Chapter III(a)– Reviewing the Dispositive Portions of the Will

We continue now with a review of specific areas of the will, including residuary clause provisions, unlimited marital deduction requirements, disclaimer trusts, testamentary trusts and special need trusts, if necessary.

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The next portion of the will is generally the residuary clause where the rest of the estate is left to the ultimate or contingent beneficiaries.  If one is married and taking advantage of unlimited marital deduction under the Federal and New Jersey Estate Tax Laws, the rest residue and remainder of the estate is often left to the spouse.  However, that provision may be subject to certain conditions including a disclaimer or credit shelter trust created as a “tax shelter” to hold the deceased spouse’s estate tax exemption.  How this applies depends on individual financial circumstances and the status of the ever evolving estate tax laws.

Under the present laws of the State of New Jersey, the estate tax exemption is $675,000.00 and if not used is not portable.  “Portability” means that the second spouse to die can utilize both spousal exemptions upon death.  In contrast, the Federal estate tax exemption exceeds $5,000,000. The Federal estate tax exemption is in fact portable.  If not used by the first spouse to die it can be utilized by the surviving spouse.  However, the portability rules can be complex especially in the case of a subsequent marriage.

All assets left to a spouse pass estate tax free under what is called the “unlimited marital deduction.”  In order to qualify for the unlimited marital deduction certain requirements must be met.  First, you must be married in the traditional sense or some other recognized marital, domestic partner or civil union.  Not all nontraditional unions are accepted in all jurisdictions and treatment may be different both on the Federal and State levels.  It should be noted that there is no common law marriage in New Jersey.  In addition to your relationship matching one of the various approved methodologies for the marital deduction, the “spouse” must also be a U.S. citizen.  The property left to the spouse must be given outright or in a qualifying trust, such as a Qualified Terminable Interest Property Trust (QTIP).  QTIP trusts will be discussed in detail in a future installment. Even if you were leaving property outright to your spouse, you may want to consider including provision for the spouse to disclaim for additional tax planning purposes that may be unforeseen.

If a spouse is not a U.S. citizen, then the spouse is not eligible for the unlimited marital deduction and only the amount of the general estate tax exemption would apply.  In order to qualify for the exemption, a Qualifying Domestic Trust (QDOT) is utilized in order to make sure that the unlimited marital deduction is applied. The details of a QDOT will also be discussed in a future installment.

If and in the event your spouse should disclaim assets to a disclaimer trust, or you place assets in a credit shelter trust or a bypass trust in order to use the New Jersey exemption, the trust is subject to certain rules for qualification.   For purpose of New Jersey, the value of the assets should not exceed $675,000.00.  We often recommend that clients fund the trust by passing assets to the spouse and letting the spouse disclaim the assets so that the spouse can select among the assets which may be most advantageous for the spouse to retain or place in a trust for the future beneficiaries.

From a planning perspective, the goal and structure of the disclaimer or bypass trust is to ensure the property earmarked for the trust does not qualify for the marital deduction in the estate of the first spouse to die, yet may provide the surviving spouse with as much access to the assets as possible.  To accomplish this the surviving spouse is given certain rights and privileges over the assets, but not absolute ownership or absolute control.  Giving too much control to a surviving spouse would leave the assets vulnerable to inclusion in the surviving spouse’s estate, defeating the purpose of the trust.  The surviving spouse may be entitled to certain interests in the disclaimer trust or credit shelter or bypass trust without causing the trust assets to be included.  It may include a non-cumulative right to withdraw the corpus of the trust up to $5,000.00 or 5% annually and a right to all income. Most typically the surviving spouse will receive the income from the trust for life and allow the remaining portion of the trust to accumulate for the benefit of the eventual beneficiaries more likely than not the children of the couple.  This distribution of income from the trust may also help with income tax issues which are not covered here.

The next provision within the residuary clause of the will usually states the eventual beneficiaries in the event a spouse has predeceased the testator, there is no spouse or as is often the case in second marriages, property is being left to other beneficiaries.  These beneficiaries are often called “contingent beneficiaries.  The distribution of property to these beneficiaries are subject to Federal and New Jersey estate tax. Any bequest to these beneficiaries may also be subject to New Jersey Transfer Inheritance Tax if the beneficiaries are not descendants, parents or grandparents of the testator.

If any of the beneficiaries to receive assets are under the age of 18 or specific ages otherwise provided, a testamentary trust may be utilized to hold the assets that would otherwise go to the individual for management for the individual beneficiaries’ benefit.  In New Jersey, the age of majority is 18 years old.  Notwithstanding the age of majority, one may provide any age over 18 or any other contingency for outright distribution of the corpus.  This may include protecting a beneficiary who has a substance abuse problem, marital issues or a disability.

The testamentary trust holds the assets until the person reaches proscribed age or ages of distribution or other triggering event, except for most common exceptions such as health issues and education.  The terms and conditions of the trust should be scrutinized to determine whether or not they are too restrictive at the review amending the will.  The trust can be adjusted from time to time.  The purpose of this trust is to exercise control over the way in which a minor or someone else incapable of managing their own money spend their inheritance.

The age of distribution should be one of the issues reviewed during an annual review.  There is no magic about the ages selected and whether someone is financially responsible.  It is based upon the individual traits of the beneficiary.

Finally, in reviewing your will you should determine whether or not your will should contain a special needs or supplemental needs trust (SNT) if it does not have one already.  A SNT is formed in the event one of the beneficiaries of the estate has become disabled or is a recipient of government benefits.  This trust allows the beneficiary to receive certain benefits from estate while not being disqualified from government benefits.  We believe this is an important part of every document that is prepared for individuals.  How a SNT works will also be discussed in a future installment.

This has been a general overview of the dispositive portion of your will.  In our next installment, we will move on to the fiduciaries, such as trustees, executors and guardians who will be the people you will select in your will to carry out your wishes and effectuate your plan.