Estate Tax 2018-What We Know, What Trump Wants and What’s To Come

On Wednesday afternoon, after months of speculation, the Congressional Republicans released their and President Trump’s proposal for tax reform/cuts to begin as soon as 2018. Much of the general parameters of the plan have been known for months with few specifics being known. The proposal released on Wednesday didn’t add many specific although the contours of the proposal were now official. Not shockingly, a repeal of the federal estate tax was amongst the proposals presented.

With a formal bill not yet written and a strategy for passage still unclear, it is helpful to look at what the estate tax system-both federal and state-may look like next year depending on what Congress does and whether or not the estate tax factors into the eventual final bill.

Federal Estate Tax Exemption-A Tale of Two Possible Futures.

Currently, the Federal Estate Tax Exemption stands at $5.49 million per individual and a collective $10.98 million for married couples. Under the federal system, through the concept of portability, a surviving spouse may utilize any unused portion of their deceased spouse’s estate tax exemption. Since all assets pass to surviving spouses estate tax free (due to the federal marital deduction), a surviving spouse has great potential to transfer an eight-figure estate to their heirs free of estate tax.

Since 2010, the exemption has been increased annually as a factor of inflation. And although an official decision will not be made by the IRS until next month, the expectation is that the exemption will be increased to $5.6 million per person and $11.2 million per married couple. It is also projected that the federal gift tax exclusion will be increased from $14,000 per beneficiary per year to $15,000.

Under the Trump/Republican plan, the federal estate tax and the generation skipping transfer tax (GST tax) will be repealed. Beyond that, very few specifics are known. Will the repeal begin in 2018, be retroactive or phased in as it was when it was repealed in 2001? What will happen with capital gains treatment of inherited property? Since there will be no longer an estate tax, will property that previously received a step up in basis be given a favorable treatment at death and what, if any, limit on stepped up basis will there be?

Another notable omission from the plan is any mention of the federal gift tax. Given the reduction in revenue that a repeal of the estate tax will create, is it possible that the federal gift tax exemption will be reduced? Or will the system also be overhauled to deal with the reality of an estate tax federal tax system? The coming weeks and months may or may not tell the tale on this issue.

New York and other local State Estate Tax Exemptions.

 In New York, the outcome of where the Federal Estate Tax Exemption will land matters more over the next year than any time since 2000. In 2014, Governor Cuomo and the state legislature agreed to increase New York’s state exemption from $1 million to eventually re-connecting it with the applicable federal exemption. Currently and through December 31, 2018, the New York estate tax exemption is $5.25 million. On January 1, 2019, the exemption will be tied to the then in-effect Federal Estate Tax Exemption. What if there is no Federal Estate Tax Exemption? It is unclear as of now what New York would do, but it seems unlikely that New York would follow suit with a full repeal.

Our neighboring states have taken different tacts with regard to their state specific exemptions. Last year, New Jersey repealed their estate tax exemption starting January 1, 2018. They continue to have an inheritance tax for bequests to non-lineal family members and with a new governor entering office shortly after the New Year, there may be additional changes to their estate tax/inheritance tax system. Like New Jersey, Pennsylvania has only an inheritance tax, but only fully exempts bequests to surviving spouses and children under 21. Connecticut has an estate tax with a current exemption of $2 million.

Beyond 2018.

By this time next year, we will likely know what both the exemptions for both the federal and state specific estate tax systems will be. But, as with any change to a tax code, it may be many months if not years before we fully understand the ramifications of these changes.

Please contact info@levyestatelaw.com for more information.

Advertisements

When a ‘minor’ issue can become a Major Problem.

One of the primary concerns for families with minor children have with regard to their estate planning is the care, both personal and financial, of the minor children if both parents predecease the child before he or she reaches the age of majority. The appointment of a guardian (typically a relative or close friend) provides a level of comfort for parents who wish to be certain of who will take of their children if they are no longer around.

Relying on a guardianship appointment alone may not sufficiently protect your child from certain financial problems that are common with children who receive large sums of money at an early age. In New York, a child reaches the age of majority at 18. Unless the child consents to the continuation or appointment of a guardian, all monies and property held for their benefit must be released to them directly. In rare circumstances, a child can petition the Surrogate’s Court prior to reaching 18 if the appointed guardian is not fulfilling his or her responsibilities or the court finds guardianship to not be in the child’s best interest.

It is rare to find an 18 year old with sufficient financial maturity to handle the administration, investment and maintenance of large sums of money. It is for this reason that I strongly advocate establishing trusts for children under both last will and testaments and under lifetime trusts. The benefits are substantial and clear: first, by continuing to have a fiduciary (rather than the child) as the responsible party for the assets, the value of the assets have a reduced chance of being wasted or used for frivolous or harmful purposes.   Second, by retaining the assets in a trust and not in a child’s name, the assets can be shielded from potential creditors of the child.

