When historians study the 21^st century, it is almost certain that the events of 2020 will be seen as a major moment in time.  At all levels of society throughout the world and here at home, the world has been forced to rapidly change due to this first pandemic of most people’s lives.  While there is some hope that the cure/vaccine for COVID-19 is imminent, the long-term effects of this event will be with us for many years and perhaps decades to come.

For trusts and estates practitioners, we have seen the way we work both in the planning and administration of estates significantly change over the last twelve months.  These changes are likely to increase as we determine how best to serve our clients and how the recent changes made by New York state and the New York Surrogate’s Court will affect our means of advising and assisting clients beyond the end of the pandemic.

In addition, with the recent Presidential election bringing a new party to the Executive Branch and potentially to lead Congress, changes to federal laws may usher in a new series of challenges regarding estate, gift and income tax planning.  The change of political party atop our government comes at a time when additional revenue will have to be generated to help the United States recover from the pandemic as well as the ensuing economic decline.

Over the next few days, I will discuss how to approach 2021 with the lessons of 2020 in mind.  First, I will discuss how the 2020 Federal and New York elections may reshape the tax implications for estates, trusts and individuals.  Next, I will look at how the COVID-19 pandemic has fundamentally changed estate planning and estate administration in New York.  Finally, I will discuss the long-term implications of the events of 2020 with an eye to mapping out planning strategies for 2021 and beyond.

There are two components to any properly drafted estate plan: planning for your assets and family when you die and planning for what happens if you are alive, but become ill, incapacitated or unable to make certain decisions. The former is what many focus on when they begin the process of planning and often treat the latter as an afterthought. During these times of uncertainty, the importance of preparing for possible illness, incapacity or even unavailability has become paramount.

One of the cruel aspects of the current pandemic is that due to the extremely contagious nature of COVID-19, people who become ill typically become isolated either at home or, in more dire situations, in a hospital. If a patient’s condition worsens, they may no longer be able to express their medical wishes to their doctors. If this happens, having a health care proxy and living will can allow a loved one or friend to inform the doctors and other medical professionals of your wishes.

A health care proxy is simply an appointment of another person to speak on your behalf regarding your medical treatment if you cannot do so yourself. Absent further instructions, the proxy will be vested with the ability to decide what forms of treatment the patient should be given and, potentially, if treatment should cease. The living will serves as a guide for the proxy to follow to determine what your wishes are should you be unable to express them. Common provisions in these documents include directions regarding artificial nutrition and hydration, the decision to shift to palliative care and when and how to cease treatment. These decisions are personal to each person and should be considered in consultation with loved ones and your attorney.

In addition to healthcare decisions, if a person becomes significantly ill, it is unlikely that they will be able to handle their financial and personal affairs. To ensure that these matters can continue to be handled, it is recommended that every person have a power of attorney naming one or more persons as their attorney-in-fact/agent. The power of attorney allows an individual to grant their agents’ some or all of an enumerated list of powers to handle their affairs. Power of attorneys can be durable (meaning they go into effect upon execution) or springing (meaning they go into effect upon a specified event occurring). While both accomplish the same goals, a durable power of attorney does not require any outside assessment to be used. For those with concerns over these powers being abused, every agent must counter-sign the document and are considered fiduciaries under New York law.

As more people become sick and are hospitalized, the need for these two essential documents will likely increase. Having them prepared while you are healthy is a valuable safeguard over your personal and financial well being should you fall ill.

While growing up, many children express a desire to receive adult rights and responsibilities long before they are ready for them or are legally permitted to have them. In an estate planning context, a properly executed estate plan does it’s best to slowly shift the benefit and burden of managing funds from an adult fiduciary to a minor or younger adult beneficiary. Where actual minors are involved and there is no estate plan to guide this transition, both the courts and financial institutions have their mechanisms to protect children and their assets.

In the New York Surrogate’s Court, a minor child who becomes a party to estate administration as a beneficiary, legatee or other role will often have court appointed representative known as a guardian ad litem.   Guardians ad litem are typically attorneys or other competent adults who stand in for the minor child or children and represent their interests. In an estate administration, the Guardian Ad Litem (GAL) assures that decisions made by adult fiduciaries are fairly handled as it relates to the children.

