is incapable of proper management of finances (mental incapacity); and protects from future spouses. c. Trusts allow the flexibility to incorporate the grantor’s desires for when assets are distributed to a beneficiary. A typical standard for distribution is giving the trustee the discretion to make distributions to a beneficiary for his or her health, education, maintenance and support (HEMS). d. Ability to customize trust provisions for each beneficiary (focus on only education or health). J. Provide for Children, Spouse, or Other Beneficiaries with Trusts Created under Will 1. A trust creates a safety net for beneficiaries. 2. A trust restricts beneficiaries' access to the trust funds and allows testator to control purpose, timing and amounts of distributions. 3. Many different types of testamentary trusts a. Sprinkle trust for children i.

Income and principal distributed based on needs of group of children until youngest child reaches a stated age (e.g. 18); at which time the trust could be equally divided into separate trusts for each child, from which income could be distributed automatically or in certain circumstances, principal could be available as needed or for HEMS, and each child could have the right to withdraw principal in certain amounts at stated ages (e.g. 25, 30 and 35), or it could continue on in perpetuity. Larger

   

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principal distributions are generally set at certain percentages or dollar amounts. b. Separate trusts for children i.

The trust is initially divided into separate shares, and income and principal are distributed based on differing needs of each child, when child reaches a stated age (e.g. 22), income could be distributed automatically, and principal could be available as needed or for HEMS, and child could have the right to withdraw principal at stated ages (e.g. 25, 30 and 35).

ii.

If child dies during the trust term, the remaining balance can be distributed to grandchildren or other named beneficiaries after child’s death.

c. Trust or Life Estate for Parent. i.

Income and principal distributed under HEMS’s for parent or the trust can be used only as a supplement for government benefits, such as Medicaid or other programs parent may be entitled to receive. In these cases, distribution provisions need to be carefully specified so as not to disqualify parent from said benefits.

ii.

Remaining balance distributed to children or other named beneficiaries after parent’s death.

iii.

Sometimes parent is given a life estate to live in residence that may be owned by child. At the parent’s death, the residence is distributed to other beneficiaries. Can also use qualifiers for life estate that it would expire if parent could not reside in house due to long-term medical issues.

K. Designation of Fiduciaries With a Will. 1. Personal Representative (“PR”)/Executor/Executrix has the same responsibilities as an administrator, but is designated as the fiduciary in the Will to carry out the decedent’s wishes. Decedent can grant more powers to the PR than those set under the statutes governing administrators. For instance, the ability to access digital assets and emails of the decedent. 2. Trustee - manages the assets of a trust, makes investment decisions, files tax returns, and makes distributions to beneficiary per the terms in the Will. Can    

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name multiple trustees, and if the estate is larger it is common to appoint both an individual and a corporate trustee. 3. PR, Trustee, Guardians – known as “fiduciaries” have legal obligations to make decisions in best interest of estate/trust/beneficiaries; if shirking duties or not acting in best interest of estate/trust/beneficiaries, a surcharge or removal action can be brought against them. 4. A Will allows a person to select who will administer their estate, can appoint a family member, friend, attorney, advisor, or corporate fiduciary and also designate alternates/successors. 5. Allows a person to determine the amount and rate of compensation to fiduciaries or remove the ability of receiving any compensation. IV. DIGITAL ASSETS. A. Now more than ever, digital asset planning is a critical component of any estate and business succession plan. Currently, there is no uniformly accepted definition of “digital assets.” Digital assets are not your computer, smartphones, or iPads; but rather, digital assets are the pieces of information stored on these devices, which include: digitally stored content, online accounts and files stored on digital devices, and accounts maintained and managed online. 1. Five Main Categories of Digital Assets: a. Electronic Documents - stored on a digital device, in a cloud, or other software sharing platform. b. Social Media Outlets - Facebook, Twitter, LinkedIn, Snapchat, Shutterfly, etc. c. Financial Assets - financial information (stored on digital devices or an account maintained online; majority of people now use paperless billing and statement information), bitcoins, PayPal, Amazon, eBay accounts, and other accounts/data associated with a monetary value, etc. d. Business Accounts - customer information, databases, trademarks, trade-secrets, websites, domain names, Dropbox, etc. e. Blogs, Music, Videos - online gaming and other miscellaneous Digital Assets (iTunes, Pandora, loyalty programs, YouTube, Apple’s iCloud, etc.)    

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B. Reasons to Plan - Two of the most important reasons to plan are 1) to ensure your wishes are followed with the management, transfer and/or disposal of your digital assets at death/incapacity; and 2) to make the transfer and/or disposal of digital assets easier upon a triggering event. Planning avoids unnecessary delays. C. Plan by including provisions that address accessing digital information and digital assets in your Will and Power of Attorney. 1. Majority of people have more digital assets than they realize. 2. As we move towards a paperless world, digital assets will exponentially increase as technology becomes increasingly intertwined with daily activities. D. Prevent the loss of assets at death that can be transferred (not all digital assets can be transferred, as discussed later in-depth). 1. Some digital assets have monetary value (PayPal, eBay, bitcoins, etc.), but many digital assets have sentimental importance (flickr, photo sharing websites, etc.) that is priceless. 2. If digital assets are not identified, they can be almost impossible to discover. 3. Management and disposition of digital assets is growing more complex and should be given more attention. E. iTunes, eBooks, Yahoo, Google Play, Amazon and Apple accounts, as well as other digital assets, may be subject to User License Agreements that prohibit the sharing and transfer of these assets. 1. Essentially, only have license in iTunes during your lifetime. 2. Planning for the disposition of these assets can be difficult if not prohibited. F. Many states have not yet enacted laws to govern the transfer and/or disposal of digital assets at death or incapacity. Technology develops much more quickly than legislation. In the last 10 years, legislation has been markedly behind the technology times. G. There are two main federal laws that govern digital assets: 1. Stored Communications Act (Title II of the Electronic Communications Privacy Act of 1986), which protects the privacy of the contents of files stored by service providers and of records held about the subscriber by service providers, such as subscriber name, billing records, or IP addresses.    

