SPRING CLEANING TIME MEANS CLEARING OLD PAPERWORK

        With tax day over and the need to collect and forward any number of financial and tax documents to the government and with the coming of spring, it is time to turn to spring cleaning.  The question should be asked, what paperwork can I throw out, should I throw out and what paperwork should I keep.  To be accurate, you should never throw out any financial paperwork, you should shred or incinerate such documents.  It is inevitable that in any such endeavor, you will come across documents that matter for purposes of your estate planning, such as wills, trusts and the various financial documents that speak to your estate planning.  In any event, you should rely on a system to help you collate these important documents for future use.  

You should keep certain original documents in an easily accessible but safe place, such as a fire proof safe or perhaps even a safety deposit box.  Things such as birth certificates or adoption paperwork, licenses and passports, marriage certificates, judgments of divorce, military discharge papers and social security cards.  Other documents do not necessarily need to be kept as an original, they should be regularly review, at least bi-annually, if not more often.  Documents such as a will, trust or other testamentary documentation will be kept by your attorney or law firm, but it still always best to maintain a copy or, better still, several copies on hand.

CHOOSING THE RIGHT PERSON AND STEPS TO TAKE

        As noted in a previous blog, being an executor of an estate can be a thankless job.  There are ways, however, that can allow you to make the job and life of an executor easier and less painful.  It is a job that carries with it much responsibility, so taking a few proactive steps may help to save the executor a lot of heartache.  One of the first steps you need to do, even before helping a named individual is to name the individual.  In other words, pick the right person; in fact it is even better to pick a few individuals as successors in the event that the executor passes away before you or is otherwise unable to serve as the executor of your estate.  Even better is to pick two people who will serve as co-executors; if you do this, you must make someone the primary person who shall serve and who has the final authority to make whatever decision needs to be made in the event that there is a disagreement.  

It is important to keep in mind that the person you chose is going to in charge of your assets that you amassed throughout your life.  All other things being equal, it is best to have someone who lives local and in the same state as you.  Few things in life provide such a stark choice.  It may be more important to you and the heirs, however, that you pick someone who is familiar with you, your wishes and your assets, even if they live further away or in a different jurisdiction.  If you choose a professional, such as an attorney, it is important to keep in mind that there will be costs associated with this.  If you permit and allocate a specific payment structure into the will or testamentary trust, it may not matter, since even a family friend or relative may also be entitled to a fee.  Finally, it is best to speak with that person in advance to ensure that they understand that they are being named as the executor of your estate and that they will do so.

VERY SIMPLE CONCEPT

This blog examined the dynasty trust in the past but it is time to reexamine certain aspects of the dynasty trust.  The dynasty trust is a trust designed primarily to avoid the generation skipping transfer tax when a person wants to leave money to their grandchildren or great grandchildren (or even generations beyond that).  Before getting into the nuts and bolts of what a dynasty trust is, it is best to outline some of the basic tax issues inherent in the generation skipping transfer tax.  

Grandfather wants to leave an asset to his son, with the intention that he will leave it to his son and for him to leave it to his son and so on.  Just to make the dollar figures simple, let us assume that it worth $10 million.  For further simplicity, let us also assume that grandfather’s estate already went through the federal (and state) estate tax exemption.  That means that son has to pay the current top estate tax rate of 40%, which means that the asset is no longer worth $10 million.  Instead it is only worth $6 million.  For further simplicity, father’s estate also passed through all of his estate tax exemption, so instead of the asset being worth $6 million when it passes to the grandson, it is now worth $3.6 million in light of the 40% estate tax.  And the process goes on and on.  

RULE OF HALVES

Many people find themselves going into nursing homes earlier than expected and without the appropriate planning.  Things happen in life to derail our best laid or thought out plans.  With more and more elderly Americans living longer, the need for nursing home care is increasing and will continue to increase indefinitely.  Whenever someone does not properly plan for going into a nursing home, often their personal funds will be the basis upon which they will pay for their nursing home care.  Certainly, there are those amongst us who purchase long term care insurance but for the majority of us, we rely on utilizing Medicare or private insurance or some combination of the two.  

