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.

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

Frequently Asked Questions-Part Two

Last month, I took a look at some of the most common questions that I get from clients and prospective clients. Today, I’ll answer a few more frequently asked questions:

6) “I am concerned about protecting my assets from the claims of creditors. Is there a way to protect my assets?”-It depends. If you currently have no known or possible claims against you, there are several options available to protect your assets including the use of trusts and business entities such as LLCs and partnerships. However, if you have known or anticipated claims against you, any transfers made to protect your assets will likely be deemed to be fraudulent conveyances by the courts.

7) “My advisor suggested the use of an irrevocable trust, but I am concerned that if I contribute assets to a trust, there will be no way to get it back. Are irrevocable trusts truly irrevocable?”-The intention behind the creation of an irrevocable trust is forever transfer assets out of the grantor’s name for the benefit of one or more trust beneficiaries. With that said, if a trust needs to be changed, revoked or otherwise modified, there are several options available. If the grantor, trustees and beneficiaries all agree, the trust can be amended under New York law. In New York, a trustee can also take advantage of the decanting statute to transfer assets out of a “bad trust” into a more advantageous trust. Finally, a beneficiary or a trustee can petition the surrogate’s for a modification, amendment or termination. Each of these options come with drawbacks ranging from added tax burden to extra expense with no guarantee of success.

8) “My biggest concern is that the administration of my estate will take a long time and cost my estate too much. Is there a way to reduce the time and cost?”-The time and costs of an estate administration vary depend on numerous factors including the size and nature of a deceased person’s assets, the number of beneficiaries, distributees and fiduciaries and what, if any, debts and taxes will be due. Proper planning can reduce the time and cost of administration, but there are many variables that may be impossible to control. Ensuring the proper beneficiary designations and titling of your property before you die is a significant way to reduce the time and cost of estate administration.

9) “Have the recent changes to the New York estate tax law made some of the trust planning under my will unnecessary?” The increases to the estate tax exemption that began this year will make the use of marital trusts under a will not always the best choice. However, because marital trusts provided additional benefits besides estate tax savings, many still prefer to use this type of trust over an outright bequest. For couples with combined assets approaching the current New York estate tax exemption, the use of a mandatory credit shelter trust may be preferable to avoid the New York estate tax cliff.

10) “We recently completed our wills and were curious about when we should revisit them. Is there a certain recommended time frame or certain events when we should revise our documents?”-Revising your wills and other estate planning documents should be done only when necessary to ensure that your wishes are still effectuated by your plan. Changes in your health, wealth or family are good times to consult with your attorney. In addition, when laws related to your estate plan are change, consulting with your attorney is key to preventing your plan from becoming obsolete. Finally, if nothing changes in your life or in the law, consulting with your attorney approximately every four years will help ensure that your planning remains the best reflection of your personal wishes.

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

Frequently Asked Questions-Part One

In my years counseling clients, I have found that each client, couple or family who comes to me have their own unique situations to plan for. But while their situations are unique, the questions that they ask tend to be very similar. Below are some of the most common questions I get and some general answers to those questions.   Later this week, I will post some additional questions and answers:

1) Why do I need to use an attorney? Can I draft my will/estate plan myself? The proliferation of products like Legal Zoom have encouraged do-it-yourselfers to consider drafting their own estate plans with little to no advice from an attorney. In some situations, a “simple will” may be all you need and the harm in using self-preparation software is minimal. However, for most individuals, a simple will does not reflect their complicated lives. Moreover, while Legal Zoom does provide some legal counsel, the professionals they use are likely less dedicated to the do-it-yourselfers than their own clients.

2) Who should I select as my fiduciaries (executors, trustees, guardians)? Can they be the same people? The main criteria for selecting a fiduciary is whether you believe a person is qualified to handle the tasks they are appointed to do.   You may have family or friends who may handle financial situations well, but would struggle in the role as a guardian. There may be individuals whose current life situation is simply too complicated to serve in any capacity while others could handle all roles in a manner that you find appropriate. In the end, your fiduciaries should reflect your values and beliefs in how each role should be handled.