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2. Computer Fraud and Abuse Act (17 U.S.C. § 1030), which penalizes people who access computers and data without authorization. 3. Some digital assets allow for beneficiary designations (for example, Facebook allows for you to designate a beneficiary of your account), while others do not. H. Digital asset planning is increasingly becoming an integral part of any estate and business succession plan. V.

POWERS OF ATTORNEY A. Financial. 1. A Power of Attorney is a very powerful document, which allows agents to do almost anything (i.e. buy/sell houses, litigation, etc.) that the principal could do personally with his or her finances. In New Jersey, POA’s are governed under N.J. Rev. Stat. § 46:2B-8.2, in Pennsylvania, POA’s are governed under 26 Pa.C.S.A § 5601 - 5612. 2. A POA can allow for the appointment of both primary and successor agents, or joint agents. 3. Can have a limited POA, which only allows agent to act in a specific situation or over a specific asset, or for a specific period of time. For example, may have limited POA to sell your car or house, etc. 4. Powers of Attorney are crucial not only to an individual but also to a business owner (especially, a sole proprietor), in the event the owner is no longer able to make financial decisions for the business. This document allows the person named as the agent to step into the shoes of the business owner and maintain business operations, make decisions for the business, and ultimately transfer, sell, or close the business. 5. If you have a general financial POA and become incapacitated, you already have named a person who is authorized to handle your financial affairs and avoid going to court to have a guardian appointed for both your estate and your person. 6. Saves time, hassle, and money and protects yourself and assets! Easy to do as part of general estate plan, and is not expensive – but could be costly if not done and is needed later. 7. In Pennsylvania, POA laws changed on January 1, 2015 through the enactment of Act 95. Now, if one wants the agent to be able to have certain powers it must be specifically stated in the document. These powers include:

   

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a. Ability to delegate authority granted to the agent in the POA to another person; b. Create, amend, revoke or terminate an inter vivos trust; c. Make a gift; d. Create or change rights of survivorship; e. Create or change beneficiary designations; f. Waive the principal’s right to be a beneficiary of a joint and survivor annuity, including a survivor benefit under a retirement plan; g. Exercise fiduciary powers that the principal has authority to delegate; and h. Disclaim property, including a power of appointment. 8. Notice provisions and agent’s acknowledgement were also changed under new PA law, among other changes. Beware of old form documents. 9. In order for document to be effective, it must be dated and signed by the principal or by another person at the direction of the principal, acknowledged before a notary, and witnessed by two adult individuals, neither of whom is the agent named in the power of attorney, the notary, or an individual signing on behalf of the principal. These execution requirements are applicable under new law. 10. In New Jersey, the execution requirements are the same requirements for a Deed. B. Healthcare Powers of Attorney. 1. Appoint primary and successor health care agents to have access to health care information and make health care decisions on your behalf. If you become incapacitated, this avoids court proceedings to have guardian appointed. In New Jersey Health Care Powers of Attorney and Medical Directives are governed under N.J. STAT. ANN. § 26:2H-53-81, and in Pennsylvania, Health Care Powers of Attorney are covered in 26 Pa.C.S.A § 5451 - 5465. 2. Can limit or expand agent’s power; or revoke if have capacity (i.e. unconscious and need surgery – can have agent authorize). 3. Saves time, hassle, and money and protects you.    

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4. In practice, health care providers are not always aware that patient has a HC POA. 5. In New Jersey, the document needs to be dated, and signed by individual who has capacity and is 18 years of age or dated and signed by another individual at the direction of the principal if principal is unable to sign. The signature must be witnessed by two individuals who are not health care providers or agents of health care provider. In the alternative, the document may be signed by the individual and notarized. 6. In Pennsylvania, the document needs to be dated, and signed by individual who has capacity and is 18 years of age or dated and signed by another individual at the direction of the principal if principal is unable to sign. The signature must be witnessed by two individuals who are not health care providers or agents of health care provider. Notary is not required, but good practice to have document notarized. C. Advanced Health Care Directives. 1. Document sets forth whether principal wants to initiate, continue, withhold or withdrawal life sustaining treatment if person cannot communicate his or her own wishes and they have an end-stage condition or are in an irreversible coma with no chance of recovery. 26 Pa.C.S.A § 5441 - 5447. 2. Directive allows person to authorize or refuse some or all life-sustaining treatment (food/tube feeding, antibiotics, life-support, etc.) 3. Clearly spells out health care wishes. 4. Provides guidance for health care agent to follow if incapacitated. 5. Authorizes agent to follow guidance or authorizes them to make independent decisions. 6. Can include specific wishes and provisions. Unless otherwise specified, always allows for treatment to relieve pain. 7. Can also include provisions to allow agent to override wishes set forth on directive. 8. The document needs to be dated and signed by principal who has capacity and is 18 years of age or dated and signed by another individual at the direction of the principal if principal is unable to sign. Signature needs to be witnessed by two individuals who are 18 or older and are not health care providers to the principal. Notary is not required, but good practice to have document notarized.    

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9. An Advanced Directive is different from a Do Not Resuscitate Order. VI. TAX STRATEGIES A. Unlimited Martial Deduction and Unified Credit 1. Unlimited amount of property can pass to surviving spouse during lifetime or upon death without Federal Estate Tax or State inheritance tax. 2. Use of marital bequests or trusts and credit shelter or bypass trusts. 3. Techniques to minimize estate or inheritance taxes at death of second spouse. 4. Unified Credit allows any person during life or at death to transfer up to $5,450,000 free of federal estate or gift tax. Any amounts transferred beyond the exemption are taxed at a 40% rate. I.R.C. § 2010(c)(3). 5. Portability is the mechanism that allows a deceased spouse to transfer their unused exemption amount at death to the surviving spouse by making an election on a timely filed Estate Tax Return. B. New Jersey Inheritance Tax (Current Law) 1. Transfer tax imposed transferee’s right to receive a gift, devise or bequest from a decedent. A decedent can direct that this tax is paid by the decedent’s estate. 2. Tax is determined based on the value of the property and the relationship between the beneficiary and the decedent. 3. This tax is due 8 months from the date of the decedent’s death. 4. Rate of taxation: a.

Class A beneficiaries: Includes surviving spouse, civil union partners, parents, children, grandchildren, and any other lineal ancestor or descendant – exempt from tax.

b.

Class B – repealed.

c.

