Category Archives: Trusts

Another Year, Another Chance to Review Your Estate Plan

By Joseph L. Goldman, Esq.

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!


Using Decanting To Modify An Irrevocable Trust

By Jennifer Castranova, Esq.

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.

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

By Joseph L. Goldman, Esq.

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.

An Issue We Hope You Will Never Have to Deal With

By Louis Pashman, Esq.

For people who have disabled dependents, there is a device called a special needs trust.  A special needs trust is intended to allow a disabled individual to maintain eligibility for certain needs-based government benefits such as Medicaid, supplemental security income and others.  Assets in a special needs trust are not considered “available assets” for those purposes.

In order to achieve the purpose of a special needs trust, the trust must be properly created and administered.  The requirements for creation and administration of special needs trusts are precise and complex.  This is not intended as a tutorial on how to do it.

Two recent decisions addressed certain very specific issues related to special needs trusts.  Special needs trusts implicate both state and federal law.  One obligation of a trustee is to take care that certain state-permitted acquisitions by the trust do not disqualify the beneficiary from federal benefits.

In The Matter Of A.N., a Minor, 430 NJ Super 235 (App. Div. 2013) examined that question.  A trustee sought to purchase a home for the benefit of the disabled beneficiary, permitted by the State.  The trustee sought approval of the transaction from the Chancery Division and also sought an instruction regarding the impact of the transaction on Medicaid eligibility.  Such an application must be served on the Division of Medical Assistance and Health Services (DMAHS), the agency that makes Medicaid eligibility determinations.  After review, the court decided that the Chancery Division could review and approve the transaction but could not issue any direction on future Medicaid eligibility.  Only DMAHS could do that after an application for Medicaid had been filed.

The other recent case, J.B. v. W.B., 215 NJ 305 (2013), examined the use of special needs trusts as part of a divorce and resulting support obligations.  That case was complicated because it involved modification of an existing property settlement agreement, but putting that aside the court noted

“A special needs trust in conjunction with a thoughtful plan to gain eligibility and and receipt of government benefits, including Medicaid, SSI, and Division of Developmental Disability (DDD) programs, permits a family to provide health care, income, housing, and vocational services for their disabled, dependent child.  The redirection of a child support obligation from a parent to a trust designed to meet the present and future needs of the dependent, disabled child should not be considered exceptional or extraordinary relief, if such a plan is in the best interests of the unemancipated child.”

As noted earlier, this is not intended to give guidance on how to prepare or administer a special needs trust, or even if such a trust is appropriate for your circumstances.  It is intended only to point out two recent cases of interest.  Should you have to deal with these unfortunate issues, we are ready to help.