Estate Planning 2012: A Look Ahead

A new year has begun and it is already looking to be a very interesting year.  The upcoming national elections have once again been dubbed “the most important election ever” by the media and despite the hyperbole, there is no doubt that the upcoming election could potentially reshape the direction of our nation.

This is especially true for those of us in the estate planning world.  In late 2010, the president and Congress agreed to reinstate the estate tax with a $5 million exemption and a top tax rate of 35%.  This change came with a significant catch-the new exemption and rate would expire December 31, 2012 and absent an agreement prior to that date, the exemption would return to $1 million and a top rate of 55%.

Given the gridlock in Washington over the last twelve months and a national election that will likely worsen that gridlock, this massive change may become a reality come this time next year.  But, this is not the only possible change to look out for.  These additional issues bear watching throughout the next year:

Changes to the Federal Gift Tax:  For the last year, estate planners have noted the limited and significant opportunity for individuals to make large lifetime gifts while the gift tax exemption remained at $5 million.  There was some concern that the gift tax exemption would be reduced to produce revenue during the Super Committee negotiations, but nothing came of that (much like the negotiations themselves).  With an exemption now at $5.12 million, there remains an ever-decreasing window to make large lifetime gifts.

Interest Rates:  For individuals looking to sell assets to their relatives or to pass them on through vehicles like GRATs, the federal interest rates have remained at historically low rates.  There are indications that these rates may rise before the end of 2012, so this advantage may soon disappear.

Market Volatility: The current volatility in the stock market is another reason to consider vehicles such as GRATs.  Individuals can transfer assets to their relatives at a lower value than they will likely have over time.  This allows individuals to use a smaller portion of the lifetime gift tax exemption while providing their beneficiaries with a higher valued asset.

Changes to the Federal Income Tax: Along with the expiration of the current estate and gift tax rates and exemptions, absent action before December 31, 2012, the federal income tax rates will revert back to the rates that were in place prior to the Bush tax cuts.  Additionally, the President has proposed several changes to the income tax system that would reduce the use of the itemized deduction for wealthier Americans.  The Democrats in Congress have also suggested a surtax on individuals making more than $1 million a year.

Same Sex Marriage Laws:  Beyond taxes and asset values, changes to the legal status of same-sex couples remains an issue to watch with regard to estate planning.  The administration’s decision to stop defending the Defense of Marriage Act and the continued challenges to state bans on Same Sex Marriage (most notably, the lawsuit against Proposition 8 in California) may alter the way same sex couples plan their estates during the next 366 days.

It is likely that other factors will alter the way estate planners counsel our clients during 2012.  However, having seen the estate tax repeal and subsequent reinstatement during 2010, something no one ever imagined would happen, it would be crazy to predict what will actually happen this year.  The best you can do is sit back, watch and make sure your planning is up to date!

Please contact for more information.

Planning for what? Part Two-Federal and State Transfer Taxes

On Wednesday, I discussed one of the main objectives of any estate plan, the streamlining of the estate administration process.  For many, ensuring that assets pass in an expedited manner is the sole aim of their estate plan.  But, for people with larger estates, a second and sometimes more important goal is to minimize or eliminate the transfer taxes owed at their death.

Below is a brief explanation of the categories of transfer taxes related to estate planning.  One tax that is commonly discussed but not listed below is the “death tax.”  Despite the claims of many, there is no tax imposed at death simply due to the passing of an individual.  The following taxes are very real and require proper planning.

Federal Estate Tax.  The “death tax” typically refers to the federal estate tax.  In 2010, the federal estate tax was reinstated with a $5 exemption, meaning every individual can pass up to $5 million without incurring a tax (the exemption increases to $5.12 million in 2012).  Assets passing between spouses at death also pass free of estate tax due to the federal marital deduction.  In addition, married individuals who do no use their entire estate exemption may pass the remaining exemption to their spouse using a newly created concept known as portability.

The top federal estate tax rate is 35%.  However, absent action by Congress and the President before December 31, 2012, the exemption will be reduced to $1 million and the top tax rate will increase to 55% in 2013.

