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Basis Considerations in Lifetime Gift Planning in New Jersey

Published on: January 11, 2017 | by Lindabury, McCormick, Estabrook & Cooper, P.C.

A previous article appearing in Planning Matters discussed the use of lifetime gifts to reduce New Jersey estate taxes. The article pointed out that although there can be advantages to lifetime gifts, there are situations where embarking on a lifetime gifting program in New Jersey is ill-advised. This article will address some of those circumstances where lifetime gifts will not result in a tax benefit.

The starting point for this discussion is the income tax concept of basis. Basis is relevant for determining the gain realized from the sale or other disposition of property for capital gain tax purposes.[1] In general, the basis of property is the cost of the property to the taxpayer.[2] There are special rules with respect to basis where property is acquired by lifetime gift and where property is acquired from a decedent.

In the case of property acquired from a decedent’s estate, Section 1014 provides the general rule that the basis of property in the hands of a beneficiary is the fair market value of the property at the date of the decedent’s death. This concept is oftentimes referred to as “stepped-up basis” because the taxpayer receives a free step-up in basis to the value of the property at the time of the decedent’s death without being subjected to the payment of a capital gain tax.[3]

Court Puts The Brakes On New Overtime Regulations

Published on: November 28, 2016 | by Lindabury, McCormick, Estabrook & Cooper, P.C.

By now, most employers had already implemented or were posed to implement the United States Department of Labor’s (DOL) new overtime rules aimed at swelling the ranks of employees eligible for overtime payments. The rule increased the salary threshold to qualify for the executive, administrative or professional overtime exemptions from $23,660 to $47,476 per year. As a consequence, employers were faced with the prospect of many employees who were previously exempt from overtime requirements being overtime eligible when the rule were scheduled to go into effect on December 1, 2016.

However, in a surprise 11th hour development last Tuesday, a Judge in the U.S. District Court, Eastern District of Texas issued a national preliminary injunction staying implementation of the new DOL rules. The injunction is not a permanent injunction, but merely preserves the status quo until the court can review the merits of arguments by the challenging parties that the DOL overstepped its authority in raising the salary basis test for exemption. Pending a further decision from the Eastern District or an appellate court, employers need not comply with the new salary requirements. While employers generally champion the ruling, the DOL is expected to file an appeal.

What’s an employer to do? For those employers who had yet to take final steps aimed at meeting the new overtime requirements, further action should be delayed until this issue winds its way through the courts. Unfortunately, in anticipation of the regulations many employers notified salaried staff that going forward they would be paid on an hourly basis and be overtime eligible, or alternatively, bumped up the salary of key employees to meet the increased salary basis and preserve the overtime exemption, actions that may not be readily reversed by the employer. Employers should consult with employment law counsel for further guidance on this new development. In all cases, employers cannot assume that the new overtime rules are permanently shelved, and should have a compliance plan in place should the new regulations be revived.

Breaking Up Your Company: Why Shareholder Disputes Take Place

Published on: November 28, 2016 | by David R. Pierce

What is a shareholder dispute or, in other words, shareholder oppression? The terms “shareholder dispute” and “shareholder oppression” are short hand references to business disputes between two or more owners of closely held businesses. Although the phrases both refer to “shareholders” they are used interchangeably by most people to refer to disputes between owners of not only corporations, but between owners of partnerships and limited liability companies. There are important distinctions between the various business entities that can be used, but those are beyond the scope of this introduction.

In a closely held business there are often several shareholders/partners who decided to go into business together. They can be relatives, close friends or even just business acquaintances who realized that they could combine their efforts and make a go of a new business. In many cases there is an inside partner and an outside partner. The inside partner typically is responsible for the production and fulfillment operations of the business while the outside partner is responsible for promoting the business and securing orders for the businesses goods and/or services. Sometimes a business is started by one person with a vision, but they want to share their success with others who have helped them out, when the business founder decides that he or she wants to give those individuals a chance to share in the growth and prosperity of the company, they do so by giving them stock in the company. Other times the founder opens up the ownership of the business to others in an effort to raise capital to help take the business to the next level. Whichever scenario, or even any other scenario that hasn’t been mentioned, there is the very real potential for disputes to develop over, among other things, the management of the business, the direction of the business, the level of effort being expended by owners, the compensation being paid or lack of profits to distribute.

