Category Archives: Estate and Trust Administration

Another Year, Another Chance to Review Your Estate Plan

By Joseph L. Goldman, Esq.
jgoldman@pashmanstein.com

In the words of John Lennon:  “Another year over.  And a new one just begun.”  So this year, among your New Year’s resolutions, why not review your existing estate plan and estate plan documents (Will, Power of Attorney, Health Care Directive)?

For 2015, the top federal estate tax rate remains at 40%.  The federal estate tax exemption amount is up to $5,430,000 per individual.  That amount is $10,860,000 for a married couple, if each owns at least $5,430,000 in his or her own name, or if they take advantage of “portability”.  But remember, there is no “portability” for state estate tax purposes.

The New Jersey estate tax exemption amount remains at only $675,000.  For couples with total assets of over $1,350,000 that means there can be New Jersey estate tax due on the death of the surviving spouse, even if their assets are well below the federal estate tax threshold.

A big change in the New York estate tax exemption amount took place last year.  An increase to the New York exemption is being phased in so that it will conform to the federal exemption amount in 2019.  For decedents who die prior to April 1, 2015, the New York estate tax exemption amount is $2,062,500.  For decedents dying after April 1, 2015, the exemption is $3,125,000.  For couples with total assets of over $6,250,000 there can be New York estate tax due on the death of the surviving spouse after April 1, 2015.

Non-tax considerations, including changes in your family situation, such as marriage or divorce, births or deaths, or a change of residence to another state, may also call for updating your estate plan documents and your estate plan.

Consider also the use of gifting strategies, life insurance planning, and use of lifetime trusts for both tax and non-tax purposes.  Even if you fully used up your federal state and gift tax exemption in 2015 ($5,340,000 for an individual, $10,680,000 for a married couple), the increased 2015 exemption amount ($5,430,000) allows you to make additional gifts of $90,000 ($180,000 for a married couple) in 2015 beyond the $14,000 annual gift tax exclusion gifts per donee.  But be careful what you give away.  A gift of appreciated property can result in a loss of the stepped-up basis the donee would take if he or she inherited the property.  The capital gain on the subsequent sale of that property could exceed any estate tax savings.

Finally, don’t forget to check your beneficiary designations on retirement plans and life insurance to make sure they are up to date.

Here’s hoping you stick to your New Year’s resolutions in 2015!

 

Major Changes to New York’s Estate and Gift Tax Law

By Joseph L. Goldman, Esq.
jgoldman@pashmanstein.com

Effective April 1, 2014, the 2014-2015 “Executive Budget” makes significant changes to New York’s estate tax and gift tax.  These changes will have a major effect on estate planning for New York residents.  While these changes provide some tax relief for the moderately wealthy, wealthier New Yorkers will see little, if any, change, except under certain circumstances that will cause an increase in estate tax.

The Executive Budget increases New York’s basic exclusion amount ($1 million per decedent prior to April 1, 2014) to $2.0625 million per decedent as of April 1, 2014, with gradual increases annually until January 1, 2019 when the basic exclusion amount will reach $5.25 million.  Thereafter, it will be indexed for inflation, which should link New York’s basic exclusion amount to the federal amount (presently $5.34 million, but also indexed for inflation).  The basic exclusion amount is increased as follows:

chart4

Because of a quirk in the way New York calculates its estate tax, the basic exclusion amount is rapidly phased out once the value of a decedent’s taxable estate exceeds the basic exclusion amount in the year of death, and is totally phased out when the value of a decedent’s taxable estate is greater than 105% of the basic exclusion amount.

The Executive Budget implements the exclusion by allowing a credit of the “Applicable Credit Amount” to be taken against the tax imposed by the statute, as follows:

  • If the New York taxable estate is less than or equal to the basic exclusion amount, the Applicable Credit Amount will be the amount of the tax so computed and, therefore, serves as a wash.
  • If the New York taxable estate is up to 5% greater than the basic exclusion amount, the Applicable Credit Amount will be limited based on a formula, resulting in a rapidly increasing tax for each percent over the basic exclusion amount.
  • If the New York taxable estate is greater than 105% of the basic exclusion amount, no credit is allowed.

The Executive Budget keeps the top bracket at 16%.  Nevertheless, there has been a change in bracket structure.  As a result, estates valued in excess of 105% of the basic exclusion amount will have the same tax they would have had under the old law.

The rates included in the Executive Budget only cover the period for a decedent dying on or after April 1, 2014 and before April 1, 2015.  While this might have been an error that will require a technical correction, there is some question as to whether it is a time-limited compromise, test period or mandate reached during the budget negotiations.

