Windsor, DOMA and the Future of Estate Planning For Same-Sex Couples

Posted on by
Reply

This past Friday, the United States Supreme Court decided to hear two cases related to the treatment of same-sex married couples.  One of the cases, Windsor v. United States, was brought as a challenge to the Defense of Marriage Act (“DOMA”) which was enacted in 1996.  Under DOMA, regardless of any recognition by states or other jurisdictions, the federal definition of marriage is limited to a marriage between a man and a woman.  This has been detrimental to same-sex married couples seeking equality with their heterosexual counterparts in numerous areas including estate planning and estate tax.

In Windsor, Edith Schlain Windsor sued the United States as the executor of her wife’s estate.  Windsor and her wife were New York residents and married in Canada in 2007.  While New York did not recognize same-sex marriages performed in New York until 2011, it did recognize marriages performed in jurisdictions where same-sex marriage was recognized.  Despite having her marriage recognized by New York, Windsor was denied the federal estate tax marital deduction by DOMA.

In June, the United States District Court for the Southern District of New York held that the section of DOMA defining marriage as being only between a man and a woman was unconstitutional because it violated the equal protection clause of the Constitution.  In September, the United States Court of Appeals, Second Circuit, affirmed this finding and further held that classifications based on sexual orientation are subject to a higher level of scrutiny than previous courts had held.

The arguments for each side at the Supreme Court(scheduled for Spring 2013) will likely track those made at the Court of Appeals level.  The proponents of holding DOMA unconstitutional will likely focus on the heightened scrutiny required for laws based on sexual orientation.  They will also seek to show that marriage is generally decided at the state level and that DOMA, by interfering with a power reserved to the states, overstepped federal authority.   Proponents of retaining DOMA will continue to make the case that sexual orientation is not a suspect class and that the Federal government has a rational basis to legislate the definition of marriage.

If the Court upholds the Second Circuit ruling, the benefits to same-sex couples will be significant.  First, whereas New York couples are currently only entitled to a marital deduction on their New York estate tax, they will be entitled to the same deduction at the Federal level.  Secondly, lifetime transfers between same-sex spouses will no longer be subject to federal gift tax (or use up a portion of a spouse’s lifetime gift tax exemption.  Finally, assuming estate tax portability is retained, same-sex spouses will be able to utilize the remaining portion of their spouse’s estate tax exemption.

It is premature to predict an outcome and the ruling may be limited or broad.  Nevertheless, it appears 2013 will be, at the very least, an interesting year for preparing estate plans for same-sex married couples.

Please contact info@estatelaw.com for more information about estate planning for same-sex couples.

Thanksgiving Food For Thought: Talking To Your Parents and Grandparents about Estate Planning

Posted on by
1

Tomorrow, families across the United States will gather to celebrate Thanksgiving.  Both immediate and extended families will be spending a significant portion of the next few days with each other and inevitably, interesting discussions will emerge.  One discussion point that will be less likely to emerge than most is about estate planning, specifically the plans parents and grandparents have in place. But while talking about this topic may not be the happiest way to spend your holiday, having a conversation with your older relatives is essential to protecting them, their assets and your own planning.

There are several reasons why a child (or grandchild) should be concerned with their parents’ and grandparents’ estate plans.  First, knowing what your senior relatives plans are will allow for a smoother transition and administration of their assets if they die, become severely disabled or incapacitated.  Second, with nearly 75% of all adults over 65 having some form of a long-term care event during their lifetime, children and grandchildren may have to coordinate the payment of their elder relatives long-term care expenses.   Third, in the event of death, severe disability or incapacity, children and grandchildren may be asked to serve as fiduciaries for senior family members as executors of their estates, trustees of trusts or agents under power of attorneys and health care proxies.  Finally, children and grandchildren may be named as beneficiaries of their parents’ and grandparents’ estates.  An inheritance can raise issues for the inheriting children and grandchildren including tax and creditor related problems.

Understanding why you should speak to your parents and grandparents about estate planning is significantly easier than actually speaking to them about the subject.  Each family member has their own temperament when it comes to discussing financial and other personal matters, so an awareness of how a relative will react is key to avoiding unnecessary conflict.  If they are open to having a discussion about estate planning, explain that you are coming from a place of concern.  Inquire about what they have and have not done in terms of their planning.