Any of these disputes can blossom into full-fledged, to the death litigation contests, pitting partners, and their respective wills, against each other. Often times the dispute erupts over perceived slights or resentment that has festered beneath the surface for months or even years. These disputes can, and do, usually lead to the breakup of the business relationship. One owner may be compelled to sell his or her interest to the other owner at a price determined through a valuation process. In rare cases the sale of the business to a third party may be forced.

Alimony Statute Amendments From 2014 Can Be Applied To Divorces Finalized Years Earlier

Published on: November 7, 2016 | by James McGlew, II

Today’s current economic reality is one of great uncertainty, especially when it comes to employment. Employees who could count on receiving an annual cost of living adjustment or performance bonus no longer have that luxury, nor the security that their years of experience and training will translate into an equal or higher-paying position should they lose their job. These realities of employment cut across the entire New Jersey labor market, yet they have an even deeper impact when faced by divorced individuals with existing alimony obligations.

Alimony, which is sometimes referred to as spousal support or maintenance, is defined as the obligation upon one spouse to provide financial support to his or her spouse before or after marital separation or divorce. In 2014 the New Jersey Legislature passed, and the Governor signed, an alimony reform bill which “modernized” how alimony awards are to be calculated. One change in the new alimony statute deals with how judges can interpret cases where the payor of alimony attempts to lower or all together eliminate their alimony obligations due to job loss.

Recently, a Superior Court judge in New Jersey rendered a decision effecting thousands of divorced spouses in our state. The judge’s ruling confirmed for the first time that the 2014 alimony overhaul would not just apply to individuals divorced since the revisions were enacted two years ago, but to all divorced individuals currently paying or receiving alimony.

Recent Changes to New Jersey Estate Tax

Published on: October 31, 2016 | by Anne Marie Robbins and Lindabury, McCormick, Estabrook & Cooper, P.C.

On October 14, 2016, Governor Christie signed a bill that raises the gasoline tax 23 cents per gallon, effective November 1, 2016. There will also be a reduction in the sales tax from 7% to 6.625%, to be phased in over two years.

Other provisions of the new law have an impact on New Jersey estate and income taxes. Specifically, the New Jersey estate tax exemption will increase, effective January 1, 2017, from its present $675,000 to $2,000,000, with a complete elimination of the New Jersey estate tax slated to be effective January 1, 2018. Note that these changes are to the New Jersey estate tax regime; the New Jersey inheritance tax, which applies to gifts to persons other than spouses, direct descendants, and direct ancestors, was not changed and remains effective at rates of 11% to 16%.

The effect of the change to the estate tax law is that New Jersey taxpayers will be able to shelter more of their assets from taxation. While gifts to spouses at death do not bear tax under either New Jersey or federal law because of the unlimited marital deduction (for U.S. citizens), the new law means that upon the death of the second spouse, with appropriate planning a married couple will be able to shelter from the New Jersey estate tax up to $4 million of assets for their descendants. The federal estate tax exemption, also called the Basic Exclusion Amount, is much higher and is indexed for inflation. That exemption stands at $5.45 million per taxpayer in 2016, increasing to $5.49 million in 2017.

Equitable Defenses for Spill Act Liability Other Than God, War or Sabotage

Published on: October 19, 2016 | by David R. Pierce

A New Jersey Supreme Court decision in 2015 settled the uncertainty regarding whether the statute of limitations was a valid defense to liability under the Spill Compensation and Control Act, N.J.S.A. 58:10-23.11, et seq. (the “Spill Act”). The Court in Morristown Assoc. v. Grant Oil Co., 220 N.J. 360 (2015) concluded that the statute of limitations did not act to bar such claims. This was based upon the fact that the statute of limitations was not one of three permissible enumerated defenses to Spill Act liability set forth in the Act itself. N.J.S.A. 58:10-23.11g(d). The Spill Act specifies that the only permissible defenses to liability are: 1) an act of God, 2) war, and 3) sabotage. Id.