State Estate Tax.  Seventeen states and the District of Columbia also impose a state specific estate tax.  In the past, the state and federal estate taxes were linked, but due to the changes to the federal estate tax since 2001, most states have decoupled their estate taxes from the federal tax.

New York, New Jersey and Connecticut all have state estate taxes and New Jersey has an additional tax known as an inheritance tax.  In New York, the current exemption is only $1 million and is unlikely to be increased in the future.  Similar to the federal estate tax, assets passing to spouses pass estate tax-free.

While the tax rate is much lower than federal rate, it is still important for estates valued at or around $1 million to properly structure the estate plans to eliminate, reduce or delay payment of state estate tax.

Federal Gift Tax.  Transfers made to individuals other than a spouse during your lifetime are also subject to the federal gift tax.  There are two ways to avoid gift taxes on lifetime transfers.  First, you may use a portion of your lifetime gift tax exemption, which is currently $5 million (lifetime gifts reduce the amount of assets you can pass tax-free at death as the estate and gift exemptions are considered a “unified credit”).

The second way is by using an annual gift tax exclusion.  Each individual can gift up to $13,000 to as many individuals as they like each year without incurring a tax.  Married couples may combine their exclusions to gift up to $26,000 to each individual beneficiary.

The top tax rate for the federal gift tax is 35%, the same top rate for the federal estate tax.

Federal Generation Skipping Transfer (GST) Tax.  One of the more complicated taxes, the GST tax was created to prevent individuals from avoiding taxation by transferring assets to a descendant two generations or more removed from them.  Currently, the tax is imposed in three situations.  First, when a transfer is directly made to an individual two or generations below the transferor (a “skip person”).  Second, when there is a taxable termination of an interest by a non-skip person.  This typically involves a child with a life interest dying and their interest passing to a grandchild.  Finally, GST tax is imposed on distributions from a trust to a skip person that would otherwise non be subject to gift or estate tax.

The current federal GST exemption is $5 million with a top tax rate of 35%.  As with the federal gift and estate tax, the exemption will revert back to $1 million in 2013 absent action by the government.

Transfer taxes can create many problems for estates and significantly reduce their values.  Proper planning before an individual dies and proper administration after they die are essential to ensuring that the estate’s beneficiaries receive the largest possible portion of their loved one’s assets.

Please contact for more information.

Planning for What? Part One: An Introduction to Estate Administration

Over the past few weeks, I’ve discussed the various reasons why estate planning should be a part of every adult’s broader life planning.  I’ve also explained several common techniques used by estate planners and specific groups who have a greater need for estate planning.  But, as important as planning is, it is equally important to understand how an estate is administered after the passing of a loved one.

An estate plan deals with two main administrative considerations: the probate process and the payment of transfer taxes.  On Friday, I will discuss the various transfer taxes related to estates and trusts.  Today, I will explain the basics of estate administration in New York.

The first step in administering an estate is filing a probate petition with a special court in New York known as the Surrogate’s Court.  The petition will list key information about the deceased individual (also known as the Decedent) including their personal information, the names of the beneficiaries of the estate, the assets held by the Decedent at the time of his her death and an estimated value of the estate.  The fee for filing the application will depend on how much the Decedent’s estate is worth at the time of his or her death.

Along with the petition, the Decedent’s last will and testament and death certificate are also submitted.  For people dying without a will, there is a similar application called an administration petition.  The process is slightly different than the probate process due to the lack of a will and additional documents that prove the person filing the petition has the right to the Decedent’s assets will also be required.

After the petition is filed with the Surrogate’s Court, a copy of the petition is sent to each person having a potential beneficial interest in the estate.  To avoid this, the person filing the petition (the Executor of the estate) can have the beneficiaries sign waivers by which each beneficiary waives their right to be served the petition.  Once all the waivers have been filed with the court or service is complete, the Surrogate’s Court will issue a decree and grant Letters Testamentary to the Executor of the estate.