Finally, using a trust gives the donor of the assets-the testator under a will or a grantor of a trust-the ability to structure the distributions and usage of the assets to best accommodate their wishes and the needs of the children beneficiaries. The donor is typically a parent or close relative and may have a better understanding of a child’s strengths and weaknesses when it comes to managing money.

There is no perfect solution that ensures that assets being inherited by or gifted to a child will not ultimately be wasted or abused. However, by relying on your own knowledge of a child rather than arbitrary deadlines, the chances of seeing the assets used for the intended purposes greatly increases.

 

Please contact info@levyestatelaw.com for more information.

The President has no Trust.

Following his election as the 45th President of the United States, President Trump made repeated claims that he would divest himself from his business assets to avoid any conflicts of interest. Despite numerous claims that conflicts of interest laws do not apply to a sitting president, in January, Trump finally revealed his plan to the world-he would transfer his business holdings to the Donald J. Trump Revocable Trust, a trust set up for his own personal benefit but controlled by his son Donald and Allen Weisselberg, the CFO of the Trump Organization, who were named as Trustees. This, he claimed, would allow him to remove any doubt with regard to any potential conflict between his acts as president and his business holdings.

Earlier this month, ProPublica published a report that in February, the terms of the Trust were changed to allow the President the ability to receive principal and income from the Trust at his request subject to the approval of the Trustees. While this appeared to be an about face from Trump, the truth of the matter is the choice to use a revocable trust as a means of divestiture was never a serious transfer of his assets and the control thereof.

For starters, a revocable trust is not a traditional trust under United States trust law. Typically, trusts are irrevocable and the person contributing property to a trust loses all direct control over the property. Additionally, in many states, the donor or grantor of a trust cannot also be a beneficiary of the trust. Finally, while not impossible, most trusts cannot be amended or changed without a court order.

A revocable trust has none of these restrictions. The grantor of the trust reserves the right to revoke the trust at any time. In most instances, a grantor of a revocable trust is also the main beneficiary of the trust. And while the trust agreement can put restrictions on the control and distribution of trust property, the grantor has the ability to amend the trust and remove and replace the trustees if they are not happy with how the trust is being administered.

The main restriction found in a revocable trust is that these powers typically disappear if the grantor becomes incapacitated or dies. The trust then becomes irrevocable and the grantor loses the power to revoke and amend. It is possible that the President’s trust could have included his time as president as a further triggering event to losing these powers. The certification of trust presented by the President indicates that he retained his right to revoke the trust, so it is clear he did not do that.

Revocable trusts are often used to ensure a client’s privacy, to protect a client’s assets if they become incapacitated and to reduce the time and cost of estate administration upon their death. The idea that such a trust could be used to create any sort of separation between the president and his assets ignores the fact that the rights retained by the President are not a bug, but a feature of these trusts.  Revocable trusts are trusts in name alone and cannot be used to properly separate the President or any other government official from the conflicts associated with their business holdings.

For more information on trusts, please contact info@levyestatelaw.com

A Declaration of Interdependence

Last Monday, we celebrated the 240th anniversary of the signing of the Declaration of Independence, the document by which the United States of America was born.  By recognizing the need to break free from the control of England, the former colonists put forth the belief that only by gaining independence could they gain the unalienable rights of “Life, Liberty and the Pursuit of Happiness.”

Nearly two and half centuries later, the world has changed dramatically, but the desire for independence and the ability to chart our own course remain key values to Americans. Running parallel to this need for freedom is our history of finding great success by relying upon each other.  The motto “E Pluribus Unim” (out of many, one) reflects that this is also a core American value.

When preparing an estate plan, it is understandable to want to rely on one person or one advisor to ensure all your wishes and desires are fulfilled.  However, in most cases, it is preferable and useful to have multiple advisors across multiple professions working with you to provide you and your family with the security you wish for.  By working together, attorneys, accountants, financial and wealth advisors and other professionals can bring their specific expertise to the table and strengthen the other advisors’ abilities to help a client reach their goals.

Family members and friends also play a part in ensuring your estate plan fulfills its goals. In their capacities as fiduciaries or beneficiaries, these most important individuals can assist both the individual and their advisors during their lifetime and beyond.  Conversely, a disgruntled family member can cause great harm to the success of an estate plan.

In the end, each individual’s estate plan should reflect their specific wishes and intentions.  It is each individual’s right to plan their affairs as they see fit.  Utilizing the people and resources available to you is best way to achieve this goal.

For more information, please contact info@levyestatelaw.com.