This is a misconception, insofar as the most that Medicare will pay for is 20 days for full nursing home care and up to 80 days partial care, for a total of 100 days.  Moreover, this stay must be preceded by a three day hospital stay.  Any more time in the nursing home requires that the patient either pay through private insurance or by private pay.  Granted entry into a nursing home often comes as a surprise to many, but for those who have an idea that they may have to enter into a nursing home, they scramble last minute to dispose of their assets with the mistaken belief that they will be able to show to the government that they do not have any assets and are thus eligible for Medicaid, to pay for their further nursing home stay.

LARGE NEED TO REDUCE AND PREVENT FINANCIAL EXPLOITATION

        The American  Bankers Association is looking to serve a large market that is only getting larger by the day.  At the same time, they are working to shore up the larger financial markets in a larger effort to prevent financial fraud perpetrated against seniors.  As one banker noted during a speech on the topic, the banking community responded to the need to protect those with diminished ability to discern the difference between a real deal being sold by a legitimate vendor and a scam by predators.  In February, 2016 it launched the Safe Banking for Seniors program, with various state bankers association across the nation rolling out their own version modeled on the American Bankers Association.  

As of the inception of the program, 30 states joined in to help usher in the program.  The New York Bankers Association is not one of the 30 states and does not currently such a program.  Nevertheless, it is gaining popularity across the nation and many states bankers associations are seeing the utility and popularity of such a program.  Furthermore, the program is not restricted to states bankers associations, individual banks, regional banks and bank chains can join in the program.  As the American Bankers Association notes, 30% of the population of the country will be 60 or older by 2025.  The Consumer Finance Protection Bureau and the American Bankers Association both note that $2.9 billion per year is lost to fraud perpetrated against elder Americans.  Some estimates are as high as $36 billion per year, with only one in 43 cases of financial fraud against an elderly American properly documented and reported.  The primary program is designed for banks and bankers associations, which will in turn filter down to individual elderly bank customers.

COMMON PROBLEM

There is much talk lately of how to deal with email, facebook, twitter accounts, et cetera of people who pass away.  For those of us who have friends or family who passed away and see their facebook account send a reminder to all of their friends on their birthday or some other event, it is nothing short of strange, even ery to see their former friend live into perpetuity in the digital realm.  Many people use it as an opportunity to post memories and give a public shout out to the living that their friend or family is still alive in their heart.  Others find the matter to be a painful memory.  

Facebook instituted a policy whereby a legacy contact can delete your account or transition the account to a memorialized account, whereby your name will be changed to a remembered account (more properly a “remembering account“).  Currently, New York does not allow an executor, or anyone else for that matter, to access the emails, online drives and various other digital accounts owned by a person after they pass away.  If it was private while the person was alive, shouldn’t it be alive after they pass away?  Yet, this is a rapidly evolving area of the law, with private corporations creating their own rules in the absence of legislative pronouncements to the contrary.   In the 2012-2013 legislative session, Representative M. Kearns introduced a bill that would address the issue of access to such accounts by an executor.

PRINCE APPARENTLY DID NOT HAVE A WILL

The world learned recently that Prince joined the long list of celebrities who passed away intestate or without a will.  Some of the names on the list are surprising, others not so.  The Honorable Salvatore Phillip “Sonny” Bono, Michael Jackson, Howard Hughes, Abraham Lincoln, Pablo Picasso, Martin Luther King are all grouped together with such musical greats as Jimmy Hendrix, Curt Kobain and Amy Winehouse.  Pablo Picasso’s estate was valued at approximately $30 million upon his passing in 1973 and is now valued at several billion dollars and took several years to sort out.

