Category Archives: Wealth Distribution

Before You Retire: Steps for Planning In Advance

By Joseph L. Goldman, Esq. and Naomi B. Collier, Esq.

The article below appeared in the November issue of Meadowlands USA newsletter.

As the average life expectancy in the United States seems to increase with each passing year, having a secure retirement plan is more important than ever. Retirement planning encompasses much more than simply saving enough money to live on after you stop working—it is an ongoing and dynamic process.

While it is tempting to put it off, the best time to start planning for retirement is well in advance of when you are actually ready to retire.

Consider the following suggestions as you start down the long, winding road that is your retirement:

  1. Get organized. Organizing and understanding your finances is a great starting point. Create a balance sheet that contains your financial information, including asset type and value, and how owned. Consider how the assets will be distributed upon your death. Consolidate your account log-in information and corresponding passwords—and ensure that your advisors and trusted family members/friends can access the information in the event of your incapacity or death.
  1. Build your team. Pick professional advisors that you trust to work with you towards your goals. Make sure your team works together. By gathering a well-rounded team, including an attorney specializing in estate planning, a financial planner, an accountant and an insurance adviser, you will have put in place a system with built-in checks and balances.
  1. Create a budget and savings plan. Carefully monitor your spending patterns and expenses to determine how much you will need to live during your retirement years. This will enable you to work with your advisors to create realistic current and projected budgets, and tailor your savings approach. Review spending and expenses (at least annually) to reflect any significant changes.
  1. Consider retirement goals. Think about your life after retirement. Consider where you might live, your desired retirement lifestyle, any ongoing obligations, as well as expected and unexpected health care expenses. Consider the impact of these factors on your finances in retirement.
  1. Review your estate planning documents. Review your existing estate planning documents to make sure they still make sense. Have the documents reviewed by a trust and estates attorney to ensure that they reflect current law. If you do not have documents in place (including a will, durable power of attorney, and health care proxy/living will) consult with an attorney qualified to assist you with preparing and implementing these documents.
  1. Review your beneficiary forms. Even if you have estate planning documents in place, be mindful that certain assets pass outside of a will. For example, life insurance, IRAs and retirement plans generally pass to the designated beneficiaries. If your beneficiary designation forms are not coordinated with your estate planning goals, your objectives may not be realized. Be aware that failure to designate individual beneficiaries may also have adverse income tax consequences.
  1. Consider estate tax implications on your estate. It is also important to discuss with your attorney whether your estate will be subject to estate tax. While the federal exemption has increased dramatically over the years ($5,450,000 in 2016, indexed for inflation), some states continue to have much lower exemptions ($675,000 in New Jersey). If your estate will be subject to estate and/or inheritance tax, consider how it will be paid and/or whether you can minimize those taxes.
  1. Consider long term care implications on your estate. Consider how you will fund your long term care, if necessary. Are your assets sufficient to self-fund such care? Alternatively, evaluate whether long term care insurance is a viable option or if qualifying for government benefits might be necessary. Consult an attorney versed in elder law to better understand the options available to you.
  1. Talk about it. Most people do not want to think about what will happen when they die or become incapacitated, let alone talk about it! However, having a discussion with the important people in your life when you still can, before you are in a crisis situation, beats the alternative. Ensure that everyone understands your wishes as related to health care decisions, why you made certain provisions in your estate planning documents and how you wish your affairs to be handled if you are unable to handle them yourself.

Not all roads to retirement are alike and events often occur that require adjustments to your plan.  However, if you create a retirement plan in advance, select the right advisors to help you implement and oversee your plan and make adjustments as necessary, you will go a long way to helping yourself enjoy a successful and rewarding retirement.

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:

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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.

Estate Planning Tips for Your Art Collection

By Eleanor Lipsky, Esq. and Joseph L. Goldman, Esq.

Many collectors view art as more than a financial investment and often do not wish to readily part with a piece of sentimental and aesthetic value. Nevertheless, when an art collection is part of a taxpayer’s estate a number of estate, gift and income tax strategies should be considered.