The Perils of Procrastinating: Six Ways Delaying Your Estate Planning Can Harm You, Your Assets and Your Family

Procrastinating is a typical and normal response to having to deal difficult and uncomfortable tasks and situations. Everyone would prefer to delay dealing with the hard decisions related to setting up an estate plan. But, for far too many people, what begins as procrastination turns into inaction. Since no one can accurately predict when any part of an estate plan will need to be utilized, this inaction can have irreparable and unwanted harm on an individual, his or her assets and their family.

Without an estate plan in place, many decisions that should have been made by an individual are left to a series of statutes and rules related to the laws of intestacy. These laws and rules dictate how a person’s estate will be managed and administered if they did not leave a properly executed will or other testamentary device when they die. While those who have an estate plan will be able to make these choices, those without will have numerous choices made for them:

Who will benefit from your estate? The laws of intestacy determine who will benefit from your estate based on a specific line of familial succession. If you are married without children, your spouse receives everything.   If you are married with children, the surviving spouse and the children split the estate 50-50.   If no children or spouse are living, the line of succession continues down all the way to first cousins once removed if no previous class of relative is alive.

This poses several potential problems. First, the statutes do not differentiate minor children from adults, leaving a potential situation where a minor child will receive potentially large sums of money. How this money is held and the level of court control over this money becomes an issue as well (more on that later).

Second, for more complicated family structures, the statutes pose significant problems.   Children born of wedlock or adopted children may face the need to prove their relationship with a deceased parent in court. Non-blood relatives who might have benefited from the deceased individual’s estate are not considered.

Finally, since New York does not recognize the concept of common law marriage, a non-married partner will be left out of the inheritance even if they had children with the deceased. It is especially important for persons in non-traditional relationships to have their wishes outlined in an estate plan if they wish to benefit persons other than their blood relatives.

Who will administer your estate? Without a will or other testamentary device, the Surrogate’s Court will look to the intestacy order of succession to determine who will be appointed the administrator of the estate. In addition to taking this decisions out of an individual’s hands, the lack of a clear choice to administer the estate may lead to higher costs, a longer administration and potential litigation from unhappy beneficiaries.

Who will care for your minor children? In the rare instances where both parents die with minor children, a will or other testamentary instrument will typically nominate person to serve as the guardian for any minor children. Without a will, the friends and relatives of the deceased may petition the court for the right to care for the children. It is then up to the judge to decide, based on his or her opinion, who the most qualified person is. The judge’s criteria may differ sharply from the parents’ criteria for choosing a guardian.

How will the assets of the estate be held and what involvement will the court have with the administration of the assets? It is often advisable to utilize one or more trusts under a will as the receptacle for the assets passing out of the estate. Asset protection, tax savings and avoidance of waste are common reasons why using trusts are preferred over outright bequests. A court is unlikely to create a trust for an individual who does not have a will or testamentary instrument. This failure to plan may expose assets to risks that a trust could easily avoid.

In addition, if a minor is a beneficiary of an estate, the court and their guardian will oversee their share of the estate until the minor reaches eighteen.   The guardian will be required to petition the court for any distributions that a child may need and requests for distributions are not automatically granted.

How can I avoid, delay or reduce estate, gift and generation skipping transfer taxes? Beyond using an individual’s state and federal exemptions, coupled with the marital deduction if an individual is married at the time of their death, failure to have an estate plan in place will almost completely foreclose any tax planning for an estate’s assets.   Post-mortem (after death) planning is an available option, but it may not be as effective as proactive planning.

Who will make decisions related to finances and medical care if I am unable to? The previous questions related to what happens after someone dies, but issues related to incapacity and disability are equally important.   Along with a will, a durable power of attorney, health care proxy and living will are essential components of an estate plan. Without theses documents, decisions related to finances and medical decisions may not be made by the correct person or may require court intervention to authorize. In a worst-case scenario, a dispute may arise amongst family members about these decisions that could devolve into litigation.

It is impossible to predict when and how you will need to utilize an estate plan. However, for most people, it is clear that making the decisions that will affect themselves, their families and their assets is preferable than leaving these decisions to others.

Please contact info@levyestatelaw.com

An Estate without Trust: An Introduction to Estate and Trust Litigation

Two of the most difficult situations that people find themselves in are the administration of a deceased loved one’s estate and an active litigation matter.   It is no surprise then that when those two stressful situations combine, the resulting conflict can result in loss of assets and the destruction of close family bonds. In order to minimize the damage that an estate or trust litigation can bring, it helps to understand how these type of matters are handled.