Class C beneficiaries: Siblings, son/daughter-in-law. Tax rates: i. $25,000 – 0% rate and 11% on excess ii. $1,100,000 – 13% iii. $1,400,000 – 14%

   

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iv. $1,700,000 – 17% d.

Class rates: i. ii. iii.

D beneficiaries: more distant relatives and other individuals. Tax Entitled to exemption of $499 15% on any amount up to $700,000 16% on any amount in excess of $700,000

e.

Class E beneficiaries: tax exempt charities and governmental organizations, educational institutions, etc. Exempt from tax.

f.

Life insurance proceeds are not subject to New Jersey Inheritance tax. Other assets are also exempt.

C. New Jersey Estate Tax (Current Law) 1. Estate tax applies only to New Jersey residents with estates in excess of $675,000. 2. Transfers between spouses are exempt. 3. Estate tax rates range from 4.8 to 16 percent on amounts in excess of $675,000. 4. Return and tax is due 9 months from date of decedent. 5. Life insurance is included for purposes of determining the tax, unless insurance is in an Irrevocable Life Insurance Trust (as discussed later). D. Pennsylvania Inheritance Tax 1. Transfer tax imposed transferee’s right to receive a devise or bequest from a decedent. A decedent can direct that this tax is paid by the decedent’s estate. Pennsylvania does not have a separate estate tax. 2. Rate of taxation is based on beneficiary’s relationship to decedent. 3. Spousal transfers are taxed at 0% rate. 4. Transfers to parents, children, grandchildren, stepchildren are taxed at 4.5% rate. 5. Transfers to siblings are taxed at 12% rate. 6. Transfers to anyone else are taxed at 15% rate. 7. Tax and Return are due 9 months from decedent’s death.    

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8. Life insurance is not includable for PA Inheritance tax purposes; neither are retirement accounts if decedent had not reached age 59.5. 9. Gifts made within one year of the decedent’s death are brought back into the estate for inheritance tax purposes, less a one-time exemption of $3,000. E. Annual Gift Tax Exclusion 1. Utilize the annual gift tax exclusion to slowly transfer value out of an estate over a long-period of time. The exclusion amount in 2016 is $14,000 per individual per donee ($28,000 for a married couple). I.R.C. § 2503(b). 2. Gift up to $14,000 per year, per person to anyone tax free and with no reporting requirements.  

3. No limit on number of donees. 4. Do not have to pay gift tax on gift. 5. Recipients do not pay income tax on gift. 6. Recipients must have present interest in gift; otherwise it is considered an incomplete gift. a. Contributions to certain trusts can qualify for a present interest exception in order to qualify the gift as part of the annual exclusion amount – rules can get complex if not outright gift and are beyond the scope of this course. b. 529 Savings Plan qualifies for annual gift tax exclusion - can front-load up to 5 years ($70,000) in contributions in one year to plan. c. Transfers to UTMA accounts for minors qualify for the annual gift tax exclusion. F. Annual Medical Exclusion 1. Gift an unlimited amount of money to anyone for medical care. IRC § 2503(e). 2. Must be ONLY for medical care. 3. Must have payment sent directly to the health care provider from the donor. 4. No gift tax due on amounts paid.    

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5. No income tax due from recipient. 6. No reporting requirement. 7. Donee must not be able to receive any reimbursements for health care, otherwise taxed on that amount. 8. No restriction on the number of donees able to receive gift. 9. Donee does not have to be related to donor. 10. Excellent way to reduce value of estate and provide medical care to loved ones. G. Annual Educational Exclusion. 1. Gift an unlimited amount of money to anyone for tuition. IRC § 2503(e). 2. Must only be for tuition costs a. Room and board are not included 3. Must be paid directly to the educational institution. 4. Must be a qualified educational institution: a. Regularly maintains faculty and students b. Can be used pre-kindergarten to graduate school 5. No gift tax due on amounts paid. 6. No income tax due from recipient. 7. No reporting requirement. 8. No restriction on the number of donees able to receive gift. 9. Donee does not have to be related to donor. 10. Excellent way to reduce value of estate and provide educational assistance to loved ones.

   

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H. Life Insurance as a Planning Opportunity. 1. Income replacement. 2. Provide loved ones with security. 3. Can be used to equalize gifts among children. 4. Generally, outside of probate estate. 5. Irrevocable life insurance trust (ILIT) – various rules to ensure value of policy is outside estate, certain trusts can qualify for annual gift exclusion. 6. Policies owned by and ILIT are not subject to federal or New Jersey estate tax, so long as the transfer of the policy to the ILIT was three years before the decedent’s death. Great planning tool to reduce a decedent’s New Jersey taxable estate. I. Disclaimer Trusts. 1. Estate planning technique that allows a surviving spouse to disclaim part of his or her inheritance, and upon the disclaimer the assets would pass into a disclaimer trust for the surviving spouse’s benefit. 2. In New Jersey, technique is generally utilized to preserve the first spouse’s exemption amount of $675,000 for New Jersey Estate Tax purposes. 3. Surviving spouse would disclaim assets in this amount and assets go into trust in which surviving spouse is primary beneficiary, and is entitled to all income from trust and typically, principal in trustee’s discretion for the spouse’s health, education, maintenance, and support. 4. Upon surviving spouse’s death, assets pass to remainder beneficiaries free of any additional transfer tax. 5. This type of trust has a lot of flexibility, as spouse does not necessarily need to disclaim his or her interest in any part of the estate and at the time of the decedent’s death the decision to do so can be evaluated.

   

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Jennifer L. Zegel, Esq. Partner Philadelphia, PA 215.495.6523 [email protected] Jennifer L. Zegel, Partner in the Firm’s Philadelphia Office, devotes her practice to the representation of clients in the areas of estates and trusts, business law, real estate, and employment law. Ms. Zegel handles a wide range of estates and trusts matters, including drafting wills, trusts, special needs trusts, powers of attorney, and health care powers of attorney documents. She also assists clients in estate, trust, and guardianship administration, and business succession planning. Ms. Zegel devotes a substantial portion of her time to estate planning, with a focus on asset distribution while minimizing potential tax liability on asset transfers. Ms. Zegel has experience in entity formation, drafting and negotiating commercial contracts, shareholder, partnership and operating agreements, and analyzing business structures for legal, liability, and tax issues while providing cost-saving business solutions to clients. Ms. Zegel handles real estate matters for both residential and commercial clients. In addition, Ms. Zegel has experience in drafting and negotiating employment agreements, restrictive covenants, and in handling employment discrimination litigation.