This Supreme Court decision gave parties seeking contribution for cleanup costs under the Spill Act a powerful weapon in that they could bring their contribution claim against other responsible parties at any time, even many years later. A recent trial court decision, however, provides hope that despite the limiting and strict language of the Spill Act, various equitable defenses may still be applied to defeat a claim for contribution under the Spill Act under certain circumstances. 22 Temple Ave., Inc. v. Audino, Inc., BER-L-9337-14, 2016 N.J. Super. UnPub. LEXIS 2226 (Law Div. Oct. 5, 2016).

In 22 Temple, the trial court ruled that the plaintiff’s Spill Act contribution claim against the defendant was barred by the doctrine of laches, notwithstanding the fact that laches is not one of the three permissible defenses enumerated in the Spill Act. Id. The doctrine of laches is an equitable defense that is a creation of the common law used to bar claims when the claimant has unreasonably delayed asserting its claim and that delay has prejudiced the defendant, most commonly by making it difficult or impossible for the defendant to mount a fair defense through the loss of evidence and/or witnesses.

A “SEP” in the Right Direction, Part 1

Published on: October 19, 2016 | by Lindabury, McCormick, Estabrook & Cooper, P.C.

Why in the aftermath of a chemical accident does the government seek enormous cash penalties for accident prevention, when instead they could do more to reap the benefits of improving the environment and the communities surrounding an incident, and at the same time the government could be more proactive in avoiding future environmental problems?

The EPA has provided the ideal vehicle to address the avoidance of environmental harm in the guise of Supplemental Environmental Projects (SEPs). A SEP is an environmentally beneficial project or activity that is not required by law, but that a defendant agrees to undertake as part of the settlement of an enforcement action. A violator may pay a reduced cash penalty amount, but rather than simply writing a big check, they invest the would–be penalty amount in the affected community. The SEP shifts the focus toward a model where the offender works to right the harm caused by their actions. Environmental violators are encouraged to consider SEPs in communities where there are environmental justice (EJ) concerns. EJ is defined as the equitable distribution of environmental risks and benefits. EPA has always been keen to address harms done to communities disproportionally burdened by exposure to pollutants.

After a chemical accident, it makes logical sense to seek to repair the harm done to the community and to obtain measurable benefits ― by seeking to facilitate quicker and more efficient responses associated with emergency events; by seeking to provide technical support to the impacted community; by developing plans to respond to releases associated with emergency events and by working to enhance local coordination with emergency responders. If using a SEP can be viewed as a vehicle designed to make an aggrieved community whole, and if a particular SEP can enable a community to feel better equipped to handle an impending disaster, then why shouldn’t a SEP be the premier mitigation tool in the enforcement arsenal, and the preferred tool to a large cash penalty.

New Jersey Bill Would Prohibit Employers From Inquiring Into Compensation History

Published on: October 14, 2016 | by Lindabury, McCormick, Estabrook & Cooper, P.C.

Earlier this month, the New Jersey State Assembly reviewed Assembly Bill 4119 (“A-4119”), which would amend the New Jersey Law Against Discrimination to prohibit employers from seeking compensation history from prospective employees. The purpose of A-4119 is “to strengthen protections against employment discrimination and thereby promote equal pay for women[.]”

Specifically, A-4119 provides that an employer may not seek the salary history of a prospective employee until an offer of employment is extended to the candidate. The Bill further prohibits an employer from requiring an employee to disclose information about either his or her own wages, including benefits and other compensation, as well as the wages of any other employee. Additionally, A-4119 provides that an employer may not require that a prospective employee’s wage or salary history meet any minimum or maximum criteria as a condition of being interviewed or as a condition of being considered for an offer of employment. Under A-4199, an employer is prohibited from taking any retaliatory action against an employee or candidate based upon compensation history or any employee’s opposition to a request for salary information.

