Governor Christie Signs Uniform Fiduciary Access to Digital Assets Act into Law

On September 13, 2017, Governor Chris Christie signed into law New Jersey Assembly Bill A-3433, otherwise known as the Uniform Fiduciary Access to Digital Assets Act (“UFADAA”).  The Act becomes effective ninety days after the Governor’s enactment and applies to those persons who are residents of the State of New Jersey or who resided in the State of New Jersey at the time of their death.  The Act permits certain fiduciaries to access the “digital assets” of the user for whose estate the fiduciary is administering.

The Act defines “digital assets” as “…an electronic record in which an individual has a right or interest.  The term does not include an underlying asset or liability unless the asset or liability is itself an electronic record.”  The term “fiduciary” as used in the Act is defined as “…an original, additional, or successor personal representative, guardian, agent, or trustee.”

The Act permits a user (who, in practical application, will be a decedent, the ward of a legal Guardian, the Principal of a grant of authority under a Power of Attorney, or a settlor or beneficiary of a Trust) to direct a custodian of a digital asset (for example, an email provider) either through the use of a custodian provided online tool or through a Will, Trust, Power of Attorney, or other similar record, to disclose or not to disclose to a designated recipient some or all of the user’s digital assets, including the content of electronic communications.

A fiduciary can gain access to the content of a user’s electronic communications (such as email) via express consent by the user in their Will, Power of Attorney, Trust Agreement, or similar writing, or by Court Order.  A fiduciary can gain access to a catalogue of electronic communications sent or received by the user and digital assets, other than the content of electronic communications, if the user has not prohibited such disclosure or if the Courts have not directed otherwise.  The fiduciary is obligated to maintain a duty of loyalty, care, and confidentiality in the management of a user’s digital assets and, among other restrictions, may not use his or her authority to impersonate the user.

The adoption in New Jersey of UFADAA is an important step in recognizing the significance of the use of technology in our everyday lives and modernizing the administration of estates in this State.  Individuals and practitioners would be wise to include a discussion about the administration of digital assets as part of their broader estate planning conversations, and adopt language granting, restricting, or prohibiting access by a fiduciary to digital assets as appropriate.

For more information or if you have any questions about the New Jersey estate tax, please contact Judson M. Stein, Chair of the Trusts & Estates Practice Group, at 973-230-2080 or or Lauren M. Ahern, Associate in the Trusts & Estates Practice Group.

IRS Clarifies “Grantor Trust” Definition in Bankruptcy and Insolvency Settings

       The IRS has issued final regulations clarifying the definition of grantor trusts within the context of the bankruptcy and insolvency exclusions for cancellation of debt (COD) income.   COD income is includable in gross income; however, the Code provides for a number of pertinent exclusions. For example, gross income does not include any amount which would otherwise be includible in gross income by reason of the discharge of indebtedness of the taxpayer if the discharge occurs during bankruptcy or to the extent the taxpayer is insolvent. The terms “indebtedness of the taxpayer,” “Title 11 case,” and “insolvent” are all defined using the term “taxpayer.” The Code broadly defines a “taxpayer” as any person subject to any internal revenue tax.

       Notably, a grantor trust is any part of a trust that is treated as being owned by the grantor or another person. All items of income, deductions, and credits attributable to the trust are includable in computing the owner’s taxable income and credits. For example, a parent may create a grantor trust for estate and succession planning. Where the parent is the grantor, the parent reports the grantor trust’s income on their own Form 1040. Stated another way, the grantor and their own trust are considered the same economic unit.

       Nevertheless, some taxpayers have taken the position that the bankruptcy exception is available if a grantor trust or disregarded entity is under the jurisdiction of a bankruptcy court, even if its owner is not. Similarly, some taxpayers maintain that the insolvency exception is available to the extent a grantor trust or disregarded entity is insolvent, even if its owner is not. The taxpayers argue that because, for Federal income tax purposes, the disregarded entity is disregarded and the “taxpayer” is the owner of the disregarded entity’s assets and liabilities, the owner is properly seen as being subject to the bankruptcy court’s jurisdiction, or being insolvent, even though, technically, they are not.

       The IRS has rejected this position and now clarifies in the final regulations that when applying the bankruptcy or insolvency exceptions to the discharge of indebtedness income of a grantor trust or a disregarded entity, the term “taxpayer,” refers to the owner(s) of the grantor trust or disregarded entity. The regulations provide that the insolvency exception is available only to the extent the owner is insolvent, and the bankruptcy exception is available only if the owner of the grantor trust or disregarded entity is subject to the bankruptcy court’s jurisdiction. Thus, the regulations provide that grantor trusts and disregarded entities themselves will not be considered owners for this purpose.