New York has not had a gift tax since 2000 when New York’s gift tax was repealed.  Consequently, a commonly used estate planning technique to reduce the size of a New York resident’s estate tax was to make gifts within the allowable federal exemption.  Not only was the donor able to make a completed gift without incurring gift tax liability in New York, but so long as she had no retained an interest in the gifted property, she was assured that the value of the gift would not come back into her estate for estate tax purposes.  The Executive Budget provides that taxable gifts made within three (3) years of death (if not otherwise includible in the federal gross estate) must be added back to a decedent’s New York estate for estate tax purposes.  The “addback” does not apply to  gifts made (i) when the decedent was not a resident of New York, (ii) before April 1, 2014, and (iii) after December 31, 2018.  In general, “taxable gifts” do not include annual exclusion gifts (currently $14,000 per done) and payments made directly for tuition and medical expenses.  The addback, however, does not appear to exclude gifts of real or tangible personal property outside of New York State, which, if owned at a decedent’s death, would not be subject to New York’s estate tax.

The Executive Budget has repealed New York’s generation-skipping transfer (“GST”) tax, applicable to taxable distributions to “skip persons” and taxable terminations where “skip persons” receive a trust distribution on its termination.

New York residents may need to modify their estate plan and estate plan documents to reflect these changes to the New York State estate and gift tax law.  Pashman Stein tax attorneys are prepared to advise you and assist you in how best to incorporate these changes into your estate plan.

Using Decanting To Modify An Irrevocable Trust

By Jennifer Castranova, Esq.
jcastranova@pashmanstein.com

Many estate planners use irrevocable trusts to facilitate lifetime gifts and remove assets from an estate.  But what can you do when the irrevocable trust contains a provision that you would prefer to amend or when changed circumstances call for changes to the existing trust?  If the trust is “irrevocable”, are you stuck with the existing provisions?

Now, in these situations, planners are able to use a technique called “decanting” to cure substantive and administrative problems in irrevocable trusts.  Decanting allows the trustee of an existing trust to distribute all or part of the trust principal to another irrevocable trust (the “appointed trust”).  A number of states have enacted statutes specifically dealing with decanting.

In New York, EPTL 10-6.6 contains rules governing to which trusts can be decanted, what provisions may be changed and how to decant.  In order to decant in New York, the existing trust agreement must give the trustee the power to invade the trust principal.  The extent of that power determines what types of changes can be made in the appointed trust.

If the Trustee has unlimited power to invade principal then:

(1) The existing trust can be decanted to another trust for the benefit of any one or more beneficiaries of the existing trust;

(2) One or more of existing beneficiaries can be eliminated; and

(3) A beneficiary of the existing trust in whose favor principal can be distributed may be given a power of appointment in the appointed trust.

If the Trustee has limited discretion to invade principal then:

(1) The beneficiaries must be the same in the appointed trust as the existing trust;

(2) The principal invasion standard must remain the same during the term of the existing trust; and

(3) Powers of appointment that are not present in the existing trust cannot be granted in the appointed trust.

The New York statute also provides certain rules for all decanted trusts as follows:

  • The trust cannot be decanted if the trust instrument prohibits decanting or if there is evidence that the grantor opposes decanting;
  • The trustee must consider the tax implications of decanting, including all estate and gift tax consequences;
  • The appointed trust may be an existing or newly appointed trust, but it must be irrevocable;
  • The appointed trust agreement must be drafted and executed before the existing trust can be decanted;
  • The appointed trust can be a supplemental needs trust;
  • The rule against perpetuities cannot be violated;
  • A current right of a beneficiary to receive income or principal cannot be eliminated;
  • A trustee cannot be indemnified from liability;
  • A right to remove or replace a trustee cannot be eliminated; and
  • A trustee’s compensation cannot be changed.

Decanting is accomplished by an instrument in writing, signed, dated and acknowledged by either the grantor or the trustee of the existing trust.  The instrument must state whether all of the existing trust assets or a percentage of them are being decanted.  Then, either (1) a copy of the existing trust agreement, the appointed trust agreement and the executed decanting power must be served on all interested parties (the grantor of the existing trust (if living), the grantor of the appointed trust, the beneficiaries of the existing and appointed trust, anyone who has the power to remove and replace the trustee of the existing trust) either personally or by certified mail; or (2) written consent of all interested parties may be obtained after providing them with copies of all documents.  The exercise of the decanting power becomes effective thirty (30) days after service is complete (unless the parties consent in writing to an earlier date).

An interested party can object in writing to the trustee.  The decanting instrument only needs to be filed with the Court in the case of a testamentary trust or an inter vivos trust that was the subject of a prior court proceeding.