The Bill, however, does not prohibit prospective employees from volunteering compensation history provided that the disclosure is not coerced by the employer. An employer may only confirm or permit a candidate to confirm compensation history after making an offer of employment.

Child Support – How New Jersey Courts Calculate and Modify Support Obligations

Published on: October 14, 2016 | by James McGlew, II

In New Jersey, child-support is defined as a financial payment from one parent to the other to provide for the needs of their child or children. Child support is the right of every child and neither spouse can waive this responsibility. All parents regardless of their marital status have an obligation to support their children until they are deemed emancipated.

In most instances, the amount of child support to be paid is calculated by using New Jersey’s Child Support Guidelines. Income information is exchanged between the parents and this data is used in combination with factors such as the number of children, percentage of non-custodial parenting time and other prior child support obligations, to determine the amount of child support that is to be paid weekly. The Guidelines take into account the amount of funds necessary between the two parents to cover the basic needs of the children including, but not limited to, their food, shelter, healthcare and clothing expenses.

Child support obligations will remain in place for many years. Child support is not terminated automatically and may continue longer based on extraordinary circumstances such as the special needs of a child. As such, a common aspect of many divorce agreements is an agreement between the parties for the use of a “COLA” which is an acronym for Cost-of-Living Adjustment. This procedure automatically raises child-support awards every two or three years, the specific details of which are negotiated and agreed to before any final divorce judgment is entered. The purpose of a COLA is to keep the child support award’s value current due to inflation. If child support is payable through the Probation Department, parents are often contacted directly regarding the implementation of a cost of living adjustment.

Lifetime Gift Planning in New Jersey

Published on: October 13, 2016 | by Lindabury, McCormick, Estabrook & Cooper, P.C.

New Jersey has been widely recognized as among the more onerous states in terms of transfers at death. While federal and state death tax laws have been loosened over the past many years so as to exempt more and more people from estate and inheritance taxes¹, New Jersey has not been among them. New Jersey’s estate tax exemption stands at $675,000 per person. By contrast, the federal estate tax exemption is currently $5,450,000 per person² ; the New York estate tax exemption is currently $4,187,500 (rising to the federal exemption level in 2019); the Connecticut estate tax exemption is $2-million; and Florida has no estate tax at all.

The federal estate tax regimen encompasses both lifetime gifts and death-time transfers. The federal estate tax exemption is reduced by taxable gifts made during lifetime. For example, an individual making a taxable gift of $100,000 in 2016 would reduce his or her federal estate and gift tax exemption by that amount, leaving a remaining federal estate and gift tax exemption of $5,350,000. An individual making a taxable gift during lifetime does not incur a gift tax liability for federal purposes until the entire federal exemption is exhausted. In 2016, that means one would have to make taxable gifts in excess of $5,450,000 before a gift tax becomes payable. This unified estate and gift tax structure for federal purposes does not differentiate between lifetime and death-time transfers, and consequently for gifts of equal value up to the maximum federal exemption amount there is no intrinsic benefit of a lifetime gift over a death-time transfer³.

In contrast to the federal estate and gift tax regime, New Jersey imposes a tax only on death-time transfers. For policy reasons that are not entirely evident, New Jersey does not impose a tax on lifetime gifts⁴. This anomaly between the federal and New Jersey tax structures offers a planning opportunity in a number of situations. An example will illustrate the point. Assume that an unmarried individual has a taxable estate with a value of $2-million and that the beneficiaries are children of the individual. Given the federal exemption of $5,450,000, there is no federal estate tax liability, regardless of the identity of the individual beneficiaries. For New Jersey death tax purposes, inasmuch as the beneficiaries are children of the individual, the New Jersey inheritance tax is inapplicable, and the only tax of concern is the New Jersey estate tax. The New Jersey estate tax on a taxable estate of $2-million is $99,600.