3) Why should I leave property to my children (or other minors) in trust and not outright? Under New York law, any account beneficially owned by a child must be paid to that child by the time they reach age twenty-one (21). For many children, this is a very early age to be given such a large financial responsibility.   The use of a trust for a child can extend the period of time when the property earmarked for that child can be held and managed by another individual (the trustee).

4) I was told that life insurance was tax free, but recently learned that life insurance proceeds are included in my taxable estate. Is there a way to avoid having these proceeds subject to estate tax? By using a vehicle known as an irrevocable life insurance trust (ILIT for short), life insurance proceeds can be removed from an individual’s taxable estate for both federal and New York estate tax purposes. The inclusion of these proceeds in a taxable estate can increase or even create an estate tax liability where none would exist otherwise.   The creation and administration of an ILIT does require additional time and money, but if properly administered, the benefits far exceeds the cost.

5) My parents have all of their assets in a revocable living trust and recommended I do the same. Is it true that this trust can help me avoid probate? If funded and administered properly, a revocable living trust can help avoid the costs and delays associated with probate and estate administration. However, for many individuals, an estate administration proceeding may be necessary even with a revocable living trust. Oftentimes, assets will not be properly transferred into a revocable trust before a person dies. In these situations, a short ‘pour over will’ will typically transfer the remaining assets into the trust following an estate administration proceeding.

For more information, please contact info@levyestatelaw.com

 

Doing It For Your Kids: Key Estate Planning Decisions For Families with Minor Children

Preparing an estate plan at a young age comes with a series of unique and often difficult decisions for an individual, couple or family to make with regard to how their planning will be structured.   One of the primary difficulties comes from having to think about the care of their children in the event that both parents die before the children reach adulthood. This often holds people back from starting their planning, leaving their assets and their families unprotected from this unlikely-but not impossible-scenario.

To properly protect your minor children, an estate plan is a necessity. A properly drafted estate plan will outline certain key decisions that must be made to ensure that the family’s children are properly cared for. Amongst those decisions to be made are the following, namely:

How will property for the children be held-Money and other property that is held for the benefit of a minor child can be held in several different manners, each with a varying level of protection.   Parents or other relatives can set up custodial accounts for their minor children, which will protect the funds for the children they are set up for until the child reaches an appropriate age. In New York, custodial accounts must be paid out to the beneficiary of the account at age 21.

In some instances, a custodial account is insufficient or inappropriate. If the creator of the account is older, he or she may pass away without naming a successor custodian. A petition would have to be filed by another individual to gain control of the custodial account. Alternatively, the amount being held for a child may be large enough that allowing the child full access to the funds at 21 may not be wanted.   In such instances, the use of a trust can extend the period of time that the funds or property is not directly controlled by a child.

Who will control the property for your children-Careful consideration must be made to determine the persons who will control property for the benefit of a minor child. Factors such as the competence, financial knowledge and temperament should be considered in selecting executors (responsible for a person’s estate), trustees (responsible for managing trust assets) and custodians (responsible for holding custodial accounts. In addition, an individual’s relationship with the child beneficiaries and understanding of your wishes with regard to distributions should be given consideration as well.

Who will care for your children-The decision of who to select as a guardian for your children is often fraught with emotion, fear and jealousy on the part of both parents and the persons considered for this important position. However, the key factor must be who will best care for your children.   You should consider not only how well you get along with the chosen guardian, but also how well the children get along with the selected individual(s). If a person has a large family themselves, the prospect of adding one or more children may be more than they can reasonably be expected to handle regardless of how close they are to the parents of the children. Finally, how seamlessly a guardian can take over responsibility for a child should be factored into making your final decision.

How will their education be paid for-College expenses and other educational costs should be a factor in determining how best to plan your estate. The use of savings vehicles such as a 529 plan or crummey trust can help establish a funding mechanism for education at a very young age.   Life insurance can also be a helpful tool either by purchasing permanent coverage with a cash value or by carrying sufficient term life insurance to cover expected expenses.