Although the decanting requirements summarized above are lengthy and specific, they offer planners an opportunity to remedy problematic provisions in irrevocable trusts.

Goldman’s “Golden Rules” of Estate Planning – Part I

By Joseph L. Goldman, Esq.
jgoldman@pashmanstein.com

For those of our readers whose New Year resolutions included creating (or updating) their estate plan, here are some “golden” rules:

1. “The only things certain in life are death and taxes”

  • Talk of an estate tax repeal is past.  The Federal estate tax for an estate exceeding $5,340,000 in 2014 is 40%.  Add New Jersey or New York estate tax of up to 16%.  That could result in a big bite out of your estate.
  • Need to consider the ATRA 2012 provisions – the interplay of higher income tax rates and a decreased amount of estates subject to Federal estate tax (on account of the increased exemption) which has dramatically changed the dynamic of estate tax planning.

2. “Failing to plan is planning to fail”

  • Assets may pass in a manner you didn’t intend.
  • Unnecessary estate tax costs.

3. “It’s not what you say – it’s what you do”

  • Even the best estate plan is worthless if it’s not implemented.
  • Make sure assets are titled properly to achieve estate tax savings.

4. “What have you done for me lately?”

Even if you have a Will, the changes to the estate and gift tax laws make it important that you review it.

  • Formula credit shelter – because of the increased exemption amount, your spouse could get much less outright than you think.
  • De-coupling of State estate tax (NY, NJ) from Federal estate tax – there is often a State estate tax on the death of a surviving spouse, even if there’s no Federal Estate tax.
  • After ATRA 2012, weigh potential estate tax saving strategies through gifting against loss of “stepped-up” basis to transferee for income tax purposes.

5. “Let’s talk of Executors and make Wills”

  • Even Shakespeare knew the importance of having a Will.
  • Cornerstone of estate plan.
  • If you don’t make a Will, the State you live in makes one for you.
  • Tax planning through use of trusts, disclaimers.
  • Set up trusts to manage property for minors, spouse.
  • Name your fiduciaries (executors, trustees) and guardians.

6. “Credit check”

  • Two basic rules of estate tax planning – (a)    unlimited marital deduction, and (b) unified gift and estate tax credit.
  • Take advantage of credit in each spouse’s estate to avoid unnecessary estate tax in surviving spouse’s estate.
  • The de-coupling of the New York estate tax and the New Jersey estate tax from the Federal estate tax could cost you – unless you make the right changes to that credit shelter provision in your Will.
  • New York credit amount capped at $1,000,000 (although the pending New York Budget Bill would raise it to conform with the federal exemption).
  • New Jersey credit amount capped at $675,000.
  • Don’t rely on “portability” – not recognized for State estate tax purposes or for generation skipping transfer (“GST”) purposes.
  • After ATRA 2012, need to weigh the estate tax benefit of keeping assets out of surviving spouse’s estate v. increased income tax due to loss of “stepped-up” basis on surviving spouse’s death.

7. “Think of the children”

  • Make a Will to name a guardian for your minor children – or else the State will do it for you!  Not a tax reason, but maybe the most important reason to have a Will.
  • Create trusts for management of property for children, even if they have reached the age of majority.

8. “From generation to generation”

  • Use a Will to take advantage of generation-skipping transfers and reduce estate taxes to the family.
  • GST exemption tied to credit shelter amount ($5,340,000 in 2014).
  • Trust for child for life, remainder to grandchildren – avoids tax in child’s estate.

9. “Who(m) Do You Trust?”

  • Use trusts as part of your estate plan, to manage property for minor children: (a) Set ages for mandatory distribution of principal (e.g., 1/3 – 25, 1/3 – 30, balance at 35); (b) Income from age 21; (c) Discretionary principal; (d) “Hold-back” provisions – gives trustee authority to hold back any mandatory distribution if not in best interest of beneficiary – bad marital, financial or mental situation.
  • Use trusts to manage property for surviving spouse: (a) Not subject to tax in first estate; (b) Ensures that trust property goes to children.
  • Use testamentary trusts to minimize state taxes: (a) Credit Shelter Trust – Not included in surviving spouse’s estate, but watch out for triggering NJ or NY state estate tax on account of “decoupling;” (b) Marital Trust (QTIP) – (1) not subject to tax in first estate – deferred until death of surviving spouse), (2) testator names remainder beneficiaries, (3) useful in second marriage situations.
  • Use inter vivos trusts: (a) Life Insurance Trust – (1) proceeds not included in grantor’s estate, (2) can keep proceeds in trust for surviving spouse’s lifetime so also not includible in surviving spouse’s estate, (3) can provide needed liquidity; (b) Qualified Personal Residence Trust (“QPRT”) – (1) discounted gift-giving, (2) reserve an interest for a term of years, then title passes to remainder beneficiaries, (3) if not a QPRT (e.g., a life estate), retained interest is valued at zero and entire value of residence is treated as a gift, (4) grantor must survive the QPRT term; (c) Grantor Retained Annuity Trust/Unitrust (“GRAT,” “GRUT”) – (1) discounted gift giving, (2) trust is funded with income-producing property, (3) reserve an annuity for a term of years, then assets pass to remainder beneficiaries, (4) if not qualifying as a GRAT, retained interest is valued at zero, and entire value of asset is treated as a gift, (5) grantor must survive the GRAT term; (d)  Charitable Trusts – (1) remainder trusts, (2) lead trusts; (e) Supplemental Needs Trust – preserve governmental benefits.