Education • • • • •

LL.M. in Taxation, Temple University Beasley School of Law (2012) Estate Planning Certification, Temple University Beasley School of Law (2012) Employee Benefits Certification, Temple University Beasley School of Law (2012) J.D., Rutgers University School of Law - Camden (2008) B.A., Temple University (2004)

Jurisdictions Admitted to Practice • • • •

Pennsylvania New Jersey U.S. District Court, Eastern District of Pennsylvania U.S. Third Circuit Court of Appeals

Practice Groups • • • • •

Estates & Trusts Corporate & Business Services Employment Practices Real Estate Business Succession Planning

PENNSYLVANIA

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DELAWARE

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NEW JERSEY

Cira Centre, 13th Floor, 2929 Arch Street, Philadelphia, PA 19104

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MARYLAND

T: 215.495.6500

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NEW YORK

www.regerlaw.com

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Jennifer L. Zegel, Esq. Civic & Charitable Associations • Volunteers for the Indigent Program (VIP) • Homeless Advocacy Project of Philadelphia • New Membership Director and Vice President (2014-2015), Executive Women International

Professional & Bar Association Memberships • • • •

American Bar Association Philadelphia Bar Association Philadelphia Estate Planning Council, Women’s Initiative Committee Camden County Bar Association

Honors & Awards • • • •

Named as one of Pennsylvania’s Lawyers on the FastTrack by The Legal Intelligencer (2015) Included in the list of Pennsylvania Super Lawyers Rising Stars (2014, 2015 and 2016) Legal Services Recognition Award, Homeless Advocacy Project of Philadelphia (2013) First Judicial District Pro Bono Roll of Honor (2011 and 2012)

Publications & Press Mentions • • • • • • • • • • • • • • •

Featured, 2016 Top Laterals/New Partners. The Legal Intelligencer. (March 22, 2016) Author, Digital Asset Planning. Reger Rizzo & Darnall Client Alert. (January 2016) Featured, Lawyers on the Fasttrack: Jennifer L. Zegel. The Legal Intelligencer. (September 29, 2015) Featured, Reger Rizzo Promotes Two Lawyers to Partner. The Delaware Law Weekly. (July 8, 2015) Featured, People in the News. The Legal Intelligencer. (June 15, 2015) Author, New Year, New You, New Pennsylvania Financial Power of Attorney Laws? Reger Rizzo & Darnall Client Alert. (April 2015) Author, Divorce and the Estate Plan. Reger Rizzo & Darnall Client Alert. (March 2014) Author, Long-term Business Success is in the Planning. Reger Rizzo & Darnall Client Alert. (December 2013) Author, Estate Planning And the Aftermath of the American Taxpayer Relief Act. Reger Rizzo & Darnall Client Alert. (July 2013) Author, To Gift or Not to Gift Before the End of 2012? Reger Rizzo & Darnall Client Alert. (October 2012) Quoted, Making the Most of That Shiny New HSA. Reuters.com. (April 19, 2012) Quoted, How to Make Gifts to Grandchildren Without Tax Consequences. The Aging Diva Blog. (April 9, 2012) Author, Health Savings Accounts: The Good, The Bad and The Misunderstood. Society for Human Resource Management. (2012) Author, Bloody Persecution: Plight of the Falun Gong. 9.1 RUTGERS J. OF L. & RELIG. NEW DEV. 4. (Fall 2007) Author, A Funny Thing Happened on the Way to the Boycott: Why We Should Respond to China’s Religious Persecution and Human Rights Violations by Means Other than a Boycott of the 2008 Beijing Olympic Games. 9.2 RUTGERS J. OF L. & RELIG. NEW DEV. 4. (Spring 2008)

Speaking Engagements & Presentations • Presenter, The Basics of Estate Planning. The Pennsylvania Bar Institute’s 1st Annual New Lawyers Symposium. (August 25, 2016) PENNSYLVANIA

I

DELAWARE

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NEW JERSEY

Cira Centre, 13th Floor, 2929 Arch Street, Philadelphia, PA 19104

I

MARYLAND

T: 215.495.6500

I

NEW YORK

www.regerlaw.com

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Jennifer L. Zegel, Esq. • Presenter, The Basics of Estate Planning in New Jersey. The New Jersey Office of the Attorney General’s Advocacy • • • • •

Institue. (August 18, 2016) Presenter, Top Mistakes in Updating Estate Plans. The National Business Institute. (November 18, 2015) Presenter, Business Succession Planning 101. Pennsylvania Bar Institute’s 21st Annual Business Lawyers’ Institute. (November 4, 2015) Presenter, Digital Asset Planning. Citrin Cooperman. (June 24, 2015) Presenter, Business Succession Planning 101. Pennsylvania Bar Institute’s 20th Annual Business Lawyers’ Institute. (November 13, 2014) The ABC’s of Estate Planning. Executive Women International. (March 19, 2013)

PENNSYLVANIA

I

DELAWARE

I

NEW JERSEY

Cira Centre, 13th Floor, 2929 Arch Street, Philadelphia, PA 19104

I

MARYLAND

T: 215.495.6500

I

NEW YORK

www.regerlaw.com

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BASICS OF ESTATE PLANNING Presented By:

JENNIFER L. ZEGEL, ESQUIRE, LL.M. August 18, 2016

INTRODUCTION AND OVERVIEW OF COURSE • What is an estate, and a basic estate plan? • What happens if someone dies without a Will? • What are the benefits of having a Will? • Discussion of Digital Assets • The importance and purposes of financial and healthcare Powers of Attorney and Advanced Medical Directives • Gifting strategies to reduce or eliminate inheritance and estate tax

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WHAT IS AN ESTATE? •

An Estate is comprised of all the assets a person owns at death.

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Not all assets in an estate may be subject to an inheritance or estate tax at the State or Federal level.

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Some assets in an estate may be transferred by operation of law or may have to pass through a probate or intestacy proceeding in order to be transferred.