Receiving the Letters Testamentary is only the first duty of the Executor.  After he or she receives the Letters, the Executor will collect all the Decedent’s assets and retitle any personal assets in the name of the estate.  If the Decedent’s assets are not readily known, the Executor may need to contact various banks, brokerage firms and insurance companies to determine if the Decedent had any accounts with them.

With the assets collected, the Executor’s next duty is to pay off any outstanding debts that Decedent may have had.  This includes any income, gift, estate or generation skipping transfer taxes the Decedent’s estate may owe or the Decedent owed personally.  For more complicated estates, the estate administration process may take several years and as the estate is administered, it may continue to receive income.  In these situations, it will be necessary for the estate to file an income tax return for each year it remains open.

The final step is to pay out the remainder of the Decedent’s estate based on the terms of his or her Last Will and Testament.  Depending on the nature of the estate, this may prove somewhat difficult, especially if the estate holds illiquid assets such as real estate and business interests.  If the Decedent has not made specific reference to where certain property goes, the Executor may need to sell the property and distribute the proceeds to the estate beneficiaries.

Administering an estate with cooperative beneficiaries and no complications is a difficult process.  Unfortunately, in some circumstances, complicated family and business relationships make the estate administration process even more complicated and can potentially lead to litigation amongst the beneficiaries or between a beneficiary and the Executor.  Proper estate planning alone can reduce the risk of these problems, but it cannot entirely eliminate this risk.

The weeks, months and years after the death of a loved one can be incredibly difficult and having to go through the estate administration process without help is a burden most would like to avoid.  By working with trusted advisors, the family can focus on their grieving and healing process while the attorneys, accountants and other advisors ensure that their loved one’s wishes are respected.

Please contact for more information about estate administration.

The Estate Planning Lessons of “The Descendants.”

Last weekend, my wife and I saw “The Descendants,” the new film by director Alexander Payne (Sideways, About Schmidt and Election).  The film has drawn significant Oscar buzz both for the actors’ performances and the film itself.  Additionally, it has created a buzz amongst estate planning professionals regarding its two main plotlines.

The movie focuses on Matt King, played by George Clooney, who is in the midst of two major life events.  As the film begins, we learn that King is the trustee of one of the largest parcels of land in Hawaii on behalf of himself and his other family members.  The family has decided to sell the land, a move that will produce a significant windfall for the family, but ultimately, the decision of who to sell the property to and whether to sell at is left to King alone.

The other major life event involves a speedboat accident involving Matt’s wife, Elizabeth.  As the film begins, we find Elizabeth in a coma, leaving Matt with even more on his plate. Each of these life events on their own would be difficult to manage, but both simultaneously occurring (and additional drama which I won’t spoil here) leaves King with the weight of the world on his shoulders.

Fortunately, King, his wife and his ancestors successfully prepared for these events and the results of their planning manifest during the film.  The film provides three very important lessons regarding estate planning:

1.  A Health Care Proxy can reduce family friction over the care of an incapacitated loved one-When a loved one falls ill and decisions need to be made about their care, underlying conflicts between family members may get in the way of what’s best for the incapacitated person.  If a health care proxy has been executed, those conflicts can be prevented.  In the film, it becomes clear that Matt and his in-laws do not agree on much.  The one thing that they do agree on is the wisdom shown by Matt and Elizabeth by executing health care proxies.

2. Not all trusts are designed to last forever-We learn early on that the land is being sold because the perpetuities period for the trust is set to expire in five years.  Hawaii, like many other states, has codified a common law rule called the Rule Against Perpetuities, which requires a disposition of property to eventually vest in an individual.  Practically, this prevents a trust from continuing forever.  Some states have modified or eliminated this rule and it has become more common for continuous trusts known as dynasty trusts to hold property permanently in trust.  Currently, New York has retained the common law rule and trusts and other dispositions must end 21 years after the death of a specified individual who was alive when the disposition was created.