As the GAL’s representation draws to a close, he or she will right a report for the court of their findings. When there is a question about an aspect of estate administration, the GAL may intervene or object on the child’s behalf in the same capacity as an adult beneficiary. The GAL is compensated for their work and those funds often come directly from the assets left to the minor children.

On the financial side of things, financial institutions also seek to protect minors who have money set aside for them. This is regulated in New York by the Uniform Transfers to Minors Act (UTMA) and allows an adult (a parent or guardian) to serve in a custodial role over a minor’s account. Each account must benefit a single minor and pooled accounts for multiple children are not allowed.

During the period of minority, the custodian of the account is entrusted to ensure the monies are protected. The custodial role terminates at one of three times: at age 18 if the account creator dictates that the account is to terminate at the age, at age 21 if the account creator is silent on termination or upon the death of the minor before termination. If the custodian dies prior to the termination of the custodial account, a new custodian will be appointed.   Successor custodians are often not named, so a court appointment is often necessary.

These fail safe protections do not take the place of an estate plan; in fact, relying on them can cause extra costs, waste due to a child receiving funds at too young an age or extra administrative time and costs. Protecting minors and their assets is best done by a minor’s parent and they have the power to do so in a more effective, efficient and inexpensive manner.

Please contact info@levyestatelaw.com for more information.

The importance of having a last will and testament or a testamentary substitute has been repeatedly stated here and elsewhere. Failure to set up your own estate plan leaves the control of your estate to the default rules of the state specific intestacy statute. In some situations, the end result may not be horrible. For families with an uncomplicated family lineage, the pattern of inheritance will not likely stray from what most people put in place in a will. But, with more complicated families with children of multiple marriages, children born outside of marriage or the closest relatives being persons other than spouses and children, the path to completing an estate administration becomes much more complicated.

Children

Under the intestacy statute, children born of a marriage and those born outside a marriage are not treated the same. Marital children will automatically be considered heirs of a deceased individual.   On the other hand, children born outside of a marriage (now called “non-marital” children under the New York Estates Powers & Trusts Law) and their rights of inheritance will depend on whether the deceased parent is a mother or father.   Non-marital children of a mother, like marital children, automatically inherit from their mothers.

This is not the case with inheritance from a child’s father.   To inherit from a non-marital father, a child must prove one or more of the following: that paternity was established by an Order of Filiation; the mother and father filed an acknowledgment of paternity; the father signed another document acknowledging paternity; or paternity is established by “clear and convincing evidence”. “Clear and convincing evidence” can include genetic information or evidence that the father “openly and notoriously” acknowledged the child as his own.   The latter can be proven by a variety acts taken by the father and shown in an affidavit of an uninterested party.

It should be noted that the above applies only to biological and adopted children; foster children and stepchildren are not considered children for purposes of intestate inheritance.

More Distant Relatives

In some intestate estates, neither a spouse nor children are living or exist. The estate of such decedents would then pass to the closest class of relatives still living.   New York intestacy law considers, in order, grandchildren, great grandchildren, parents, siblings, uncles and aunts, nieces and nephews, grandparents, 1^st cousins and 1^st cousins once removed as possible relative classes that can inherit an intestate estate.

Once the closest class of relatives is established, the claiming relative(s) must prove their relationship to the decedent by common blood relative. A family tree showing that either all higher classes of relatives are deceased or do not exist must be created and evidence such as birth, death and marriage records must be presented. Beyond proving kinship, a claiming relative must show that no other relatives exist of a higher or equal level of relationship. If there is a dispute as to who is and who is entitled to inherit, the court may order a kinship hearing.

In a probate proceeding (an estate administration proceeding where a will is submitted to the court), most of these steps are unnecessary. Sufficient notification of all distributees (persons who would inherit property under intestacy) and those listed in the decedent’s will shall suffice the court.   The less complex nature of a probate proceeding to an intestate proceeding provides an additional benefit to preparing an estate plan rather than leaving your estate to the complexities of intestacy.