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In 2016, the majority of estates will not be subject to a Federal Estate Tax, unless the gross value of the estate exceeds $5,450,000; amounts that exceed this figure are taxed at a 40% rate.

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TYPES OF ASSETS: PROBATE ASSETS •

Some assets in an Estate pass through the decedent’s Will or through an intestacy proceeding.

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Each State has their own administration process.

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Some States have higher fees and more cumbersome procedures than others.

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New Jersey and Pennsylvania = simple

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Delaware and Florida = higher fees and a more complicated process

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TYPES OF ASSETS: NON-PROBATE ASSETS • Non-Probate Assets are assets that do not pass through a Will or through laws of intestacy, since they have a beneficiary designation or are jointly owned assets with rights of survivorship. • Examples of assets with beneficiary designations include: retirement accounts and plans, POD accounts, life insurance policies, etc. • Assets that transfer by operation of law are real estate with rights of survivorship and jointly-owned bank accounts.

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BASIC ESTATE PLAN A basic estate plan includes: •

Will - memorializes the decedent’s wishes with respect to the disposition of his or her property, appoints guardians for minor children, and designates who is in charge of overseeing the disposition of assets and paying all taxes, debts, and administration expenses.

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Power of Attorney (POA) - gives the person named as the Agent broad powers over someone’s financial affairs.

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BASIC ESTATE PLAN A basic estate plan includes: •

Health Care POA - allows the person named as the Agent to make medical decisions for the principal if they cannot communicate their wishes and also have access to medical information.

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Advanced Health Care Directives - only effective if a person has an end-stage medical condition or is in an irreversible coma, and sets forth their wishes as to what heroic medical treatments they would or would not want to receive under these circumstances.

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WHAT HAPPENS IF YOU DON’T HAVE A WILL? •

All states have an Intestate Succession statute that governs how a person’s assets are distributed if they do not have a Will.

•

New Jersey’s intestacy statutes are N.J.S.A. 3B:5-3 – N.J.S.A. 3B 5-14, N.J.S.A. 3B: 5-2(a) and Pennsylvania’s intestacy statues are set forth in 20 Pa.C.S.A. § 21012110.

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Under the intestacy rules in both states, the property may not go to whom the decedent intended.

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Most married people are under the misconception that all assets they own will pass to his or her surviving spouse at death; however, this is not often the case.

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OVERVIEW OF NEW JERSEY’S INTESTACY STATUTE To the surviving spouse or civil union partner: •

If have spouse and no children or parents, then 100% to spouse.

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If have spouse and all of the decedent’s children or issue are also children or issue of the surviving spouse and there is no other children or issue of the surviving spouse who outlives the decedent, then the first 25% of estate, but not less than $50,000 nor more than $200,000, plus threefourths (3/4) of any balance of the intestate estate.

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OVERVIEW OF NEW JERSEY’S INTESTACY STATUTE To the surviving spouse or civil union partner: •

If have spouse and all of the decedent’s surviving children or issue are also children or issue of the surviving spouse and if the surviving spouse has surviving children or issue who are related to the decedent, or if the decedent has one or more children or issue who are not related to the surviving spouse, then the surviving spouse would receive the first 25% of the estate, but not less than $50,000 nor more than $200,000, plus one-half of the balance of the residue of the estate.

•

If the total value of the estate does not exceed $20,000, the surviving spouse is entitled to the entire estate, and the assets of up to $5,000 shall be free of the debts of the decedent.

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OVERVIEW OF NEW JERSEY’S INTESTACY STATUTE Balance of estate not passing to surviving spouse or civil union partner, or the entire estate if there is no surviving spouse or civil union partner: •

To the decedent’s descendants by representation.

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If there are no surviving descendants, to the decedent’s parent’s equally, if they are both living, or to the survivor.

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If there are no surviving descendants or parents, to the descendants of the decedent’s parents or either of them by representation.

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OVERVIEW OF NEW JERSEY’S INTESTACY STATUTE Balance of estate not passing to surviving spouse or civil union partner, or the entire estate if there is no surviving spouse or civil union partner: •

If there is no descendant, parent or descendant of a parent but the decedent is survived by one or more grandparents, half of the estate passes to the decedent’s paternal grandparents equally if both survive, or to the survivor, or if both deceased, the descendants take by representation; and the other half to the decedent’s maternal relatives by the same method; but if there is no surviving grandparent, or descendant of a grandparent on either the paternal or maternal side, the entire estate passes to the decedent’s relatives on the other side in the same way.

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OVERVIEW OF NEW JERSEY’S INTESTACY STATUTE Balance of estate not passing to surviving spouse or civil union partner, or the entire estate if there is no surviving spouse or civil union partner: •

If there is no surviving descendant, parent, descendant of a parent, or grandparent, but the decedent is survived by one or more descendants of grandparents, the descendants take equally if they are all of the same degree of kinship to the decedent, but if of unequal degree those of more remote degree take by representation.

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If there are no surviving descendants of grandparents, then the decedent’s step-children or their descendants take by representation. If there are no stepchildren or descendants of step-children then to the New Jersey State Treasury.

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OVERVIEW OF PENNSYLVANIA’S INTESTACY STATUTE •

If have a spouse and no children or parents, then 100% to spouse.

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If have a spouse and parents but no children, then spouse gets first $30k and one-half balance remaining in estate, and other one-half is equally divided between the parents, if both living, or to the survivor.

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If have a spouse and children (with spouse) then spouse gets first $30k and one-half balance remaining in estate and children receive one-half, in equal shares, by representation.

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OVERVIEW OF PENNSYLVANIA’S INTESTACY STATUTE •

If have a spouse and children (not all with spouse) then spouse gets one-half and children receive one-half in equal shares, by representation.

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If no spouse than all to children, if no children then all to parents, if no parents then all to siblings, then to nieces and nephews, then to aunts/uncles, then cousins, then second cousins…and finally to the Pennsylvania Department of Revenue.

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WHAT HAPPENS IF YOU DON’T HAVE A WILL? •

Not having a Will can create many unforeseen issues -

Potential family discord over property distribution.