Prior to ATRA 2012 (American Taxpayer Relief Act of 2012), estate tax planning often involved gift and estate tax strategies designed to eliminate appreciating assets from an estate in order to reduce estate and gift taxes.  After ATRA, the federal estate tax exemption has been made permanent at $5,000,000 (indexed for inflation) so fewer taxpayers are subject to federal estate tax.  At the same time, federal income tax rates have increased, so income tax planning has become more relevant.  Accordingly, it may be advantageous for taxpayers not subject to estate tax to leave appreciating assets in their estate to get a “stepped-up” basis at their death. This would reduce potential income tax on the gain when sold by the beneficiary or heir who received the asset.

An art collector should seek regular qualified appraisals of the collection, perhaps even annually, to get a better understanding of how the collection is appreciating.  In the case of a gift or a charitable contribution, such application can help substantiate a work’s value if there is an IRS challenge, protecting a collector from additional taxes and penalties for undervaluation.  Further, if a piece is worth more than $5,000, a taxpayer seeking a charitable income tax deduction will need to include a qualified appraisal with his or her tax return.  Qualified appraisals may also be necessary when artwork is left as a bequest in a Will.  For estate tax purposes, an appraisal must be included with the estate tax return for any piece worth more than $5,000 or for a collection of similar items worth more than $10,000.  For gift tax purposes, a qualified written appraisal is typically the best way to disclose a gift of artwork on a gift tax return.    It is important to check out the appraiser’s credentials to ensure that the appraiser is an expert in the type of item.  A qualified appraiser who makes a false or fraudulent overstatement of value, may be subject to a civil penalty.

A taxpayer transferring an art collection containing at least one item valued at $50,000 or more may request an advance ruling from the IRS to ensure that the IRS will later accept the taxpayer’s valuation.   An advance ruling may be requested only after the property is transferred and must include IRS Form 8283 (“Noncash Charitable Contributions”), along with a qualified appraisal, to make the request.  An advance ruling costs $2,500 for the first three items and $250 for each additional piece.

An art collector who donates artwork to charity can also receive a substantial income or estate tax deduction.  For instance, a taxpayer who donates to a public charity a painting purchased years ago for $1,000 that has a fair market value of $10,000 today and satisfies all tax criteria for deducting the donation will receive a $10,000 charitable deduction for income tax purposes.  Donations may also help avoid capital gains taxes.  This is helpful because while most assets are subject to a 15% capital gains tax rate (in 2013), art is subject to a higher rate of 28%.

A taxpayer donating art work should keep in mind that it is best for the donation to be related to the charitable organization’s charitable purpose.  For example, donating a painting to be displayed at a tax-exempt art museum allows a taxpayer to deduct the painting’s fair market value, for up to 30% of the taxpayer’s adjusted gross income.    If the amount deductible exceeds this limit, it can still be carried forward for up to five years.  On the other hand, if the donated artwork is not related to the organization’s charitable purpose, the deduction is limited to the taxpayer’s cost basis, but up to 50% of the taxpayer’s adjusted gross income.

Another way to donate artwork to charity is to create a charitable remainder trust (CRT).  This allows the trustee of the CRT to sell the art tax-free and reinvest the proceeds in income-producing assets.  The beneficiary receives income from the trust, while the named charity receives what is left at the end of the trust term.  It is important to note that since the donation is not related to the CRT’s tax-exempt purpose, the donor’s current income tax deduction is limited to the donor’s basis in the art, up to 50% of the donor’s adjusted gross income.  Additionally, the donor’s current income tax deduction will be limited to the actuarial value of the charity’s remainder interest in the artwork.

For those art collectors who are not quite ready to part with a piece permanently by a donation of artwork to a museum, consider donating an undivided fractional interest in an artwork to a charitable organization instead.  If a taxpayer donates a one-third (1/3) interest in a sculpture worth $5 million to a museum, the museum will have the right to display the sculpture for four (4) months out of each year.  The benefit of a fractional donation is that the donor can enjoy the sculpture for the rest of the year, while still receiving a sizeable charitable income tax deduction.  This is also a good alternative when an outright donation exceeds the donor’s adjusted gross income percentage limits.  Donating a fractional interest reduces the amount of the income tax deduction, minimizing the need to worry about the five-year carry forward period, discussed above.  A museum will usually be willing to agree to receive a fractional interest during a donor’s lifetime only if the donor agrees to donate the entire interest in the painting to the museum in the donor’s Will (or revocable trust).  The donor’s estate would then be entitled to a charitable estate tax deduction for the donor’s remaining interest in the painting, based on the painting’s value at time of the donor’s death.