In New York state, litigation involved trusts and estates are handled by the Surrogate’s Court in the county where the trust or estate is situated. While there are a wide variety of actions that can be brought in the Surrogate’s Court, there are few very common actions that trusts and estates professionals see repeatedly. They include:

  1. Will Contests-If a family member or another presumed beneficiary of an estate believes that a will presented to the court is either invalid or does not express the deceased individual’s actual intent, a will contest can be brought. If the challenge is based on the intent of the Testator, the person(s) contesting the will must show that the Testator either lacked capacity when they executed the will or they were unduly influenced by another party to agree to certain provisions of the will.
  1. Construction Proceedings-A will or trust may be considered valid by all parties, but one or more provisions may be open to multiple interpretations. A construction proceeding is mechanism by which the Court can determine, based on evidence provided by each side, what the testator or a will or the grantor of a trust intended with regard to certain provisions in their documents.
  1. Discovery and Turnover Proceedings-In some instances, property that should be in the possession of an estate or trust has to be turnover to the respective fiduciaries. If the person in possession of that property is unwilling to voluntarily turn it over to the fiduciaries, the fiduciaries or other interested parties may request a discovery and/or turnover proceeding to determine if certain assets should be distributed to the fiduciaries.
  1. Contested Accountings-All fiduciaries, whether executors of an estate or trustees of a trust, have an obligation to provide their beneficiaries with a regular account of their activities.   If a beneficiary believes that the fiduciary has acted improperly, he or she may use the fiduciary’s accounting as a basis to contest certain actions that they have taken. Failure by a fiduciary to account voluntarily may lead to a mandatory accounting ordered by the court and additional relief for the beneficiaries.
  1. Fiduciary removal proceeding-If the actions of a fiduciary are so egregious that the beneficiaries believe that they can no longer serve the interests of the beneficiaries, trust or estate, they may petition the court to have the fiduciary removed.   Removal is a severe form of relief that the court is reluctant to grant unless they are presented with sufficient evidence to justify relief. If a fiduciary’s actions can be justified as being within the discretion they are granted, the court will likely seek alternative solutions rather than removing them from their positions.

Avoiding the cost and stress of an estate or trust litigation is among the most important goals an estate planner has when suggested certain planning options. Unfortunately, there is no guaranteed way to avoid litigation entirely. Proper planning beforehand and quality representation if litigation does occur are key to ensure the best possible outcome in these extremely difficult situations.

 

For more information on estate and trust litigation, please contact info@levyestatelaw.com

 

New Year, New Exemptions, Same Concerns

2014 was a year of major changes for New York estate planners. For the first time in twelve years, the state specific exemption increased from $1 million to $2.052 million. This was the first of several changes to the New York exemption that will occur annually through 2019 when it will be tied to the federal estate tax exemption.

The increased exemption was coupled with a possibly more significant development, the so-called “cliff” for estates that exceed the exemption by 5% or more. Previously, New York State only taxed the value of an estate that exceeded the applicable exemption. For estates that reach or exceed the cliff, the entire value of the estate will now be subject to taxation. This change made it even more important to carefully craft your estate plan.

As 2015 begins, here is a look at where the applicable exemptions and exclusion amounts stand:

Federal Estate Tax Exemption-In 2015, the exemption has increased from $5.34 million to $5.43 million. This represents the smallest annual increase to the exemption amount since it was indexed to the inflation rate in 2012.

Federal Gift Tax Exemption-Similarly, the federal gift tax exemption has increased to $5.43 million. For those who maxed out their exemptions in 2012, the small change will provide minimal additional room for them to make additional gifts.

Federal Gift Tax Annual Exclusion-There has been no change from the 2014 (and 2013) amount of $14,000 per beneficiary. Coupled with the small increase to the lifetime gift exemption, there has been very little additional room for donors to make additional tax-free gifts.

New York Estate Tax Exemption– On April 1, 2015, the state estate tax exemption will increase to $3,125,000.00. Although not as dramatic of an increase as the 2014 change, this still represents more than a 50% increase to the exemption.   The cliff kicks in $3,281,250 and estates at or in excess of this amount will see the entire value of their estates subject to taxation at a maximum rate of 16%.

New Jersey and Connecticut Estate Tax Exemptions-New York’s neighboring states did not follow suit with increasing their respective estate tax exemptions. Connecticut’s exemption, which had previously been higher than New York’s, remains at $2 million while New Jersey’s exemption is the lowest amongst those states with a separate state exemption a $675,000. New Jersey also has a separate inheritance tax that may or may not apply depending on who the beneficiary is.

These changes, while creating some additional flexibility, do not alleviate some of the issues that concern estate planners. In New York, it remains important to ensure that assets are properly allotted based on the applicable state and federal exemptions. If they are not, unnecessary tax may be due. The introduction of the cliff increases this concern because under New York law, unlike federal law, a surviving spouse cannot inherit the unused portion of the deceased spouse’s exemption. This concept, known as portability, is limited to federal taxation and will not protect a New York estate from exceeding the cliff.

The 2014 changes have created new opportunities to shield additional assets from taxation. They have also created new pitfalls that clients will need their estate planners’ assistance to avoid.

Please contact info@levyestatelaw.com for more information