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Issue with timing of distribution; may not want beneficiary to receive all of the assets in a lump-sum. If minor is beneficiary, court will have to appoint custodian to control assets and then child will receive remaining assets outright at age 18 in New Jersey, can be up to 21 in Pennsylvania.

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Missed opportunities to minimize (estate/inheritance) taxes on asset distributions.

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May not be able to access and gain control over digital assets.

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Family has to deal with aftermath.

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ESTATE ADMINISTRATION: NO CONTROL WITHOUT A WILL • The Administrator is responsible for legally raising an estate, collecting assets, paying funeral expenses, debts, illness, taxes, and distributing property in accordance with intestate statute. The surviving spouse is generally the first person in line to administer an estate. • The person who is allowed to qualify as the Administrator is governed by statute. The person entitled to administer an intestate estate might not be who you think; it could also be multiple people.

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ESTATE ADMINISTRATION: NO CONTROL WITHOUT A WILL • For example, in Pennsylvania, if a parent dies without a spouse and that parent has four adult children, in theory all four children have the right to serve together to administer the estate, which could be very cumbersome and time consuming. • If there are disagreements among the children it could result in a protracted estate administration. • If there is no surviving spouse, children, or parent, then the person entitled to take would be the next in line to administer the estate.

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ESTATE ADMINISTRATION: NO CONTROL WITHOUT A WILL • In New Jersey, if there is no surviving spouse, the heirs have the right to administer the estate. • If a person has significant debt, a creditor can apply to be the estate administrator. • A person can renounce their right to administer an Estate by filing a Renunciation.

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NO WILL CAN CAUSE ISSUES FOR MINOR CHILDREN •

Minor children could become wards of the State since there is no guardianship designations.

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Family would have to institute guardianship/adoption proceedings, which can be costly and time-consuming.

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Potential for inter-family guardianship contests for minor children.

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May not have financial protections in place for children, or could be in situation where child is receiving a lot of cash or assets outright; which could be squandered, misused, or abused.

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DESIGNATION OF GUARDIANS •

•

IN

WILL

Two types of Guardianships -

Guardian of the Person: physical custody of child, responsible for child’s daily needs, makes decisions on school, day-to-day activities, etc.

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Guardian of the Estate: controls child’s assets (this is different from a trustee appointed under a testamentary trust, but often the same person fills both roles). Guardian of the Estate would control other assets of the child passing outside of the Will/estate, or from other sources.

Can choose the same person to be Guardian of the Person and Guardian of the Estate, or choose different people.

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DESIGNATION OF GUARDIANS

IN

WILL

•

Appointing Guardians typically eliminates the need to go to court for lengthy court proceedings if both parents are deceased, or if one parent is deceased and other is incapacitated/unfit. Saves time, money, and provides peace of mind. Most importantly it PROTECTS CHILDREN.

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Eliminates or reduces potential for inter-family disputes.

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Allows for the appointment of a successor or alternate guardians if initial people appointed cannot serve.

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DISPOSITION OF PROPERTY WITH A WILL •

Control who receives personal property and when; allows the ability to leave property to individuals and/or charities that may not receive property under intestacy laws.

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Ability to appoint Personal Representative and alternates to carry out provisions of the Will; ability to appoint Trustees of Testamentary Trusts; and ability to appoint Guardians for minor beneficiaries.

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Ability to designate contingent beneficiaries; ability to give discretion to sell personal property if unsuitable for minor beneficiary and place proceeds in testamentary trust created under Will.

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ABILITY TO CREATE A TESTAMENTARY TRUST •

A trust created under a will is called a testamentary trust, it is irrevocable at death and it places barriers and protections between a beneficiary and assets in the trust.

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There are many different types of trusts that can be created outside a Will; such as a Revocable Trust (can be changed by the Grantor); Irrevocable Trusts; Life Insurance Trusts; Dynasty Trusts; Special Needs Trusts; Grantor Retained Annuity Trusts; Charitable Trusts; etc.

•

All trusts typically restrict access to the trust funds and allow the testator/grantor to control the purpose, timing and amounts of distributions.

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ABILITY TO CREATE A TESTAMENTARY TRUST •

A Trust also protects the assets from most creditors of the beneficiary. For instance, only the IRS or a State taxing authority could invade the trust for satisfaction of a beneficiary’s outstanding tax obligations. A Qualified Domestic Relations Order could also invade the trust corpus. In general, trust assets are not subject to equitable distribution claims.

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A Will could have several testamentary trusts for different beneficiaries: spouse, children, parents, and animals, etc.

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Spousal trusts can be especially useful in second marriages if there are children from the previous marriage.

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PROVIDE FOR BENEFICIARIES WITH TRUSTS •

A trust creates a safety net for beneficiaries.

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A trust restricts beneficiaries' access to the trust funds and allows testator to control purpose, timing and amounts of distributions.

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Many different types of testamentary trusts: - Sprinkle trust for children - Separate trusts for children - Trust or Life Estate for Parent

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DESIGNATION OF FIDUCIARIES WITH A WILL • Personal Representative - (“PR”)/Executor/Executrix has the same responsibilities as an administrator but is designated as the fiduciary in the Will to carry out the decedent’s wishes. Decedent can grant more powers to the PR than those set under the statutes governing administrators. For instance, the ability to access digital assets and emails of the decedent, as discussed later. • Trustee - manages assets of trust, makes investment decisions, files tax returns, and makes distributions to beneficiary, per the terms in the Will.

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DESIGNATION OF FIDUCIARIES WITH A WILL • PR, Trustee, Guardians – known as “fiduciaries” have legal obligations to make decisions in best interest of estate/trust/beneficiaries; if shirking duties or not acting in best interest of estate/trust/beneficiaries a surcharge or removal action can be brought against them. • A Will allows a person to select who will administer their estate, can appoint a family member, friend, attorney, advisor, or corporate fiduciary and also designate alternates/successors. • Allows person to determine the amount and rate of compensation to fiduciaries or remove the ability of receiving any compensation. 28

DIGITAL ASSETS •

Now more than ever, digital asset planning is a critical component of any estate and business succession plan.

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Currently there is NO uniformly accepted definition of “digital assets.”

