Underestimating Exposure to Estate Taxation

Often people do not believe they are worth enough to be subject to Federal
Estate Taxation. If your estate is larger than $1,000,000, the estate tax
begins at 41 percent! It is common to hear a person undervalue real estate,
especially in this portion of the country (Bergen and Passaic counties in
New Jersey rank as the 6th most expensive residential areas in the United
States, with 20 percent appreciation per year). Also, life insurance, IRA’s
and the value of your business must be considered.

Not Balancing Ownership of Assets

Too often people own most of their assets jointly. At the death of the first
spouse, all
assets pass directly to their surviving spouse. If all assets are held
jointly, one Unified Credit may be lost—that’s a $345,00 loss and mistake!
Choosing The Wrong Executor or Trustee

Frequently a person wants to choose a friend or family member. The jobs of
Executor and Trustee are very critical; numerous fiduciary obligations must
be performed, and performed correctly. Is your chosen fiduciary competent
and willing? More importantly, the person appointed to a fiduciary position
should be asked??
Wrong Beneficiary and Distribution Elections of Retirement Plans

A retirement plan is subject to estate taxation (when the unified credit is
met), then the remaining funds are subject to Income Taxation; this could
represent a 50 percent Estate Tax exposure in addition to a 38.6 percent
Income Tax. Please review the website “Article“ published May 14, 2001
addressing IRA Income Distribution Rules.

Owning Life Insurance

Many times people purchase life insurance “dedicated” to pay estate
taxation. While this may represent a wise method of “paying the bill”, too
often people fail to realize that the same life insurance will be subject to
estate taxation. If the life insurance proceeds become an asset of the
estate, the same life insurance intended to “pay the bill” just increased
the bill. Also, having the life insurance policy owned by the other spouse,
results in keeping the policy proceeds out of one estate while assuring that
the proceeds ARE INCLUDED in the surviving spouse ‘s estate and therefore
subject to Estate Taxation. The best method of assuring that the proceeds
are not included in the estate of either spouse is the use of a “third
party”—a Life Insurance Trust. An Irrevocable Life Insurance Trust can
provide for the “other spouse”, pay estate tax bills, and provide for
beneficiaries without any Estate Taxation.
Lack of Estate Planning Documentation

Not addressing the subject of Death or Disability, or perhaps
procrastination, results in not having the necessary documentation, this is
exactly what the IRS wants, 70 percent of the people in this country die
without a will!! Too often the estate planner prepares the Trust but it is
never funded. The estate plan should include, but not necessarily be limited
to, the following documentation: Will, Trusts, Durable Power of Attorney,
Health Care Proxy. As an estate becomes more complex, or if the desire is
to aggressively remove assets from Federal Estate Taxation exposure,
additional documentation may be required, possibly the use of a Qualified
Personal Residence Trust would be appropriate.
Lack of Liquidity

Whether federal or not, every estate will have some expenses to honor.
Providing liquidity for the estate can be accomplished in many ways; a
frequently used method of generating liquidity is the life insurance policy,
sometimes the “second to die” policy is appropriate. Unfortunately, the
estate plan that does not address this issue results in liquidation “sale”
of perhaps the wrong assets within the nine month “window” to settle the
estate and file the Estate Tax Return.

Loss of Tax Credits and Gifting
Too many people do not realize that an UNLIMITED amount of gifts can be made
every year up to $11,000 per recipient. This gifting ability is in addition
to the utilization of the “unified credit” or “exemption amount” that
permits the transfer of $1,000,000 without estate tax or gift tax
consequence during the calendar years 2002 and 2003. The “exemption amount”
or “unified credit” can be used either during life or at death. Remember
however that taxable gifts made within three years of death will be
“returned” to your estate and taxed accordingly.
Need for a Master Plan, and Keeping it Current
Stale documents are dangerous! Unfortunately, stale documents cost too much
in tax dollars. It is wise to have your estate plan reviewed every two
years, as well as every time the estate tax laws change—REMEMBER OUR PRESENT
LAW CHANGED JANUARY 1st OF THIS YEAR!! Also, it is wise to review your
estate plan as changes occur in your health as well as family life; a change
of intention means a possible change of documentation. When “changes” occur
which are not addressed in estate planning, the wrong person “inherits” the
wrong property, and this can lead to very expensive litigation.
Courtesy of: Steven W. Tarta, Attorney at Law. 45 N. Broad Street Ridgewood, NJ 07450 PHONE 201-444-8448 E-MAIL: TARTALAW@ATT.NET Fax 201-612-0827Please be sure to check out www.tartalaw.com for estate planning learning center information.