Please contact info@levyestatelaw.com for more information.

The final month of 2017 will begin this Friday and with it, many will be making a mad dash to wrap up various projects that they started during the year. Finalizing things during the waning weeks of the year is complicated by other priorities including work and family celebrations, holidays and vacations. Even with so much on our plates at this time of year, there are some tasks which can be undertaken during December that will help maximize the effectiveness of your estate plan.

1. Make annual gifts to friends and relatives. Each year, every individual can gift $14,000 individually to as many beneficiaries as they wish. A married couple can pool their gifting and give a collective $28,000 to their beneficiaries. This is a great way to reduce the size of your taxable estate while benefiting the people you care about without any tax consequences.

2. Complete beneficiary designations on your paid on death assets. Life insurance, annuities and most retirement accounts allow owners to designate the beneficiaries of these assets to allow beneficiaries to claim assets without court intervention. Failure to designate a beneficiary often leaves a person’s estate as a beneficiary and then requires the formality of a full estate administration.

3. Finalize your estate planning documents. If you’ve started working with an attorney and have yet to finalize your documents, finishing the process before the end of the year will provide you and your family with a sense of closure and security prior to the holidays. It will also leave you with one less goal to accomplish next year.

4. Review your existing estate planning documents. Whether it’s been a year or ten, most people don’t keep the details of their estate plan front of mind for long after they’ve completed the process.   A review of your existing documents with or without your attorney’s help can help clarify if your current planning still makes sense with your current situation.

5. Fund existing trusts. One of the biggest estate planning mistakes is unfortunately very common. When a client executes a trust, the work is only half done. Properly funding the trust, regardless of what type of trust it is, is what keeps a trust agreement from becoming nothing more than a very expensive piece of paper.

6. Prepare Health Care Proxies and Durable Power of Attorneys. Preparing for disability/incapacity is a complicated and time consuming process. On the other hand, the basic documents, a health care proxy and a durable power of attorney, can be prepared relatively quickly and cheaply. Even if you have no other planning in place, having these documents prepare before year’s end is a no-brainer.

7. Speaking with your fiduciaries. Executors, trustees and guardians all have great power and responsibility with regard to your family and your assets. Regular conversations with these important people helps to ensure that they remain the right choices for these roles. Timing these conversations for the end of the year can bring a year’s worth of perspective to these discussions.

8. Discussing the basics of your estate plan with your children. As children grow into adults, exposing them to the specifics of your planning is a good way to prepare them for what to expect when you are gone. Although these are difficult discussions to have, giving your children the knowledge that you have planned for situations like disability and death ultimately can provide them with the security of knowing that things will be set up now to avoid conflict and surprises later.

9. Revising or Creating a List of assets and accounts. It is my general recommendation to avoid listing accounts and specific assets in your estate documents if they are being bequeathed as part of a general gift. This is because the assets often change, get spent, sold or move to different institutions during a person’s lifetime. As an alternative, preparing a summary of the important assets, the location of the assets and other key information to keep alongside your estate planning documents provides a guide for your fiduciaries and beneficiaries to follow. By keeping it as an informal document, it allows you to frequently change it without the need to revise your estate planning documents.

10. Schedule a consultation with an estate planning attorney. While it is difficult to get a new estate plan put together in a month, a consultation is a good first step towards completing an estate plan.   Starting now, and not leaving this for a new year’s task, will help avoid pushing the process down the road without any forward progress.

These tasks alone or collectively can provide further clarity and completeness to your estate plan. By completing these tasks, you can enter 2018 with a more secure and clear estate plan.

Please contact info@levyestatelaw.com for more information.

During the rollout of his economic plan, Donald Trump announced his intention to push for a repeal of the federal estate tax. Trump claimed to have known many families who were “destroyed by the death tax.” If this proposal and the associated rhetoric sounds familiar, there is a reason for that: the proposal and rhetoric is identical to that of George W. Bush when he took over the presidency in 2001.

