It has been a routinely held belief among estate planners that a Revocable Living Trust is not necessary for New Jersey residents. The purpose of this article is to identify those situations in which a Revocable Living Trust can be beneficial for residents of New Jersey.
Most commonly, we hear that assets held in a Revocable Living Trust during one’s lifetime, will, at the time of death, avoid probate. Fortunately for New Jersey residents, probate is not an onerous, time-consuming, or expensive prospect. The probate process in New Jersey, which gives legal significance to the will and clothes the executor with court-approved authority, is a straightforward process often costing less than $300 and requiring little paperwork. It takes about two to three weeks to obtain Letters Testamentary, which formally authorize the executor to transact business on behalf of the estate. Other reasons often cited as benefits of a Revocable Living Trust (RLT) are privacy regarding one’s estate, and the elimination of death taxes. These reasons do not apply in New Jersey, because our probate process does not require an inventory disclosing estate assets, nor an accounting with the court listing estate income, expenses, and distributions to the beneficiaries. As for the assertion that RLTs save death taxes, this is simply not true, as all assets in an RLT are considered to be in the control of the grantor (the person who created the trust), and therefore includible in the grantor’s taxable estate.
There are, however, circumstances where an RLT is appropriate for a New Jersey resident. For example, an RLT can be a better way to:
- allow for management of assets without the need to rely on the agent named in a durable power of attorney
- hold title to real estate in another state
- seamlessly handle the investment and distribution of assets after death
- provide lifetime trusts for family members
A comparison of powers of attorney to Revocable Living Trusts reveals many advantages to the RLT. A Revocable Living Trust is often a better way to handle the assets of someone who has become mentally incapacitated. Given the potential of potential of financial elder abuse, it can be difficult for the agent under a power of attorney to convince a bank to recognize the legitimacy of the agent, whereas trustees usually do not suffer the same kind of challenges.
When creating an RLT it is important that the trust be funded soon after it is signed. In the event of a crisis a funded RLT provides a smooth transition from the grantor as initial trustee to the successor trustee named in the trust document. Typical assets to be placed in the name of the RLT are bank and brokerage accounts. This author is of the opinion that New Jersey real estate can stay in the owner’s name in case it is sold while the owner is alive and retirement accounts and annuities must stay in the owner’s name to avoid adverse income tax consequences.
RLTs are also advisable when the plan creates a trust that will last beyond the current generation. While a trust for your spouse will usually not require a trustee change, a trust that will last for a child’s lifetime means a trust that could last for 50 or more years. In that case, life events will often necessitate appointment of successor trustees. It is acknowledged that an appointment of a successor trustee can be accomplished in trusts created under a will (referred to as “testamentary trusts”). However, the parties must go before the Surrogate’s Court to formalize the resignation or removal of a currently serving trustee and secure the appointment of a successor trustee. The RLT, on the other hand, can provide an informal means for one trustee to resign or be removed, and the appointment of a successor, without the need to go to Court.
Ownership of real estate located outside of New Jersey is another indicator of the need for an RLT. Probate in states such as Florida and New York is not nearly so user friendly as in New Jersey. Under the laws of our country, generally, the disposition of real property is governed by the law of the state where it is located. So, a New Jersey estate owning a condo in Florida will necessitate Florida probate, which can be time-consuming and expensive. Therefore, when there is out-of-state property owned by a client, we often recommend use of a RLT in order to avoid probate in that state.
Lastly, a Revocable Living Trust is advantageous in New Jersey where the estate must obtain a tax waiver in order to fully distribute assets. It is acknowledged that the majority of NJ estates pass to a spouse, children or more remote descendants and, therefore, the tax waiver requirement for financial assets is replaced by a self-executing waiver, Form L-8, a quick and easy solution. However, where there are beneficiaries who will cause New Jersey inheritance tax, such as siblings, nieces and friends, commonly referred to as Class C or D beneficiaries, the Form L-8 will not suffice. In those cases, at least half of the accounts will be frozen until the tax returns are filed and the estate is audited. This can take many months. If, however, assets are held in a RLT and the grantor dies, tax waivers are not required, even when the estate passes to a Class D beneficiary.
Note that even when a RLT is advisable, a last will and testament should always be prepared as well. Sometimes a grantor has not transferred all assets to the RLT during life, or there are unforeseen or forgotten assets. In those cases, the will ensures that all assets are transferred to the RLT so that the estate plan expressed in the RLT will be carried out.