Based on California Law

Our office is commonly asked whether a contractor who files an action to foreclose on a mechanic’s lien can recover his attorneys fees against the owner of the property if he prevails at trial. There is a distinction in the type of cases where a contractor seeks to foreclose on a mechanic’s lien. Where the contractor has a direct contract with the owner, that contract may contain a provision for the recovery of attorneys fees. In that case, the contractor may obtain an award of attorneys fees for prevailing on the breach of contract action, but not on the mechanic’s lien action. It may appear that the contractor is getting his attorneys fees because it is all part of the same action, but the attorneys fees award is on the contract. A mechanic’s lien is an action against property for the value of the improvement. The claim on the contract is not secured whereas the mechanic’s lien is secured by the property.

The more common scenario where the issue arises is where a subcontractor or a material supplier files suit on a mechanic’s lien because that person or entity was not paid by the subcontractor or contractor with whom they have a contract or purchase order agreement. The supplier or subcontractor may be suing the owner because the person that they have a contract with is insolvent, has filed bankruptcy, or has nothing. That lawsuit is against the property; there is no right to attorneys fees.

The mechanic’s lien is limited to the reasonable value of the labor, services, equipment or materials furnished, or the price agreed upon by the lien claimant and the person with whom he or she contracted, whichever is less. That statutory language does not include attorneys fees.

If he or she prevails, the mechanic’s lien claimant is entitled to interest from the date of the lien being recorded, as well as certain “costs” which are nominal, and typically only include court fees, court reporter’s fees, etc., and not attorneys fees. The claimant is entitled to the interest and costs not because of the lien action but because he or she is a successful litigant. Anyone successful in a lawsuit is entitled to these nominal costs and interest if the sum was capable of being determined. For example, the interest you would be entitled to is the legal rate of interest (currently 10 percent), and not the rate of interest in your contract.

The reasoning for not allowing attorneys fees to be recovered is that the mechanic’s lien claim is against the property, and is limited to the amount that the property was improved by the lien claimant. It is not based on the contract. Therefore the only amount that can be charged against the property is the “improvement” of the property. Attorneys fees do not improve the property, but bricks and mortar do.

The presentation and/or documents are of a general nature and are intended to highlight areas of the subject matter and should not be used as a substitute for specific legal advice. You should seek the aid and advice of a competent attorney and/or accountant instead of relying on the presentation and/or documents.

Your fiduciary is an integral part of your estate plan. Who should you appoint to coordinate your affairs upon incapacity or death? Consider these questions when making the selection:

What are the responsibilities of my fiduciary? The fiduciary you select should be capable of handling the responsibilities of the appointed role. Personal Representatives and Trustees are charged with the duty of gathering your assets, satisfying your liabilities and distributing your estate among your beneficiaries.

In safeguarding your assets, fiduciaries must make prudent financial decisions. The complexity of such decisions depends upon the nature of your assets. For example, a closely held business is a more difficult asset to manage compared to a portfolio of marketable securities. Select a fiduciary knowledgeable enough to handle your specific assets.

How long will my fiduciary be required to act? The Personal Representative’s role (Executor/Executrix) is a short-term one, while that of the Trustee is long-term. A trust can last for many years and span several generations.

It may be sufficient to name a certain fiduciary as your Personal Representative due to the limited nature of that role, while another fiduciary may be better suited to act as your Trustee.

Who are the beneficiaries of my estate? Are there any special family circumstances to consider?

Your family dynamics can impact your fiduciary selection. Your fiduciary must be able to communicate effectively with your beneficiaries. Your fiduciary should also show fairness and impartiality when beneficiaries have conflicting interests. If you foresee potential conflicts among beneficiaries, it is wise to select a fiduciary immune to such tensions. Consider the potential difficulties you may impose upon a neutral family member or friend.

Will my fiduciary charge a fee for its services? If you appoint a professional fiduciary, review their fee schedule carefully. Family members or friends sometimes forego taking such fees, also, these fees are subject to income taxation.

What personal considerations do I have for selecting my fiduciary?

The selection of a family member or friend as your fiduciary may be tempered by personal goals. Do you wish to give your spouse an important role in the handling of your affairs? Do you wish to show your confidence in your child’s abilities?

An estate plan is designed to express your personal wishes, and your fiduciary selection can reflect those wishes as well. However, personal considerations should be weighed carefully against other relevant factors.

Consider appointing a family member or trusted friend as a co-fiduciary to act with a well suited individual or professional fiduciary.

Is my selected fiduciary willing to serve? Most importantly, determine if your selected fiduciary is willing to serve as such. The task of a fiduciary can be complex and time consuming. Your fiduciary should be willing to undertake the responsibility of handling your affairs. Discuss the appointment with your chosen fiduciary. A begrudging Personal Representative or Trustee does not make the most effective fiduciary.