Ten Year-End Tasks To Improve Your Estate Plan

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.

 

  1. 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.

 

  1. 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.

 

  1. 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.

 

  1. 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.

 

  1. 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.

 

  1. 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.

 

  1. 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.

 

  1. 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.

 

  1. 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.

Estate Tax Repeal Take 2? A look at the Federal and New York Estate Tax Systems Then and Now

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.

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.

An Estate Planner’s Guide To Gifting

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.

The State of New York Estate of Mind

For those who have been actively reading this blog over the past two years, you have likely noticed that I have not posted new content since this past July.  

 

There are many reasons for this inactivity, but overall, it comes down to time.  Time is something that is always in limited supply and over the past few months, time is something I have simply been in short supply of.  Because of this, some things have fallen down the priority list and one of them is this blog.

 

With that said, this blog and the importance of keeping those who read it educated and informed on the area of estate planning and estate administration remains incredibly important to me.  A lack of time does not change that and there are several posts that I have been planning and will tackle in the coming weeks.  

 

On November 25th, the two year anniversary of this blog, I will return to a regular schedule of updating this blog on a biweekly basis.   If the need or the ability to update it more frequently, I will certainly do so.

 

Thank you all for your support and understanding.  Most importantly, thank you for reading!

Protecting Their Assets, Preserving Your Planning: Why Estate Planning Is A Key Tool For Other Advisors

The question of why an individual or a family needs an estate plan is often asked and answered in a typical fashion.  Issues regarding proper distribution, the minimization of taxes, who controls assets and cares for children and how a person’s assets and family are protected from disability and incapacity are always part of my answer when it comes to stressing the importance of estate planning.

An additional concern that I raise is important not only to individuals who I work with to prepare estate plans, but also to the other advisors they work with.  Estate planning provides a prophylactic veil over the work of other advisors to ensure that their work is not compromised.  Many advisors recognize the importance of an estate plan to their specific planning and understand the consequences of their clients’ failure to plan.

Some examples of advisors who benefit from their clients’ establishing estate plans include (but are not limited to):

Financial Planners/Investment Advisors-Financial plans and investment portfolios are created with specific goals in mind and allocations based on the advisor’s strategy to achieve those goals.   Without an estate plan, a portfolio may be divided or distributed to persons that were not intended by the client and the advisors.  In addition, without a plan to delay, reduce or eliminate estate taxes or, alternatively, a way to pay for estate taxes, a portion of a portfolio may have to be liquidated prematurely.

Life Insurance Advisors-Life Insurance can be a great source of liquidity when someone dies since the proceeds of the policy will typically be paid prior to any estate taxes being due.   However, without consideration of a person’s assets, life insurance may create an estate tax where none would be due otherwise.  By working with an estate planning attorney to purchase or assign a life insurance policy to a trust, the full value of the death benefit can pass to the intended beneficiaries estate tax free.

Accountants-With many accountants serving as the “quarterback” for their clients over planning, having an estate plan in place ensures that the problems improper distributions or excess taxation harm their clients.  Some accountants will be responsible for the estate, gift and generation skipping transfer (GST) tax returns of theirs clients as well as fiduciary income tax returns for trusts and estates.  Having an estate plan in place makes the tax preparer’s job easier and less complicated.

Other Attorneys-Attorneys who practice in areas such as family, matrimonial and tax law will often be aware of the trusts and estates related issues that may complicate their work.   Real Estate and Corporate attorneys can also benefit from ensuring that their clients’ work with them is not compromised by estate related issues.   In some litigation matters,  having an estate plan in place can expedite the commencement or settlement of a lawsuit with a sick or deceased client.

In a similar vein, estate planning attorneys rely on our clients’ other advisors to help ensure the best results possible.  Advisors working together for the benefit a client enhances the client’s planning and the advisor’s reputation with the client.

Please contact info@levyestatelaw.com for more information.

The New Normal-Estate Planning in 2013 and Beyond

Since 1997, the federal estate tax exemption and maximum tax rate have changed every year but three.   The exemption has changed eleven times; the maximum rate has changed eight times.  Many of these changes have been due to the temporary nature of the tax legislation that Congress have passed and each change came with a specific end date in mind.  With each change, estate planning attorneys have been forced to speculate as to where the exemptions and rates would end up after the expiration date of each new law.

But, with the passage of the Tax Relief Act of 2012, it appears this consistent uncertainty is coming to an end.  Amongst the many revenue related changes made permanent by this law were permanent extensions of the estate, gift and generation skipping transfer (GST) tax exemptions enacted in 2010.  Each exemption will be adjusted for inflation annually and it is estimated that the 2013 exemption will be $5.25 million.

On the tax rate side, the maximum rate for these three transfer taxes was increased from 35% to 40%.  In addition, the concept known as portability-the ability of surviving spouse to utilize the unused portion of their deceased spouse’s exemption-was also made a permanent part of the estate tax law.  This is a major benefit to couples where one spouse has more wealth than the other.

Beyond the Tax Relief Act, the annual federal gift tax exclusion was increased from $13,000 per beneficiary to $14,000.  Coupled with the extension of the lifetime gift tax exemption, this change will allow for further tax-free lifetime gifting.

The changes at the federal level were not matched by a corresponding change to local state estate tax law.  In the three states that make up the tri-state area, the state estate tax exemptions remain low (the maximum tax rates are significantly lower than the federal rates).  Connecticut ($2 million), New Jersey ($675,000) and New York ($1 million) residents will still need to plan their estates to delay, minimize and possibly eliminate their exposure to state level estate taxes even if their estates are well below the federal exemption amounts

The new certainty to federal transfer tax law does not mean we will not see further changes over the next year.  With the Supreme Court scheduled to determine the constitutionality of the Defense of Marriage Act this summer, same sex married couples may see their estate planning options increase if the court strikes down the law.  Furthermore, it is clear the President Obama will seek to find additional revenue to help balance the current budget deficit and cut our federal debt.  In past budgets, he has indicated a willingness to curb popular estate planning tools such as valuation discounts and complex trusts like GRATs and dynasty trusts to produce revenue.  Whether this will be able to pass a Republican controlled House of Representatives remains unclear if not incredibly unlikely.

Regardless of any future changes, the Tax Relief Act of 2012 has allowed estate planners to shift their focus from predicting where the transfer tax exemptions and rates will end up to simply providing our clients with the best possible advice.  For that reason alone, the Act is a tremendous help to taxpayers and planners alike.

Please contact info@levyestatelaw.com for more information on 2013 estate planning.