If, like many parents and grandparents, they don’t want to discuss this issue, there are other ways to ensure that they are protected.  If they have already worked with an estate planner, encourage them to check in with their advisor to ensure their plan is up to date.  If they have not prepared an estate plan, offer them the names of attorneys, financial planners and accountants that you work with and with whom you trust.   While some older relatives may not want to openly discuss their planning with their younger relatives, many will appreciate the opportunity to speak with a professional with no personal connection to them.

Once you are able to begin the discussion, by yourself or through a professional, there are certain subjects that should be discussed.  Among them:

1)   Nature and location of the estate planning documents;

2)   What assets do they own and where are they located;

3)   Who are their professional advisors;

4)   How are they planning to pay for any long-term care expenses;

5)   Who are the beneficiaries of their estate; and

6)   Who are the fiduciaries that will be in charge of their affairs if they die, become severely disabled or incapacitated.

 Having an estate planning conversation with your parents and grandparents will be difficult.  Even if they are completely transparent and willing to talk, the subject matter can be difficult to think about.  Nevertheless, as a loving relative, it is important that your relatives are protected and that their ultimate wishes as to their estates and well-being are known and able to be fulfilled in a timely and proper manner.

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

Elections (may) Have Consequences: The Fiscal Cliff and Estate and Gift Taxes

Posted on by
Reply

For much of 2012, the looming changes to the tax rates and exemptions set to go into effect in 2013 have weighed heavily on all discussions of estate planning.  The so-called “Fiscal Cliff” and the 2012 Presidential and Congressional elections left planners with uncertainty of whether the scheduled sunset provisions of the Bush/Obama tax cuts would go into effect or if Congress and the President would strike a deal before year’s end.

Tuesday ‘s election ended some of the uncertainty with regard to the respective players in this debate and what type of leverage they would have.  President Obama won a second term as President while in Congress, the Democrats extended their majority in the Senate.  In the House, Republicans retain control, albeit by a slightly slimmer margin.  In the days following the election, the three lead players in the upcoming negotiations (President Obama, Speaker of the House John Boehner and Senate Minority Leader Mitch McConell) each expressed their positions with each retaining their previous stance on increasing or retaining existing tax rates and exemptions.

Earlier today, President Obama announced that he will meet with Congressional leaders next week to begin working on a deal to avoid the Fiscal Cliff.  The possible outcomes are several:

  1. The President and Congress will agree to a comprehensive deal-Both sides have indicated a desire to achieve a deal on both tax issues and spending cuts.  But despite the results of the election, there appears to be no true bridging of the two sides polarized positions.  This may change  after next week’s negotiations, but such a change would reflect a major shift in tactics and attitudes.
  2. The President and Congress will agree to a temporary, non-comprehensive plan-In his press conference today, President Obama stated he was ready to sign  into law the permanent extension of the income tax rates for 98% of all taxpayers.  The Senate has previously passed such a bill, but the House has refused to even vote on it.  It is possible that they will now agree to separate those tax rates from other issues, but that remains unlikely.  More likely would be a temporary extension of the current tax rates and exemptions similar to the extension passed in 2010.
  3. No deal is reached before the end of the year-If no deal is reached before the end of the year, the tax rates and exemptions revert back to their pre-President Bush levels.  While this may be frowned upon by many financial analysts, this would change the political dynamic  significantly and may force one or both sides to finally come to a comprehensive deal.
  4. A deal is reached on issues other than estate and gift tax rates and exemptions-The previously mentioned Senate bill made no mention of any extension, increase or decrease to the estate and gifts taxes.  During the Presidential campaign, neither candidate spent much time discussing these transfer taxes.  For those reasons, it would not be surprising to see the income tax issues resolved while the gift and estate tax issues are left to sunset and possibly be renegotiated in 2013.

If we are to believe the President, in any of these four scenarios, we should expect to see the federal estate and gift tax rates to increase and the respective exemptions to decrease come 2013.  To best prepare for these changes, you should consider the following three pieces of advice:

1. Make 2012 gifts ASAP-The current gift tax exemption of $5.12 million is unlikely to ever return to this high level in the foreseeable future.  For those with the means or the need to utilize a 2012 gift, it is already past the point of making more complicated gifts.  With that said, by utilizing transfers to a grantor trust, it is still possible to make a 2012 gift today of cash, securities or even a promissory note and substitute harder to value assets in 2013.

