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Will, Retirement Plan and Insurance Policy Updates

July 29, 2016

A recent New Jersey court decision and an Internal Revenue Service private letter ruling highlight the need to be diligent concerning estate asset transfer planning and to periodically review the terms of an existing Will as well as designated beneficiaries on retirement plans.

In the recent case of DeRosa v. State of New Jersey Department of the Treasury, the New Jersey court upheld and repeated a longstanding decision that the Division of Taxation determines estate and inheritance and transfer taxes based upon a decedent’s Will as accepted for probate, regardless of subsequent lawsuits resulting in changes to the Will such as a settlement of undue influence allegations.  Only determination that a Will will not be accepted for probate would alter the inheritance and estate tax results of a Will.  

The Internal Revenue Service in a recent private letter ruling came to the similar conclusion where a decedent left behind named individual retirement account (IRA) beneficiaries who were not reflected either in the decedent’s express statements while living or referenced in the decedent’s Will.  A state court rendered a judgment changing the named beneficiaries to conform to the decedent’s expressed intentions and Will.  The Internal Revenue Service, however, ruled that federal income tax laws will be applied to the IRA document as it existed on date of death and not as revised by a state court.  The state court judgment was therefore not effective for federal income tax purposes.  

It is helpful to understand that tax reportable assets for an estate include probate and non-probate assets.  Probate assets are assets that are in the decedent’s name alone and pass solely due to instructions in a probated Will or under laws of intestacy.  Non-probate assets are contractual assets where the contract states who is to receive the asset such as a joint bank account, life insurance beneficiary or IRA beneficiary.  A Will cannot change the designated recipient of a non-probate asset.  

Since both state and federal tax authorities rely on both the non-probate beneficiary designations and the terms of a Will accepted for probate, review of a Will and retirement plan or other financial contract beneficiaries is needed periodically.  Non-probate asset beneficiary designations need not be the same as the named beneficiaries in a Will.  However, if similar transfers are intended for both probate and non-probate assets, care is needed to periodically confirm that the intended beneficiaries are referred to on non-probate assets and as recipients of assets pursuant to the terms of an existing Will.