Link to Part II

T&E Potpourri: A Collection of Current Trust & Estate Developments of Interest

By Joseph L. Goldman, Esq.
jgoldman@pashmanstein.com

The Pending New York State Budget Bill May Require Taxpayer Action By April 1, 2014

The budget bill recently proposed by Governor Cuomo contains significant changes to New York’s gift, estate, and generation skipping transfer taxes as well as the taxation of income from certain trusts.

New York currently does not impose a gift tax.  Although the budget bill does not propose a gift tax, it does require taxable gifts made on or after April 1, 2014, to be added back to a decedent’s estate for estate tax purposes if the decedent was a New York resident at the time such taxable gift was made.  Consequently, a New York resident who is contemplating making a taxable gift in 2014, should consider making the gift prior to April 1.  This can be especially appealing to New York taxpayers who have not yet used their entire federal exclusion amount.

IRS Revenue Procedure 2014-18 Provides Taxpayers With Second Chance At “Portability” 

Since “portability” of the estate tax exemption became available to taxpayers in 2011, the personal representative of the first dying spouse’s estate needed to file a federal estate tax return (Form 706) after the death of the first dying spouse in order to make the portability election for the surviving spouse.  This Form 706 needed to be filed within nine (9) months following the date of death of the first dying spouse, unless the personal representative filed for and was granted an automatic six (6) month extension.

Apparently, a great number of personal representatives and surviving spouses were not aware of this deadline or otherwise did not file the Form 706 in order to take advantage of any unused estate tax exemption that remained at the death of the first dying spouse.  Revenue Procedure 2014-18 provides relief for taxpayers who neglected to timely file a Form 706 for purposes of making a portability election.

The Rev. Proc. is based on the recent Supreme Court case, United States v. Windsor, and the IRS interpretation of the tax law as a result thereof, (Revenue Ruling 2013-17).  Nevertheless, the benefits provided by the Rev. Proc. Are available to same sex surviving spouses.

New York Court of Appeals Rules That Mere Ownership of Premises in New York Is Not Conclusive of “Permanent Place of Abode”

An individual is a resident of New York State (or City) if the person is “domiciled” in the State (or City) (the “Domicile Test”), or if the individual both maintains a “permanent place of abode” and spends all or part of more than 183 days in the State (or City) (the “Statutory Residency Test”).  New York regulations define a permanent place of abode as a “dwelling place of a permanent nature maintained by the taxpayer.”

On February 18, 2014, the Court of Appeals of the State of New York, in Matter of Gaied v. New York State Tax Appeals Tribunal (“Gaied”), criticized the Tax Tribunal’s determination that a man who owned a home used by his parents in Staten Island maintained a “permanent place of abode” in New York City and was subject to New York State income tax on his worldwide income.  In earlier proceedings, the Tax Tribunal, which was affirmed by a divided Appellate Division, had held that it was improper to look into the “taxpayer’s subjective use of the premises,” finding that mere ownership was sufficient to conclude that the taxpayer maintained a “permanent place of abode.”

Gaied focused on the Statutory Residency Test and in particular the definition of “permanent place of abode.”  Mr. Gaied did not contest that he had spent more than 183 days in New York City.

Tax Court Upholds Use of a “Formula Clause” When Making Transfers of Interests in Closely Held Business to Family Members

Because of the uncertainty involved in valuing a closely held company, a tax professional said to structure gifts of interests in a closely held business as gifts of a set dollar amount that would be converted into interests in the business after a valuation of the business was done.  If the IRS determined the business was worth more, each donee’s stake would be reduced accordingly and no extra gift tax would be due.  The IRS balked at the “formula clause” because the time it spent auditing the gifts was wasted.  The Tax Court gave the OK to the “formula clause”.  Although IRS will keep fighting this issue, tax advisers can rely on the Court’s decision as authority to avoid any penalties.

The decision is a gift tax break for owners of closely held firms.