2. Consider or reconsider the use of a credit shelter trust under your will-The lower estate tax exemptions that will likely go into effect will make using a credit shelter trust, a testamentary trust that allows property to pass estate tax-free at the death of both spouses, more attractive.  Since 2010, such trusts were less appealing given the disparity between Federal and State estate taxes.  If the exemptions are reduced, that disparity will decrease as well.

3.  Speak to an estate planning attorney and stay informed.  This is a fluid issue and things may change dramatically very quickly.  It is important to keep in touch with your estate planning attorney to learn about any changes.  If you do not have an attorney, you can also keep yourself updated by reading this and other estate planning blogs.

For more information about the 2012 Estate and Gift Tax changes, please contact info@levyestatelaw.com

Giving While You Can: The 2012 Gift Tax Planning Opportunity-Part III Planning Techniques and Strategies For Making A 2012 Gift

Posted on by
Reply

Over the past two days, I have discussed why the 2012 Gift Tax Planning Opportunity is a big deal and provided several ‘best fits’ for making a 2012 Gift.  Today, I conclude this series with some examples of planning techniques and strategies that can be used to maximize your 2012 gifts.  As with any estate planning strategy, most of these techniques require careful coordination with an estate planning attorney, accountant and other advisers to ensure that they are properly structured:

1)   Outright Gifts-The simplest gifting technique requires very little work and time to complete.  This can be accomplished by any properly executed form of transfer and also requires less setup fees than the other techniques listed below.

There are several downsides to outright gifts.  First, assets gifted directly to a beneficiary remain exposed to the claims of creditors.  Second, if the gift is being made to a minor or an adult that is ill prepared to handle such a large-scale gift, the transferred assets can be wasted.  Finally, while making such a gift removes it from the donor’s taxable estate, it will be included in the beneficiary’s estate.

2)   Gifts to Trust-As an alternative, a gift to a trust may be more appropriate if there are concerns about creditor claims, taxes or waste.  An irrevocable trust can hold the gifted property outside the beneficiary’s taxable estate and the assets can be distributed to beneficiaries at the discretion of the named trustees.  Setting up a trust will require additional fees for set up and administration that are not required of a direct gift.  A suitable trustee will also be required that fits the grantor’s specifications.

3)   Grantor Retained Annuity Trust (GRAT)-Several of the more complicated trust arrangements could be useful for 2012.  A GRAT, for example, can be used to pass property to beneficiaries while retaining annuity for the donor for a set period of years.  Depending on the donor’s goals, the GRAT can be structured to have minimal annuity payments or as a means to ‘freeze’ the value of the donor’s estate.

4)   Intentionally Defective Grantor Trust (IDGT)-Using an IDGT can provide several benefits.  First, it can provide a way to remove an appreciating asset from a donor’s estate.   Second, if a portion of the transferred assets are transferred in exchange for a promissory note, the donor can retain an income stream through the repayment of interest and the principal.  Finally, because IDGTs are taxed to the Grantor of the Trust rather than the Trust for income tax purposes, the donor can further reduce the size of his estate while increasing the value of the property passing to their beneficiaries.

5)   Qualified Personal Residence Trust (QPRT)-Individuals who own their primary residences may utilize the 2012 Gift by transferring their residence to a QPRT.  The donor retains the exclusive right to live in the residence for a set period of years.  At the end of that period, ownership transfers to the remainder beneficiaries of the trust.  The donor can still live in the residence if they pay rent to the remainder beneficiaries.  The longer the term of the trust, the smaller the gift would be.  With the larger exemption in 2012, donors can set up a QPRT with a relatively short term to maximize their gifts.

6)   Family Limited Partnerships/LLCs-If a donor wishes to pool several assets into a single entity, they can utilize a family limited partnership or LLC as a means to centralize the management of certain assets.  A gift of an LLC or FLP interest can receive a valuation discount that would not be available to transfers of the underlying assets.

7)   Intrafamily Loan Forgiveness-2012 provides individuals and families to consider removing outstanding loans from a donor’s taxable estate.  Rather than continue to receive payments on a loan, the holder of a promissory note or other debt instrument can forgive all or a portion of the outstanding debt by making a gift of the forgiven amount.