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Digital assets are not your computer, smartphones, or iPads; but rather, digital assets are the pieces of information stored on these devices, which include: ― digitally stored content ― online accounts and files stored on digital devices ― accounts maintained and managed online

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FIVE MAIN CATEGORIES OF DIGITAL ASSETS 1. Electronic Documents - stored on a digital device, in a cloud, or other software sharing platform. 2. Social Media Outlets - Facebook, Twitter, LinkedIn, Snapchat, Shutterfly, etc. 3. Financial Assets - financial information (stored on digital devices or an account maintained online; majority of people now use paperless billing and statement information), bitcoins, PayPal, Amazon, eBay accounts, and other accounts/data associated with a monetary value, etc.

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FIVE CATEGORIES OF DIGITAL ASSETS 4. Business Accounts - customer information, databases, trademarks, trade-secrets, websites, domain names, Dropbox, etc. 5. Blogs, Music, Videos - online gaming and other miscellaneous Digital Assets (iTunes, Pandora, loyalty programs, YouTube, Apple’s iCloud, etc.)

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WHY SHOULD YOU PLAN? Two of the most important reasons to plan are: 1. To ensure your wishes are followed with the management, transfer and/or disposal of your digital assets at death/incapacity; and 2. To make the transfer and/or disposal of digital assets easier upon a triggering event. Planning avoids unnecessary delays.

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WHAT SHOULD I INCLUDE IN MY PLAN? •

Plan by including provisions that address accessing digital information and digital assets in your Will and Power of Attorney.

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Prevent the loss of assets at death that can be transferred (not all digital assets can be transferred).

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iTunes, eBooks, Yahoo, Google Play, Amazon and Apple accounts, as well as other digital assets, may be subject to User License Agreements that prohibit the sharing and transfer of these assets.

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Many states have not yet enacted laws to govern the transfer and/or disposal of digital assets at death or incapacity. Technology develops much more quickly than legislation. In the last 10 years, legislation has been markedly behind the technology times.

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FEDERAL LAWS GOVERNING DIGITAL ASSETS •

Stored Communications Act (Title II of the Electronic Communications Privacy Act of 1986), which protects the privacy of the contents of files stored by service providers and of records held about the subscriber by service providers, such as subscriber name, billing records, or IP addresses.

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Computer Fraud and Abuse Act, which penalizes people who access computers and data without authorization.

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POWERS OF ATTORNEY There are several types of POAs: •

Financial

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Healthcare Power of Attorney

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Advanced Health Care Directive

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POWERS OF ATTORNEY: FINANCIAL • In New Jersey, POA’s are governed under N.J. Rev. Stat. § 46:2B-8.2, in Pennsylvania, POA’s are governed under 26 Pa.C.S.A § 5601 - 5612. • Ability to appoint primary and successor agents. • Can have limited POA’s which only allow agent to act in a specific situation or over a specific asset. • POA’s are crucial not only to an individual but also to a business owner. • If person has a general financial POA and becomes incapacitated, there is already a named a person who is authorized to handle financial or business affairs.

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POWERS OF ATTORNEY: FINANCIAL • Saves time, hassle, and money and protects assets! • PA POA laws changed on January 1, 2015 through Act 95 − Ability to delegate authority granted to the agent in the POA to another person; − Create, amend, revoke or terminate an inter vivos trust; − Make a gift; − Create or change rights of survivorship; − Create or change beneficiary designations; − Waive the principal’s right to be a beneficiary of a joint and survivor annuity, including a survivor benefit under a retirement plan; − Exercise fiduciary powers that the principal has authority to delegate; − Disclaim property, including a power of appointment. 37

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POWERS OF ATTORNEY: FINANCIAL •

Notice provisions and agent’s acknowledgement were also changed under new PA law, among other changes.

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Beware of old form documents.

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In order for document to be effective, it must be dated and signed by the principal or by another person at the direction of the principal, acknowledged before a notary, and witnessed by 2 adult individuals neither of whom is the agent named in the power of attorney, the notary, or an individual signing on behalf of the principal. These execution requirements are applicable under new law.

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In New Jersey, the execution requirements are the same requirements for a Deed.

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POWERS OF ATTORNEY: HEALTHCARE • Appoint primary and successor health care agents to have access to health care information and make health care decisions on your behalf. • In New Jersey, Health Care Powers of Attorney and Medical Directives are governed under N.J. STAT. ANN. § 26:2H-5381, and in Pennsylvania, Health Care Powers of Attorney are covered in 26 Pa.C.S.A § 5451 - 5465. • Can limit, expand or even revoke an agent’s power. • Health care providers are not always aware that a patient has a HC POA.

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POWERS OF ATTORNEY: HEALTHCARE • New Jersey: document needs to be dated, and signed by individual who has capacity and is 18 or dated and signed by another individual at direction of the principal if principal is unable to sign. Signature must be witnessed by two individuals who are not health care providers or agents of health care provider. In the alternative, document may be signed by individual and notarized. • Pennsylvania: document needs to be dated and signed by individual who has capacity and is 18 or dated and signed by another individual at direction of the principal if principal is unable to sign. The signature must be witnessed by two individuals who are not health care providers or agents of health care provider. Notary is not required, but good practice to have document notarized.

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POWERS OF ATTORNEY: ADVANCED HEALTH CARE DIRECTIVES

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POWERS OF ATTORNEY: ADVANCED HEALTH CARE DIRECTIVES • Sets forth whether principal wants to initiate, continue, withhold or withdrawal life sustaining treatment if person cannot communicate his or her own wishes, and they have an end-stage condition or are in an irreversible coma with no chance of recovery. 26 Pa.C.S.A § 5441 - 5447 • Allows a person to authorize or refuse some or all lifesustaining treatment. • Clearly spells out health care wishes. • Provides guidance for health care agent to follow if incapacitated. • Authorizes agent to follow guidance or authorizes them to make independent decisions. 42

POWERS OF ATTORNEY: ADVANCED HEALTH CARE DIRECTIVES • Can include specific wishes and provisions - unless otherwise specified, always allows for treatment to relieve pain. • Can also include provisions to allow agent to override wishes set forth on directive. • Document needs to be dated and signed by principal who has capacity and is 18 or dated and signed by another individual at direction of the principal if principal is unable to sign. Signature needs to be witnessed by two individuals who are 18 or older and are not health care providers to the principal. Notary is not required, but good practice to have document notarized. • An Advanced Directive is different from a Do Not Resuscitate Order.