       With respect to partnerships, the regulations state that the owner rules apply at the partner level to the partners of the partnership to whom the discharge of indebtedness income is allocable. For example, if a partnership holds an interest in a grantor trust or disregarded entity, the applicability of the bankruptcy and insolvency exceptions to COD income of the grantor trust or disregarded entity is tested by looking to the partners to whom the income is allocable.

        For more information or if you have any questions about estate planning, please contact Judson M. Stein, Esq., Director of the Trusts & Estates Practice Group, at 973-230-2080 or or John A. Grey, Esq., member of the Trusts & Estates Practice Group, at 973-230-2088 or


Protecting Tax Benefits for Estates Holding S Corporation Stock

Today, S corporations represent the most common type of corporate tax filing. Planning for an estate, which includes closely held business interests held through an S corporation requires careful planning so as to ensure that the flow-through tax benefits are not jeopardized. An S corporation affords significant income tax benefits as the owners are only subject to one level of taxation as compared to two layers imposed upon a traditional C corporation. Qualification for S corporation treatment requires certain elements such as having no more than 100 shareholders and one class of stock. If this criterion is not satisfied, the corporation will no longer be taxed as an S corporation to the tax detriment of the shareholders.

In estate and succession planning for closely held businesses, high net worth clients often establish an Intentionally Defective Grantor Trust (hereinafter “IDGT”) to hold S corporation stock. Thereafter, the S corporation stock can either gifted or sold to the IDGT during the grantor’s lifetime as consistent with their long-term succession goals. The transfer of S corporation stock to the IDGT has significant tax benefits.

Death of the Grantor

One of the primary issues practitioners must address is planning after the death of the grantor. At the death of the grantor of an IDGT, the IDGT ceases to have such status. However, the IDGT will generally continue to be treated as a qualified S corporation shareholder for two years; thereafter, the trust will cease to be an eligible S shareholder unless it otherwise qualifies as another type of trust permitted to be an S shareholder and an election is timely filed. The potential loss of tax saving S corporation status can undermine years of successful planning thus defeating the very purpose of a large estate plan. However, this unfortunate result can be prevented through proper planning.

QSST Election Option

One option is to elect to be treated as a QSST which can be a permitted S corporation shareholder providing the beneficiary makes the election. A QSST is a trust which: (1) distributes or is required to distribute all income to a citizen or resident of the United States; (2) has certain trust terms including the requirements of only one beneficiary; (3) does not distribute any portion of the trust corpus to anyone other than the current income beneficiary during their lifetime; and finally, (4) the income interest of the current income beneficiary ceases on the beneficiary’s death or the termination of the trust. Providing the QSST satisfies this criterion, the QSST may qualify as an S corporation shareholder; consequently, the shareholders will only be subject to one level of taxation.

ESBT Option

The ESBT is an equally attractive option for holding S stock and is less restrictive than a QSST. Specifically, an ESBT is any trust which: (1) does not have as a beneficiary any person other than an individual, estate, or organization defined in Section 170(c)(2) through (5); (2) no interest in the trust was acquired by purchase; and (3) an election has been made with respect to the trust. To qualify as an ESBT, the trustee of the trust must make the election by signing and filing an election statement with the IRS Service Center. An ESBT is treated as two separate share trusts for tax purposes, an S portion that consists of all of the S corporation stock and a non-S part, which encompasses of all of the other trust assets.

Advantages and Disadvantages of the ESBT

The ESBT allows for multiple income beneficiaries among whom the trustee can distribute income and principal at their discretion. This allows the client to make transfers to several beneficiaries through a sprinkle trust, affording control over the timing and the amount of the distributions. Nevertheless, the ESBT can produce a potentially higher tax cost.


In summary, estate and succession planning for clients who own closely held businesses requires careful attention to S corporation stock. Only certain kinds of trusts under an estate plan may hold S corporation stock; accordingly, estate practitioners must carefully evaluate whether a particular trust qualifies for this tax friendly status following the grantor’s death.

For more information or if you have any questions about estate planning, please contact Judson M. Stein, Esq., Director of the Trusts & Estates Practice Group, at 973-230-2080 or or John A. Grey, Esq., member of the Trusts & Estates Practice Group, at 973-230-2088 or

How to Reduce Gift Taxes Transferring Wealth Parent to Child

Parents can transfer substantial amounts of wealth, free of gift taxes, to their children every year through the use of “annual exclusion gifting.”