8)   Funding a large life insurance policy-Donors can utilize all or a portion of a 2012 gift to fund a large life insurance policy.  If the beneficiaries do not need immediate access to the funds, this may be an attractive option to provide for a later benefit.  To fully protect the gift from any taxation, the insurance policy should be purchased by an irrevocable life insurance trust (ILIT).

As we draw closer to the so-called “Taxmageddon,”  the opportunity to fully take advantage of the current tax rates and exemptions shrinks.  Many of the techniques discussed above require time to set up and fund, so for those looking to make a 2012 Gift, time is not on your side.  The time to start planning your 2012 Gifts is now.

Please contact info@levyestatelaw.com for more information about 2012 Gift Tax Planning.

Giving While You Can: The 2012 Gift Tax Planning Opportunity-Part II Best Fits For “Supersize” Gifts

Posted on by
Reply

As the window for making large-scale gifts shrinks each day, many individuals and families will be encouraged by their attorneys and other advisers to consider taking advantage of the 2012 Gift Tax Planning Opportunity.  While this unique event could be a windfall for many people, there are certain situations where utilizing the current gift tax exemption and gift tax rates are most beneficial to the donors.

Below is a non-exhaustive list of some of the ‘best fits’ for making a 2012 Gift:

1)    Individuals with a taxable estate at or above the current Federal Estate Tax Exemption-The current federal estate tax exemption, as with the gift tax exemption, is $5.12 million.  And just as the gift tax exemption will expire on December 31st, the federal estate tax exemption will reduce to $1 million 2013.

Given the likelihood that the estate tax exemption will be reduced, individuals who may have a taxable estate if they die in 2012 would be wise to consider gifting a portion of their estate before year’s end.  By doing so, they can increase the portion of their estate that passes to their heirs free of federal estate tax.

2)    Individuals with a taxable estate at or above their current State Estate Tax Exemption-Residents of Connecticut, New Jersey and New York face lower estate tax exemptions than residents of most other states in the U.S.  Even those individuals whose estates will likely pass free of federal estate tax could have a state estate tax imposed which would similarly reduce the value of the property passing to their heirs.  Making a 2012 Gift is especially useful in reducing potential state estate tax exposure because none of the tri-state area states impose a state specific gift tax.

3)    Family Business owners looking to transition their businesses to their family-One of the many reasons that business succession planning fails is that the incoming owners may be unable to pay the current owners the full value of the companies they are purchasing.  In a family business, a senior family member willing to transfer some or all of their business to their successors as a gift can avoid this hurdle while assuring that the business continues uninterrupted.  For those concerned about a loss of income or not receiving sufficient assets to live off of, using a planning technique like a GRAT or a sale to a defective grantor trust may allow the senior family member to be more generous with their gifting.

4)    Real Estate Owners-In some areas of the country, real estate have begun to rebound.  Nevertheless, the values are still significantly lower than they were prior to the 2008 Financial Crisis.  Gifting a second home or investment property this year could be more tax efficient than transferring it when values increase.  In addition, individuals interested in gifting their primary residence can utilize a technique known as a qualified personal residence trust (QPRT) to transfer ownership of the property while retaining the right to live in the residence for a set period of years.

5)    Individuals with highly appreciating or income producing property-Property likely to increase in value over the next few years can either be gifted outright or to a trust using today’s values.  This allows the beneficiary of the gift to receive the full benefit of the appreciation while reducing the donor’s taxable estate.  Alternatively, by utilizing planning techniques like a GRAT or IDGT, the donor can freeze the value of their taxable estate while also providing their beneficiaries with a significant long-term benefit.  This is also true of property that produces significant income.

6)    Same Sex Married Couples and Domestic Partners-Without the benefit of a marital deduction at the federal level (New York same sex married couples) or at both state and federal levels (domestic partners), non-traditional couples are at a distinct transfer tax disadvantage.  In addition, whereas gifts between married couples are consider non-taxable events, gifts between same sex married couples and domestic partners are.  Fully utilizing the 2012 Gift opportunity may be a unique opportunity for these couples to make tax-free gifts to one and other.

7)    Individuals who have made intra-family loans-The current low interest rate environment have encouraged many family members to make loans to their junior family members.  However, if the junior family member does not pay back the principal of these loans and interest, the lender is deemed to have made a gift.  If the lender does not need or want the money back, a 2012 Gift can be used to forgive a portion or the entire loan amount.