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TAX STRATEGIES • Unlimited Martial Deduction and Unified Credit • New Jersey Inheritance Tax • New Jersey Estate Tax • Pennsylvania Inheritance Tax • Annual Gift Tax Exclusion • Annual Medical Exclusion • Annual Educational Exclusion • Life Insurance as a Planning Opportunity • Disclaimer Trusts

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Unlimited Martial Deduction and Unified Credit • Unlimited amount of property can pass to surviving spouse during lifetime or upon death without Federal Estate Tax or State inheritance tax consequences. • Use of marital bequests or trusts and credit shelter or bypass trusts for tax planning. • Techniques to minimize estate or inheritance taxes at death of second spouse. • Unified Credit allows any person during life or at death to transfer up to $5,450,000 free of Federal estate or gift tax. • Portability is the mechanism that allows a deceased spouse to transfer their unused exemption amount at death to the surviving spouse by making an election on a timely filed Estate Tax Return.

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NEW JERSEY INHERITANCE TAX (CURRENT LAW) • Transfer tax imposed on transferee’s right to receive a gift, devise or bequest from a decedent. • Decedent can direct that tax is paid by decedent’s estate. • Tax is determined based on the value of the property and the relationship between beneficiary and decedent. • Tax is due 8 months from the date of the decedent’s death. • Rate of taxation – varies based on class of beneficiaries. Transfers to spouse, children, and grandchildren are not subject to this tax. • Life insurance proceeds are not subject to New Jersey Inheritance tax. Other assets may also be exempt. 47

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NEW JERSEY ESTATE TAX (CURRENT LAW) • Estate tax applies only to New Jersey residents with estates in excess of $675,000. • Transfers between spouses are exempt. • Estate tax rates range from 4.8 to 16 percent on amounts in excess of $675,000. • Return and tax is due 9 months from date of decedent. • Life insurance is included for purposes of determining the tax, unless insurance is an Irrevocable Life Insurance Trust (as discussed later).

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NEW JERSEY LEGISLATIVE UPDATES

- Status on proposed legislation to repeal New Jersey Estate Tax. - Adoption of the Uniform Trust Code, effective July 17, 2016.

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PENNSYLVANIA INHERITANCE TAX • Transfer tax imposed transferee’s right to receive a devise or bequest from a decedent. A decedent can direct that this tax is paid by the decedent’s estate. • There is no PA estate tax. • Rate of taxation is based on beneficiary’s relationship to decedent. • Spousal transfers are taxed at 0% rate. • Transfers to parents, children, grandchildren, stepchildren are taxed at 4.5% rate. • Transfers to siblings are taxed at 12% rate.

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PENNSYLVANIA INHERITANCE TAX • Transfers to anyone else are taxed at 15% rate. • Tax and Return are due 9 months from decedent’s death. • Life insurance is not includable for PA Inheritance tax purposes, neither are retirement accounts if decedent had not reached age 59.5. • Gifts made within 1 year of the decedent’s death are brought back into the estate for inheritance tax purposes, less a one-time exemption of $3,000.

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ANNUAL GIFT TAX EXCLUSION • Utilize annual gift tax exclusion to slowly transfer value out of an estate over a long-period of time. • The exclusion amount in 2016 is $14,000 per individual per donee ($28,000 for a married couple). • Gift up to $14,000 per year, per person to anyone tax free and with no reporting requirements. • No limit on number of donees. • Do not have to pay gift tax on gift. • Recipients must have present interest in gift, otherwise it is considered an incomplete gift.

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ANNUAL MEDICAL EXCLUSION • Gift an unlimited amount of money to anyone for medical care. • Must ONLY be used for medical care, and payments must be sent directly to the health care provider from the donor. • No gift tax due on amounts paid and no income tax due from recipient. • No reporting requirement. • Donee must not be able to receive any reimbursements for health care, otherwise taxed on that amount. • No restriction on the number of donees able to receive gift. • Donee does not have to be related to donor. • Excellent way to reduce value of estate and provide medical care to loved ones. 53

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ANNUAL EDUCATIONAL EXCLUSION • Gift an unlimited amount of money to anyone for tuition. • Must be ONLY be used for tuition costs. • Must be paid directly to a qualified educational institution. • No gift tax due on amounts paid, no income tax due from recipient, and no reporting requirements. • No restriction on the number of donees able to receive gift. • Donee does not have to be related to donor. • Excellent way to reduce value of estate and provide educational assistance to loved ones.

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LIFE INSURANCE AS A PLANNING OPPORTUNITY • Income replacement. • Provide loved ones with security. • Can be used to equalize gifts among children. • Generally, outside of probate estate. • Irrevocable Life Insurance Trust (ILIT) – various rules to ensure value of policy is outside estate; certain trusts can qualify for annual gift exclusion. • Policies owned by an ILIT are not subject to federal or NJ estate tax, so long as the transfer of the policy to the ILIT was 3 years before the decedent’s death. Great planning tool to reduce a decedent’s NJ taxable estate. 55

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It’s okay, I’m insured!

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DISCLAIMER TRUSTS • Estate planning technique that allows a surviving spouse to disclaim part of his or her inheritance, and upon the disclaimer the assets, would pass into a disclaimer trust for the surviving spouse’s benefit. • In New Jersey, technique is generally utilized to preserve the first spouse’s exemption amount of $675,000 for New Jersey Estate tax purposes.

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DISCLAIMER TRUSTS • Surviving spouse would disclaim assets in this amount and assets go into trust in which surviving spouse is primary beneficiary and is entitled to all income from trust and typically, principal in trustee’s discretion for the spouse’s health, education, maintenance, and support. • Upon surviving spouse’s death, assets pass to remainder beneficiaries free of any additional transfer tax. • This type of trust has a lot of flexibility, as spouse does not necessarily need to disclaim his or her interest in any part of the estate and at the time of the decedent’s death the decision to do so can be evaluated.

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QUESTIONS? Jennifer L. Zegel, Esquire, LL.M Reger Rizzo & Darnall LLP Cira Centre, 13th Floor 2929 Arch Street Philadelphia, PA 19104 E: [email protected] T: 215.495.6523

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