It is helpful then to compare where things stand today versus fifteen years ago to see if today’s estate tax environment is comparable to that of 2001:

Federal exemption, then and now. When President Bush took office, the federal estate tax exemption sat at $675,000 per individual or $1,350,000 per married couple. The maximum tax rate was 55%. Bush and Congress passed sweeping tax cuts once he entered the office including temporary repeal of the estate tax in 2010. By the time 2010 came along, both the Presidency and Congress had switched to the Democratic Party and in order to avoid a return to the exemptions of 2001, Congress and President Obama agreed upon two compromises.

First, in 2010, the estate tax was reinstated with an exemption of $5,000,000.00 and a maximum tax rate of 35%. Second, in 2012, as part of the fiscal cliff negotiations, the reinstated exemption of 2010 was made permanent with yearly adjustments for inflation and a maximum tax rate of 40%. In 2016, the exemption currently stands at $5,450,000.00 per individual or $10,900,000.00 per married couple.

Portability. The 2010 compromise also added a new concept known as portability to the federal estate tax system. Previously, if a married individual died leaving a portion of their estate tax exemption unclaimed, the remaining exemption was lost. The advent of portability changed this to allow a surviving spouse the ability to claim the remaining portion of their deceased spouse’s exemption by filing a federal estate tax return.

New York exemption, then and now. At the time of the enactment of the federal estate tax repeal, New York’s estate tax exemption was increased from $675,000 to $1,000,000.00. In addition, New York and other states decoupled from the federal estate tax system and continued to tax estates at or above their exemption amount. This led to many estates being subject to New York estate tax but not federal estate tax.

In 2014, Governor Andrew Cuomo enacted the first change to estate tax exemption in New York in over a decade. Through the end of 2018, the New York estate tax exemption would increase several times before being tied to the federal exemption starting in 2019. This change greatly reduced the number of New York estates subject to any estate tax liability.

The Tax Cliff. The changes to the New York estate tax system were not all beneficial to taxpayers. Beginning in 2014, estates valued at 5% or more of the applicable exemption would be subject to estate taxation on the entire value of the estate. Estates at or less than 5% of the exemption would continue to be taxed only on the value of the estate above the exemption.

This change created a further burden on large estates while alleviating smaller estates of any estate taxation. The New York system, unlike its federal counterpart, does not provide for the use of portability for any unused portion of a deceased spouse’s exemption. This continued discrepancy between the New York and federal systems requires individuals with estates at or near the exemption to be ever more vigilant about their planning.

Additional Changes. The changes to the exemptions and tax rates are not the only ways that the tax system has improved for taxpayers and their families. Along with increasing the federal estate tax exemption, the 2010 compromise also increased the federal gift exemption from $1,000,000 to $5,000,000 and subsequently the same amount as the federal estate tax exemption. This allows wealthy families to transfer highly appreciable property during their lifetime to their heirs.

Same sex married couples have also benefited from these changes as a result of the decision in Obergefell v. Hodges. With the federal estate tax marital deduction and exemptions now available to all married couples, even more taxpayers are able to protect their estates from taxation.

Then vs. Now. At the federal and New York levels, the past fifteen years have seen unprecedented growth in the amount of assets individuals can pass to their heirs estate tax free. The amount of estates owing any estate taxes have declined dramatically with only approximately .02% of estates being subject to federal estate tax.

In the eyes of the opponents of the estate tax, none of this matters. Their objections to this so-called “death tax” does not concern itself with these facts. But, regardless of one’s politics and beliefs, the reality of the estate tax system in the United States and New York is very different today than it was when we heard Donald Trump’s current policy views spoken by President Bush in 2001.

Please contact info@levyestatelaw.com for more information about your and your family’s estate planning and estate administration needs.

For most people, the terms gift or gifting brings to mind holidays, birthdays and other celebratory occasions. In the context of estate planning, making a gift or entering into gifting plan is a powerful tool to provide a benefit to family members, charities and other beneficiaries while also creating a tax benefit to the donor or giver of the gift. And while the intention behind giving a gift is similar to giving holiday and birthday gifts, the benefits and risks are much more significant.