Other individuals and situations may also be appropriate for 2012 Gifts.  Tomorrow, I will go over several planning techniques that can be used to maximize the benefit of making a 2012 Gift.

Please contact info@levyestatelaw.com for more information about 2012 Gifts.

Give While You Can: The 2012 Gift Tax Planning Opportunity-Part I An Introduction/Re-Introduction

Posted on by
Reply

Estate Planners are always looking for new ways to assist their clients navigate and fully take advantage of the transfer tax system in ways that effectuate their wishes and intentions.  Much of our focus is on planning their estates and how property will pass when they die.  For some clients, estate planning also includes devising strategies for transferring assets during their lifetime.

From 2002 until the end of 2010, each individual could only transfer $1 million during their lifetime without incurring a gift tax.  This changed dramatically at the end of 2010 when the President and Congress enacted the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act (“TRA 2010” for short).   Among the changes to the tax system was a significant increase in the lifetime gift tax exemption.  This provided a significant opportunity for individuals looking to make large-scale transfers of property during their lifetime.

As with most good things, this opportunity will not last forever and it is unclear whether the gift tax exemption will ever be this high again.  Over the next three days, I will explain what this opportunity could mean to you and your family, who this opportunity would be a good fit for and provide several planning techniques that can be used to maximize the benefits of this ‘once-in-a –lifetime’ tax planning event.

First, here is a brief overview of what this means to you and your family:

What is the 2012 Gift Tax Planning Opportunity? Under TRA 2010, the lifetime gift tax exemption was increased from $1 million to $5 million per individual ($10 million per married couple).  In 2012, the exemption was increased to $5.12 million.

Why is it a big deal?  The lifetime exemption has never been this high before and given the current fiscal health of the United States, it may never be this high again.  Before 2010, individuals wanting to make large-scale lifetime transfers above the $1 million exemption had to choose between making multiple smaller transfers utilizing the annual gift tax exclusion (currently $13,000 per individual) or paying a gift tax at a maximum tax rate between 35% and 50%.  After 2010, individuals could transfer five times as many assets at one time without incurring any gift tax.

When do the current exemption and tax rates expire?  The current gift tax exemption and maximum tax rate of 35% will expire on December 31, 2012.   It is possible that before the November election (very unlikely) or during the lame duck session after the election (possible), Congress and the President will enact new legislation that may maintain the current exemption and tax rate or possibly reduce both.  If the current exemption and maximum tax rate expire, the exemption will reduce to $1 million and the maximum tax rate will increase to 55%.

Who should take advantage of the current exemption and tax rates?  This opportunity could be useful to a wide variety of individuals and families.  For wealthy individuals looking to reduce the size of the taxable estates, making a gift this year will provide more certainty about their tax liability than exists with the current federal estate tax regime (the estate tax rates and exemptions will expire on December 31, 2012 as well).  In New York, there is no separate state gift tax, so a 2012 gift that reduces the New York state estate tax liability would be good utilization of the current federal exemption and rate.  I will go into more detail about this in tomorrow’s post.

Are there other reasons to make a 2012 gift besides gift tax savings? Yes.  In addition to the historically low gift tax rate and high exemption, interest rates are at historic lows.  For people looking to utilize planning techniques such as GRATs, transfers to defective grantor trusts and intra family loans, this low rate environment will allow individuals to pass the maximum amount of property to their beneficiaries while keeping any annuity, installment sale or loan payments low.

Depressed asset values also provide an additional benefit to the gift tax savings.  While the stock market has rebounded significantly, real estate and other non-publically traded assets have not.  Transferring these types of assets now will allow your beneficiaries to enjoy the appreciation of the property when values rebound.

Are there risks/disadvantages to making a 2012 gift?  Few planning opportunities are risk free.  Making 2012 gift comes with several including the possibility of running out of money if the donor does not retain sufficient assets; the transferred assets being included in an individual’s estate if they die within three years of making the gift; the potential of a ‘claw back’ of a portion of a 2012 if the exemption and tax rates are reduced; and the loss of a step-up in basis that property receives if the donor transfers the property at death.  It is therefore essential that anyone interested in making large-scale gifts consult with their attorneys, accountants and other advisors before making such a gift.

I don’t have $5.12 million.  Can I still make a 2012 gift?  You can and in some circumstances, you should.  Utilizing a portion of the full exemption can provide the same benefits to a person or family with a smaller taxable estate as it can to someone with a federal taxable estate.