The benefit to making these crucial decisions early on is that once an initial plan is put in place, it can be modified and changed as your children grow older to meet their changing needs. Being prepared also can be a powerful way to reduce parental anxiety about their children’s future by ensuring that their children will be protected financially and cared for even after they are gone.

 

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

Changes To New York Estate And Gift Taxes-2014 and Beyond

Earlier this month, Governor Cuomo along with both houses of the New York State Legislature, enacted the most sweeping changes to the New York Estate and Gift Tax system in well over a decade. Some of these changes have already gone into effect while others will progressively be phased into how estates and trusts are taxed over the next few years.

Among the changes are the following:

1) A progressive increase in the state exclusion to ultimately index the New York exemption with the federal exemption by 2019.  Beginning April 1, 2014, New York has increased its estate tax exclusion from $1,000,000.00 to $2,062,500. This will remain in effect until next April when the exemption will again increase. A full list of scheduled changes to the exemption is below:

04/01/14-03/31/15                       $2,062,500

04/01/15-03/31/16                       $3,125,000

04/01/16-3/31/17                         $4,187,500

04/01/17-12/31/18                       $5,250,000

From January 1, 2019 on, the state estate tax exemption will be indexed with the federal estate tax exemption every year subject to inflationary increases.

2) A phase out of the estate tax credit for estates valued at 105% or more of the applicable exemption. This change may cause many unintended results if not properly planned for. In short, estates that are above the applicable estate tax exemption but below 105% of the exemption, will be taxed on the portion of their estate above the exemption in effect the year of the death. However, for estates valued at 105% or more of the exemption, the ENTIRE ESTATE will be taxed! This change has been questioned by many planners and tax professionals, but until further guidance or changes are enacted by the legislature, it should be assumed that this was the intended result.

3) Inclusion of gifts made on or after April 1, 2014, but before January 1, 2019, within 3 years of decedent’s death in the decedent’s taxable estate. This change will limit the ability of taxpayers to make lifetime transfers during the final years of their life to avoid estate tax inclusion. While this provision has a limited time-frame, it may make certain gifting strategies less attractive from a tax avoidance perspective.

4) Income taxation of certain trust income from certain trusts. Under the new legislation, income payable to New York residents from exempt resident trusts will now be subject to income tax. Furthermore, income from incomplete non-grantor trusts will be included in the income of the grantor. Both of these changes are subject to certain dates with regard to when the income is received.

5) Creation of a New York Specific QTIP Election. Prior to the new legislation, an individual wishing to leave property to their spouse in a QTIP marital trust would be required to file a federal estate tax return to take advantage of this exclusion. The new legislature now allows New York residents to make a QTIP election specific to New York estate tax law without a corresponding federal election.

These changes come with several planning opportunities and pitfalls. First and foremost, with the changes to the state estate tax exemption, the difference between the state and federal exemptions will shrink and ultimately disappear. This makes the use of mandatory credit shelter trusts more attractive. Previously, the use of such a trust could cause state estate tax to possibly be due at the first spouse’s passing. Now, the bigger risk is failing to utilize both spouses full state exemption. Under federal law, a surviving spouse can ‘inherit’ the unused portion of their spouse’s exemption; under New York law, this is only possible by using a credit-shelter trust.

Second, given the significant taxation that becomes due once an estate exceeds 105% of the state estate exemption, individuals may wish to consider gifting a portion of their estates to a spouse, their children or making a charitable bequest.

Finally, for those individuals who are looking to make gifts over the next four and half years, it may be advisable to consider alternative gifting vehicles other than outright gifts.

It is likely that these changes will evolve during the next few years and clarifications will be made to certain provisions of the new legislation. For this very reason, the proper legal and tax advice is crucial to ensure that your estate is properly protected from excess taxation.

For more information, please contact info@levyestatelaw.com