Here is an introductory guide to gifting as part of your estate plan:

1.  What is a gift? When discussing gift planning, the term gift is used to describe any gratuitous transfer during a donor’s lifetime. Transfers made for consideration or some form of compensation is not treated as gifts for tax purposes (although the IRS may claim a partial gift is made if the consideration is insufficient). Transfers made at a donor’s death are also not considered gifts for purposes of this discussion.

2.  When is tax potentially due on a gift made by a donor? Under federal tax law, each individual has two distinct exemptions for purposes of making gifts. First, each individual may gift up to $14,000 to as many recipients or donees as they wish each year. Married couples can collectively gift up to $28,000 to each donee each year without any gift tax applying.

If an individual or married couple exceeds their annual exclusion amount in any                 given year, the excess is then deducted from their lifetime gift exemption.                         Currently, the lifetime exemption is $5.43 million with a maximum tax rate of 40%.             The lifetime exemption is tied to the federal estate tax exemption, so use of your               lifetime gift tax exemption will reduce the amount that can pass tax-free at your                 death.

3. Are transfers to all donees potentially subject to taxation? No. Transfers from one spouse to another spouse are exempt from all gift tax. This is helpful in planning the estates of married couples with uneven estates. The spouse with a larger estate can gift a portion of their estate during their lifetime to their spouse with no gift tax consequences and potentially large estate tax savings. However, transfers between spouses, like all transfers, are subject to the three-year look-back rule that will be discussed later in this article.

4. What is cost basis and how does it relate to gift planning? When property is transferred, the new owner of the property receives a cost basis that will be used to calculate capital gains when the property is later sold. Depending on when the property is transferred and how it is transferred, the calculation of the cost basis varies. Property that is purchased for consideration will have a cost basis equal to the sale price of that property.   For gratuitous transfers, the cost basis will either be carried over from the previous owner or stepped up to the fair market value of the property at the time it is transferred. Property that is inherited generally receives a stepped up basis to the date of death (or alternative valuation date) value. This is a significant benefit to those who sell inherited property shortly after a loved one’s death.

Property that is transferred by gift will typically carryover the basis of the donor. If the          property has appreciated since its purchase or if the property is likely to appreciate            after the transfer, the donee may be left with a significant capital gains tax upon their          sale of the property.

5. What gifting pitfalls should I avoid? Gifting property comes with certain common pitfalls that should be avoided if possible, namely:

Creating joint ownership is a gift.   It is not uncommon for older individuals to add a           child or sibling to their bank accounts and/or real property deeds. However, many             do not realize that adding someone’s name to their property ownership actually gifts         a portion of their assets to that person. In addition to unintentionally making a gift,             adding a child or another loved one to a real estate deed will cause the donee to               receive the donor’s cost basis and lose out on the potential stepped up basis in the           property if it was transferred at the donor’s death.

Transfers made within three years of a donor’s death. If a donor is attempting to               reduce their taxable estate, making a gift of property is one of the best ways to                 actively reduce their estate value. However, any transfer made within the three years         prior to a donor’s death will be included in the calculation of the donor’s taxable                 estate.

Transfers made to qualify for Medicaid. Older individuals often consider gifting as a           means to qualify for Medicaid. In New York, Medicaid can be applied for if services           are needed in the home or community (community Medicaid) or if a person needs to         move into a nursing home (nursing home Medicaid). For the former, Medicaid will               begin paying once a person reaches the appropriate income and asset limits                     regardless of when the transfer is made. For the former, however, any transfers                 made within five years of the application will be counted against the applicant. The             total amount of gifts will be divided by the current average cost of a nursing home in         the applicant’s county and the sum will be the amount of months the applicant will             have to self pay before Medicaid will cover their nursing home expenses.

Gift planning comes with many benefits and pitfalls that require careful consideration. By working with the proper advisors, you can maximize the value of your gifts to your beneficiaries and to yourself.

Please contact info@levyestatelaw.com for more information.