Please contact info@levyestatelaw.com for more information about 2012 gift tax planning.

You Don’t Need A “License To Ill” To Express and Protect Your Values

Posted on by
Reply

“Cause I’m a specializer, rhyme reviser

Ain’t selling out to advertisers

What you get is what you see

And you won’t see me out there advertising”

-“Triple Trouble” by Beastie Boys

Earlier this year, Adam “MCA” Yauch, one-third of the groundbreaking rap group the Beastie Boys, passed away from salivary gland cancer.  Throughout his career, Yauch had publicly expressed very clear opinions on a range of issues from Tibet to the objectification of women.  It was not surprising to find out that his Last Will and Testament reflected these convictions.

Yauch’s will included several conditions that will prevent his music from being used for purposes that he would have objected to.  His wife Dechen was named the sole owner of his artistic property, allowing her the right to utilize it in a manner that she believes her husband would have approved of. In addition, his will contained provisions that expressly prevented his personal image and created works from being used for advertising purposes.

Provisions that express your values and beliefs are not just the providence of artists or the super affluent.  For individuals who wish to reflect their beliefs in their wills, there are several methods of doing so:

1)    Conditional bequests-Wills may include bequests that are conditioned on the gift being used for specific purposes or may become available to the recipient only if they abide by certain conditions.  Utilizing these types of bequests can provide an individual with the knowledge that the money they are leaving behind will be used for only specific purposes.

2)     Fiduciary Instructions-In the same way that a conditional gift can limit the ways a beneficiary can receive the testator’s property, instructions to a fiduciary can also allow a testator control over how their property is used.  In some ways, instructions to a fiduciary can be more difficult to enforce.  Furthermore, depending on the type of instructions, the restrictions put on the fiduciaries may not be upheld by the Surrogate’s Court.

3)     Charitable Gifts-Putting conditions on bequests and limiting a fiduciary’s actions may not always provide a testator with clarity that their values and beliefs will ultimately be upheld.  A more concrete way to utilize an estate plan in this manner is by making charitable gifts to causes that you support.  Gifts can be made at death, during an individual’s lifetime or a combination of both.  A secondary benefit to charitable planning is the possible estate, gift and income tax deductions created by any gift made to an eligible charity.

By protecting his image, Adam Yauch was able to ensure that his values would continue to be expressed even after his death.  This benefit of estate planning is not always considered, but it is a powerful way to continue your legacy long after your passing.

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

Five Reasons Why You Should NOT Have An Estate Plan

Posted on by
Reply

You may be wondering why I would ever consider writing a post about not having an estate plan.  As an estate planning attorney, it might seem counterintuitive for me to discuss the reasons why an estate plan isn’t a necessary component of every adult’s life planning.

The reality is the reasons listed below come not from me, but from conversations I have had with people who do not have estate plans.  People of all ages, levels of wealth and familial situations have used one or more of these reasons to explain their reluctance or unwillingness to prepare an estate plan.  And with more than 60% of adults in the United States lacking even a basic will, it’s more likely than not that a relative, friend or colleague of yours has relied one of these reasons.

Reason Number One: Insufficient Assets.  One of the key goals of any estate plan is to delay, minimize or eliminate any estate taxes on the assets passing from an individual to his or her heirs.  Without sufficient assets, this component of an estate plan is unnecessary.

BUT, for individuals living in New York, New Jersey and Connecticut, having sufficient assets to require tax planning is more common than in other parts of the country.  First, individual income and personal wealth are higher in the tri-state area than in many other parts of the United States.  Second, the estate tax exemptions in Connecticut  ($2,000,000), New Jersey ($675,000) and New York ($1,000,000) are amongst the lowest in the US (many states do not have a state estate tax).  When you consider the real estate values in the tri-state area and the fact that life insurance death benefits are included in a taxable estate, it is very easy for an estate to surpass the state exemptions.

This does not even factor in the possibility that in 2013, the federal estate tax exemption will drop to $1,000,000.  This would expose many individuals to both federal and states estate taxes.

Reason Number Two: Estate Planning is Expensive.  Compared to many forms of planning, the upfront costs of preparing a good estate plan may seem expensive.