Before donating to charity in a Will, a collector should consider the unlimited marital deduction.  The decedent can leave the artwork to his or her surviving spouse and then have the surviving spouse donate the artwork to the charitable organization during the surviving spouses’ lifetime.  This gives the surviving spouse an income tax charitable deduction without a federal estate tax on the artwork in the estate of the deceased spouse because of the unlimited marital deduction.  The advantage to this added step is that the surviving spouse will inherit the artwork at a new cost basis equal to the fair market value on the date of death of the first spouse.  The surviving spouse can also bequeath the artwork in his or her own Will and receive a 100% estate tax charitable deduction.   A taxpayer making a bequest of artwork to a charitable organization, through a Will should describe the artwork with as much specifics as possible.  Additionally, since a charity can renounce a bequest, the Will should include an alternative beneficiary as well.

Finally, a collector may choose to keep the collection in the family and only leave artwork to heirs and other beneficiaries through specific bequests in his or her Will.  Specific bequests can reduce conflict among family members and avoid some of the income tax issues connected with residual gifts.  A taxpayer should discuss his or her plans with family members in order to avoid issues and surprises later on.

No matter how you choose to plan for your art collection’s future, you should consider the tips discussed above to gain the best possible return on your valuable investment.

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

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

Link to Part I

10. “Never look a gift horse in the mouth”

  • Don’t forget gifting as part of your estate plan.
  • Federal unified gift and estate tax exemption amount is $5,340,000 in 2014.
  • Annual exclusion gifts – $14,000 per year, per donee.
  • Gifts for education and medical expenses don’t count toward $14,000 annual exclusion.
  • Discounted gifts – gifts of a limited partner interest or an LLC interest – (a) need to substantiate the discount (e.g., appraisal), (b) the strategy is carefully scrutinized by IRS, (c) watch out for “business purpose” and control tests.
  • After ATRA, 2012, need to weigh benefit of estate tax savings through gifting v. loss of stepped-up basis for donee for income tax purposes.

11. “But the greatest of these is charity”

Charitable bequests can satisfy your charitable inclination and save you money as well.

  •   Outright bequests,
  •   Charitable remainder trusts,
  •   Charitable lead trusts.

12. “It’s time to hang em up”

Pay attention to proper designation of retirement plan and IRA beneficiaries to maximize income tax benefits.

Pay attention to proper designation of retirement plan and IRA beneficiaries to maximize income tax benefits.

  •   Designated beneficiaries,
  •   Don’t name estate,
  •   Spousal rollover,
  •   Stretch IRA,
  •   Use of trusts.

13. “I got the power”

  • Signing a general durable power of attorney allows you to name an agent to make financial decisions for you and can avoid costs and hassles of a guardianship proceeding in the event of a disability.
  • “Springing” power of attorney only becomes effective on the occurrence of a triggering event (e.g., certification of disability by your regular physician (or other licensed physician).

14. “Living well is the best revenge”

  • Make sure to execute a health care document or documents to name an agent to make medical/health care decisions for you if you are unable to do so.
  • NY – Health Care Proxy, Living Will.
  • NJ – Advance Directive for Health Care.
  • You can set forth your wishes regarding use of “heroic measures” if you are in a “terminal” condition – do you want mechanical respiration, artificial nutrition and hydration?
  • Organ donation.
  • Failure to make your wishes known can result in lengthy, painful family disputes.

15. “Nobody’s perfect!”

  • Don’t put off implementation of your estate plan until you develop the “perfect” plan.

16. “It’s never too late”

  • Even if you haven’t done any estate planning yet, do it now.  You could save your family a bundle and avoid headaches after you’re gone.