3.  It is important to pick a fiduciary who will protect your family’s interests and protect the property you leave behind-Throughout the movie, Matt’s decision regarding the land is a point of interest for not only his family, but for many in the community as well.  In the end, his decision is based on what he believes his predecessors would have wanted for his family and not necessarily what the current generation of beneficiaries wants.  In choosing Matt, his ancestors believed that he would provide for the rest of his family while preserving and protecting the family property.  His personality, intelligence and management capabilities, and not just his status as a relative, made him a good choice to oversee this valuable property.

The estate planning aspect of “The Descendants” helps tie the two life events together and they help to define the character of Matt King.  In many ways, the legacies we leave behind through our estate plans help define how our descendants will remember us after we’re gone.

Please contact for more information about estate planning and estate administration.

Now or Later: Choosing Between a Will and a Revocable Living Trust

A Last Will and Testament is the most essential part of any estate plan.  It explains who your assets will pass to, how they will pass (outright or in trust), who will be in charge of administering the assets and who will care for your minor children.  For many people, a properly drafted will is sufficient to allow their estate to pass as they wish.

In some circumstances, however, a will is secondary to another document known as a Revocable Living Trust.  A revocable trust is trust established and funded during the lifetime of an individual (the “Grantor” of the trust).  At the Grantor’s death, a short will known as a “pour over will” pays any remaining assets in the Grantor’s estate to the revocable trust.  Revocable trusts have become an extremely popular alternative to the traditional last will and testament plan.

So, which is the better fit for your planning needs?  Consider these ten factors:

  1. Probate-One of the main advantages of a revocable trust is the avoidance of the process known as probate.  During the probate process, a will is submitted to a court (in New York, the court is called the Surrogate’s Court) and the named executor under the will is granted the power to distribute the Grantor’s assets.  The process can take several months and may cost a significant amount in legal and court fees.  A properly drafted and administered revocable trust can minimize or eliminate the need for the probate process.  This is especially important for individuals with property in multiple jurisdictions.
  2. Funding-In order to ensure that a revocable trust works properly, assets must be transferred to the trust before the Grantor dies.  Any assets not in the trust at the date of death will have to pass through the probate process.  This negates one of the main benefits of a revocable trust. A will requires no lifetime transfers or retitling of assets.
  3. Administration-During the Grantor’s lifetime and after they die, a revocable trust must be administered in accordance with trust instrument.  A will requires no lifetime administration.
  4. Cost-An estate plan that includes a revocable trust will typically cost more up front than a plan that includes only a will.  However, the costs after an individual dies may be less for a revocable trust due to the limited or nonexistent probate costs.
  5. Privacy-Once a will is submitted to the court, it becomes part of the public record and the general public can access it. The trust instrument, unlike a will, is not submitted to a court and the beneficiaries of the trust can remain private.
  6. Tax Planning-One common misconception about revocable trusts is that they provide tax planning benefits over wills.  In reality, both wills and revocable trusts can be drafted to minimize or eliminate estate and other transfer taxes.
  7. Revocation and Amendment-Both wills and revocable trusts can be amended or revoked any time prior to the Grantor or individual’s death.  After the Grantor’s death, both become irrevocable and the fiduciaries of the estate or trust cannot change the terms of the will or trust.
  8. Disability-The trust agreement creating a revocable trust will include successor trustees who will serve if the initial trustees can no longer act as trustees.  It is also common to have a second person serve as a co-trustee with the grantor of the trust.  If the grantor becomes disabled or incapacitated, the remaining co-trustee or successor trust can administer the trust’s assets without applying for guardianship over the grantor.
  9. Ability to Challenge-While will contests are more common, it is also possible to challenge the validity of a revocable trust on the basis of a lack of capacity on the part of the grantor and the trust being created due to the undue influence of another party.
  10. Asset Protection-During the Grantor’s lifetime, a revocable trust provides no asset protection from creditor claims.  After the Grantor dies, the Trust can be structured to protect assets from creditor claims.  This is option is also available when drafting wills.

The choice between a will and a revocable should be well thought out and discussed with your advisors.  While a revocable trust does provide certain advantages to a traditional will, it must be properly drafted, funded and administered to ensure that you receive the maximum benefit.

Please contact for more information about revocable trusts.