For 2015, the annual exclusion amount is $14,000. It follows that an individual can gift free of tax, up to $14,000 per donee, per year. To illustrate, a parent with three children can transfer a total of $42,000 to them, free of federal gift taxes. However, if the annual gifts exceed $14,000, the excess amount over the exclusion is taxable.

Gift-Splitting by Married Taxpayers

Married couples can transfer even more money, tax-free. Gifts to children made during the year can be treated as “split” between the husband and wife, even if the gift is only given by one of them.

Accordingly, and by “gift-splitting,” a married couple can presently transfer to each child up to $28,000 a year ($14,000 per spouse). Indeed, the more beneficiaries that qualify for the annual exclusion, the more opportunity to consistently remove wealth from the taxable estate. To illustrate, a married couple with two married children can currently transfer tax-free a total of $112,000 to their children and the children’s spouses.

Gifting to a Trust: The “Present Interest” Requirement
As an alternative to making gifts directly to a child, parents may gift to a Trust designed for the benefit of their children. In general, Trusts provide a myriad of tax and asset protection benefits; moreover, they protect against inexperience.

To qualify a gift for the annual exclusion, it must constitute a transfer of a “present interest.” This means that the donee’s enjoyment of the gift must be immediate (as in the present) and not delayed until a date in the future. When gifting to a Trust, the Trust must allow each beneficiary a limited right of withdrawal for a reasonable period of time. Typically, 30 days is sufficient in this setting.

Lifetime Credit for Taxable Gifts
Finally, it is noteworthy that gifts which exceed the annual exclusion amount of $14,000 may not ultimately result in any tax liability. This is because, in addition to the annual exclusion, each individual has a lifetime credit from the federal gift tax of presently $5,430,000 which mirrors that of the federal estate tax exemption. The federal exemption amount is adjusted annually for inflation.

In conclusion, parents can transfer significant amounts of wealth to their children by the use of regular annual exclusion gifting. Such gifting, while relatively easy to set up and administer, requires periodic attention to the tax rules as taxation pervades much of estate planning.

For more information about annual exclusion gifting, or if you have any questions about estate planning, please contact Judson M. Stein, Esq., Director of the Trusts & Estates Practice Group, at 973-230-2080 or or John A. Grey, Esq., member of the Trusts & Estates Practice Group, at 973-230-2088 or

Inherited IRAs Are Not Protected In Bankruptcy

In the recent case of Clark v. Rameker, 573 U.S. _____ (2014), the Supreme Court was tasked with determining whether the Federal Bankruptcy Code protects inherited IRAs in Bankruptcy against the claims of a bankruptcy debtor’s creditors.

Section 522(b)(3)(C) of the Bankruptcy code describes protected assets to include “retirement funds” that are “exempt from taxation” under IRC Code Sections 401, 403, 408, 408A, 414, 457, or 501(a). An account therefore, generally has to be characterized as a retirement vehicle in order to qualify as exempt under the Federal Bankruptcy Code.
In Clark, Ruth Heffron died, leaving her IRA to her daughter, Heidi, a Wisconsin resident. Heidi elected to receive the account as an inherited IRA and to take required minimum distributions over her remaining life expectancy, in accordance with the IRS Regulations. In 2010, Heidi and her husband filed for Chapter 7 bankruptcy, excluding the IRA from their bankruptcy estates. Heidi’s bankruptcy creditors argued that the IRA funds were improperly excluded from her bankruptcy estate because an inherited IRA is not a retirement fund under the definition of Section 522.

The Supreme Court agreed with the creditors, holding that assets held under an IRA inherited by a non-spouse beneficiary are not “retirement funds,” and are therefore not protected by bankruptcy creditors. The Court noted that material differences between an originally owned IRA and an inherited IRA reflect Congress’ intent that inherited IRAs are not “held for retirement”.

First, the Court reasoned that inherited IRA beneficiaries must take required minimum distributions on at least an annual basis, reducing the potential of the account as a retirement savings vehicle. The Internal Revenue Code requires that the beneficiary of an inherited IRA take required minimum distributions over their individual life expectancy, or within five years of the account owner’s death (depending upon whether the original owner passed away before or after attaining the age of 70 ½, respectively). This is in contrast to an original IRA, where the original account owner does not have to start taking distributions until the reach the age of 70 ½.