BUT, unlike other forms of planning, the fees for estate planning are not re-occurring unless your plan needs to be changed.  Additionally, while many of the larger law firms may charge fees that are uneconomical for many, there are numerous high quality boutique law firms and solo practitioners in the tri-state area who can provide a comparable service for a fraction of the cost.

Reason Number Three: I’m Too Young To Need An Estate Plan.  Fortunately, the likelihood of a premature death is small for most Americans.  For parents with minor children, the chances that both parents will pass before a child reaches 18 is very remote.

BUT, just because something is unlikely or an event is remote does not mean it is impossible.  The care of a minor child is not something most parents want to leave to chance.  And while there may be relatives or friends willing to step in and care for a minor child, not having a guardian named is a risk not worth taking.

Reason Four: I Can Rely on the State Intestacy Statute to pass my property to my heirs.  It is true that every person has a fallback estate plan regardless of whether they prepare any documents on their own.  New York, like all states, has a statute known as the intestacy statute which governs who will inherit your property and who will be able to manage your property if you die without a will.

BUT, the distribution pattern laid out by the New York intestacy statute is not necessarily what you would want.  For example, if a spouse and children survive an individual, the spouse will receive only fifty percent of the estate with the remainder passing to his or her children.  There are no provisions to reduce estate taxes, protect assets from waste or select your own representatives by utilizing this statute.  Furthermore, from a purely ideological perspective, there are very few people who would prefer such intimate decisions to be made by the government rather than by themselves.

Reason Five: Mortality Fears.  An unfortunate consequence of preparing an estate plan is the necessity to think about death and severe illness.  In many cases, this fear trumps all the previous reasons for stopping individuals from preparing an estate plan.

There is no BUT attached to this reason as because mortality fears are very real and deserve proper consideration.  In my experience, for many of my clients, preparing an estate plan allows an individual a sense of piece of mind from the fact that their affairs will be handled properly if they die.  Furthermore, preparing an estate plan reduces the stress and complications that your family will have to deal with in the aftermath of an already traumatic event.

And in the end, for all the reasons not to prepare an estate plan, the ability to protect your family from those stresses and complications remains the best counter-argument for estate planning.

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

The 2012 Lifetime Gifting Opportunity-A Planning Trick or Treat?

Posted on by
Reply

For estate planning professionals, one of the major changes presented by the 2010 Tax Act was the increase of the lifetime gift tax exemption from $1 million to $5 million (in 2012, it increased to $5.12 million).  This substantial increase to the amount that an individual could gift during their lifetime posed what many consider to be an “once-in-a-lifetime” opportunity to gift large portions of a person’s assets during their lifetime.  And with this increase in effect until December 31, 2012, a sense of urgency spread amongst advisors.

But just as quickly as this opportunity presented itself, tax professionals began to question if this was really the great planning tool it appeared to be.  Specifically, some began to worry that utilizing the full lifetime gift tax exemption may eventually lead to a claw back of a portion of the gift when the donor dies.

The premise of the claw back relates to interplay between lifetime gifting and the calculation of estate taxes at a person’s death.  When an estate ‘s executor calculates the taxable value of an estate, he or she must account for taxable gifts (gifts in excess of the annual gift tax exclusion) made by the decedent during their lifetime.  The more taxable gifts that are made, the smaller amount that can pass at your death free of estate tax.

The concern is because the current estate and gift tax exemptions are $5.12 million and both are set to reduce to $1 million, the IRS may impute a portion of a gift made before the end of 2012 into a future calculation of estate tax.  By way of example, if a claw back exists and an individual with a $6 million estate gifts the full $5.12 million before the end of 2012, then $4.12 million of that gift will be clawed back and used to calculate their estate taxes.

The main argument for the existence of a claw back is that under the current statutory interpretation, when calculating an estate tax, a tax preparer uses the constructive gift tax that would be due in the year that a gift is made.  Therefore, where that amount is low as it would be in years with a high exemption, the credit against the estate tax would be high and reduce the estate tax by less.  There has yet to be dispositive word from the IRS one-way or the other on this interpretation.

For those who don’t believe that the claw back is a problem, the primary argument against the application of a claw back is the intent of the 2010 Tax Act.  There was clearly no intention on the part of Congress to allow for large-scale gifts only to eventually recapture the lost tax revenue at a later date.   In addition, the nature of the gift and estate tax system is to tax gifts at the time they are made, not at death.  A claw back would be inconsistent with this.