Second, the Court held that because an inherited IRA account beneficiary may never make contributions to the account, a beneficiary of a retirement account is therefore not incentivized to contribute to their retirement savings.

Finally, the Court reasoned that because inherited IRA beneficiaries may withdraw amounts from their account at any time penalty-free, they are not funds “objectively set aside for one’s retirement.” This is in contrast to an original IRA, where the owner is penalized from reducing their retirement savings if they make a withdrawal from their account prior to reaching the age of 59 ½.

The Supreme Court’s opinion did not make it entirely clear as to whether spousal rollovers would be definitively protected in bankruptcy. As there is no deadline for a surviving spouse to elect to perform a qualified rollover of their spouse’s IRA account, a surviving spouse could initially choose to accept an inherited IRA for immediate access to the funds and later rollover the account into his or her own IRA. Performing a spousal rollover soon before a bankruptcy filing could create an argument by a creditor that the rollover was effectively a “fraudulent transfer” that should be undone.

Additionally, it is important to understand the limitations of this holding to bankruptcy proceedings – and further, to those debtors that have opted to utilize the Federal bankruptcy exemption rules. Each state has its own bankruptcy exemptions, and five states exempt inherited IRAs from the claims of bankruptcy creditors. If a bankruptcy debtor has satisfied their states’ domicile requirements, they may opt into their state bankruptcy exemptions, which may be more favorable than the Federal ones.
Furthermore, many, if not the majority of states, exempt inherited IRAs from the claims of creditors outside of bankruptcy (with limited exceptions). Even so, when leaving retirement assets to a non-spouse beneficiary, one should consider designating a qualifying “see-through” trust as the designated beneficiary of an IRA account in order to achieve protection from claims of their beneficiaries’ known and unknown exception creditors as well as to achieve the desired income-tax deferral of extended required minimum distributions.

I expect that we will see more law further expounding upon some of these new and novel concepts in the near future.

Tax Thoughts On Trust Protectors

Despite the frequent assurances practitioners very often hear from their clients that they have a perfect choice of a wholesome, trustworthy, and financially savvy Trustee, it is not uncommon to hear stories about these “ideal” individuals misappropriating or mismanaging funds in some way.

As is such, it may often be advisable to suggest the idea of a “trust protector” provision. The degree of a trust protector’s authority can vary greatly. The overarching purpose of the protector, however, is to place an additional set of checks and balances on an existing or successor trustee and to provide for additional flexibility over uncertain future events.

Although the concept of a trust protector is fairly novel and has not yet been fully hashed out either in common law or by statute, the definition of a protector is evolving, especially as additional jurisdictions pass new domestic or foreign asset protection trust legislation.

Some typical powers given to trust protectors include the ability to veto trust distributions or investment decisions, change the trust situs, consent to the exercise of a power of appointment, or remove, add, and replace trustees. However, as is the case with choosing whom to appoint as a normal trustee, there are important tax concerns that must be addressed when choosing a trust protector and selecting their permissible powers.

If a power is granted to a trust protector (who is acting in a fiduciary capacity) that can be exercised in favor of the protector, his creditors, or the creditors of his estate, or to discharge a legal obligation of support, then the protector will have retained a general power of appointment, unless it is limited by an ascertainable standard, such as “health, education, maintenance, and support.” However, it is of the opinion of some practitioners that, depending upon who is chosen to act as a trust protector, ascertainable standard language may be omitted without causing adverse general power of appointment tax consequences. For example, it may be argued that if a professional, such as an attorney, has been appointed as trust protector with the power to add beneficiaries, that it would not be inferred that the settlor’s intent was to include members of the attorney’s own family within the permitted class of appointees.

A Settlor can be given even greater flexibility and control over the originally appointed parties, including the power to remove and replace a trustee or even a trust protector without estate inclusion.  The scope of this permitted control will depend, however, upon the authority the trustee/protector is given and whether or not the trustee/protector is acting in a fiduciary capacity.

If the protector is acting in a fiduciary capacity and if the powers granted to the protector would cause estate inclusion if held by the grantor, then the grantor can hold a power to remove and replace the protector, if the replacement protector is not related or subordinate (independent person). If the protector is not a fiduciary and the powers granted the protector would cause estate inclusion if held by the grantor, then the grantor should not hold a power to remove and replace, even with a related or subordinate (independent) person. However, if the protector only holds powers that a grantor could also safely hold, then the grantor can have a power to remove and replace the protector, even with a related or subordinate person (non-independent trustee).