There is also a political argument against the claw back.  While the gridlock in Washington makes any action before the end of 2012 unlikely, it is in neither party’s interest to apply a claw back.  Further, the 2010 Act was supported by both a Democrat President and Congress who would be more likely to support purported tax increases than their Republican counterparts.  It seems unlikely that they will support matters that would counter their previously passed laws.

Claw back or not, making a large gift before the exemptions expire at the end of 2012 still make sense for those with the means to make them.  For people with appreciable assets, shifting those assets to a younger generation now will remove the appreciation from their estates.  Further, for business owners looking to transfers their business in a tax efficient manner, this may be the best time to make those transfers while incurring less taxes than they will incur in future years.

Large scale gifting always comes with a degree of risk from a tax perspective.  The fear of a claw back may turn out to be real or imaginary, but in the end, it should not be the deciding factor in determining whether making a large gift is right for you.

For more information about lifetime gifting, please contact info@levyestatelaw.com.

The Coming “Taxmageddon” and How It May-Or May Not-Affect Your Estate Plan

Posted on by
Reply

This December, for the third time in four years, Americans will be faced with a significant change to the federal tax laws that may significantly affect their estate planning.  The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 will expire on December 31st of this year and barring Congressional Action, 2013 will begin with significant changes to the tax rates and exemptions that many have relied on in preparing their estate plans.

This potential change, which has been termed “Taxmageddon” by many in the media,  could be prevented if Congress and the President agree on a temporary or permanent change to the Tax Code.  However, with a national election coming in November and less than two months after that for any action to occur, there is a very real possibility that the below changes will go into effect.

Here is how these changes will affect your estate plan if there is no action by Congress and the President:

Estate and Generation Skipping Transfer Tax (GST Tax) Exemptions and Rates-The 2010 Tax Act increased the federal estate and GST tax exemption to the highest amount it has ever been and reduced the top tax rate to the lowest it has ever been.  After an adjustment at the end of 2011, the exemption stands at $5.12 million and the top tax rate is 35%.  Without a change to the law, starting in 2013, the exemption drops to $1 million and the top tax rate increases to 55%.

Gift Tax Lifetime Exemption and Rates-Currently, the lifetime gift tax exemption and top gift tax rate mirror the estate tax exemptions and rates.  However, prior to the end of 2011, the gift tax exemption had remained much lower than the increasing estate tax exemption.  And while opponent of the estate tax will likely work diligently to return the exemption to as close to the current exemption as possible, it is unclear that the gift tax exemption will have the same current support.  With a drop from $5.12 million to $1 million, the ability to make large lifetime gifts may soon disappear forever.

Portability of Spouse’s Estate Tax Exemption-One of the new ideas enacted by the 2010 Tax Act was the concept of portability.  Previously, a spouse could utilize their deceased spouse’s estate tax exemption only by using a credit-shelter trust created under their will.  The 2010 Tax Act allowed spouses to utilize any unused part of their spouse’s estate tax exemption without using a trust.  This concept will sunset along with the other provisions of the 2010 Act and it is unclear whether it will be continued when and if the Tax Code is amended.

Personal Income Tax Rates-All federal income tax rates are set to increase in 2013 with the largest increases falling on those making less than $9,000 a year and those making more than $380,000 a year.  It is uniformly agreed amongst both political parties than increasing the tax rates of most Americans would be harmful to our already fragile economy.  The difference that exists is about whether or not the tax rates for the top income earners should remain at the current 35% level or increase to 39.6%.   There is also some support for an additional tax on persons making over $1 million a year in income.

Personal Capital Gains Tax Rates-The current 15% tax rate for long-term capital gains will expire at the end of 2012 and increase to 20% beginning in 2013.  In addition, all dividends will be subject to ordinary income tax rates as the distinction between qualified and ordinary dividends will disappear.  For high earners, an additional 3.8% surcharge on capital gains income will be applied as part of the Affordable Care Act.

These changes can significantly alter not only a person’s financial planning, but their estate planning as well.  With less than six months until this change comes and the two political parties in no position to compromise, now is the time to speak with your financial advisors and your estate planning attorney to understand the consequences of this possible ‘doomsday’ scenario.

For more information on the 2013 tax changes, please contact info@levyestatelaw.com