 If a will does not surface, which seems likely, the local probate Court will follow Minnesota’s intestacy laws to divvy up at his estate which is initially estimated at at least $100 million and very well likely be worth several hundreds of millions of dollars.  While Prince was no doubt a creative genius on par with others who were considered truly great, his creativity did not go into the realm of financial planning, as a will is the most basic of all legal documents.  No doubt he could have afforded the most well paid team of lawyers to easily and without much interference value his estate and develop a legal strategy to help prevent public drama which could cost millions in legal fees as well as untold emotional costs to his family members and very well may cause an irreparable rift in family relations.  Prince and the other above celebrities, however, are in the majority, as the American Bar Association estimates that approximately 55% of Americans pass away without a will.  Forbes estimates that the number may be as high as approximately two out of three Americans.

As was outlined in the most recent blog posting, if you compare the costs and benefits of creating a will now versus passing away intestate, there is no doubt that the benefit is huge and the cost is small.  It is thus high time to explore New York’s intestacy laws in detail.  It is important to note that intestacy laws are important not only because they instruct a probate Judge on how the estate must be divided but it also tells the probate Court what is not permitted as well as what is neither required nor prohibited; in other words the parties can agree to certain final dispositions.  The specific statute that defines intestacy and the outlines the specific requirements that a Court must adhere to is found at New York Estates, Powers and Trusts Law (EPTL) Section 4-1.1.  

Family Law and intestacy laws are one of the few areas of the law that recognizes and codifies a different treatment of the sexes, insofar EPTL Section 4-1.2 requires that a child conceived outside of marriage (so called and grossly titled “illegitimate” children) must have an acknowledgement of paternity by their father or a finding by a Court that the children in issue are indeed the children of the deceased man before those children can inherit as a child of the deceased.  Not so with mothers, since, except in the case of children mistakenly switched following birth, there is no doubt that children are the issue of their mother.

The technical legal term when a person passes intestate is that their estate is administered and a person who passes with a will, called testate, has their will probated.  Within the universe of individuals who are material to the probate Court are children, spouses and siblings.  Adopted children at treated the same as biological children although unadopted stepchildren are not considered children as far as the intestacy law is concerned.  New York has adoption proceedings and recognizes adult adoptions to legally redefine this relationship.  Divorced spouses are immaterial, although separated spouse are still considered spouses as far as the law is concerned.  

FURTHER CHANGES MAY BE NEEDED

When a person receives an asset via the probate process, the transaction must be reported to the IRS, even if it does not trigger any tax liability as to the estate or the recipient.  This is because the IRS needs to track the basis of the asset to determine any net capital gains or other calculations for tax liability purposes.  Price minus basis equals profit is the rough calculation to determine how much a person realized in a sale, which in turn determines the capital gain on the sale of the asset.  

There is a tension built into the system whereby the executor wants to assign the lowest possible value to the asset, so as to keep the value of the estate low, while the beneficiary wants to have the highest possible value assigned so when they dispose of the asset in the future it will incur less tax liability.  The IRS sought to address this tension when they lobbied Congress create 26 U.S.C. § 6035, which in turn enabled them to create the new IRS form 8971.  Form 8971 requires an executor to notify the IRS which beneficiary receives what and the value of the asset.  Part of the same legislation also created 26 U.S.C. § 1014 which requires beneficiaries to use the value of the asset at the date of death for purposes of reporting basis.  This value cannot be greater than the amount that the executor reported on the estate tax return.

ORDER OF PAYMENT

It should not be a surprise to anyone that when someone passes away, their estate must pay for all legally binding outstanding debt owed by the decedent just prior to passing. New York as well as just about every other jurisdiction has laws that address how the estate puts creditors on notice that they must file a claim, but how the creditor must go about making a claim and getting paid from the estate. As in other areas of the law, there is an order and priority to the claims that can be paid. The administrator has a fiduciary obligation to the heirs to distribute the estate to the terms of the will. That fiduciary obligation also extends to creditors of the estate. The payment of expenses, ensuring that all disbursements are properly documented and all taxes and fees are paid are core responsibilities of the estate administrator.

To do this, the estate administrator must first understand what assets the deceased owned, the value of those assets, which in and of itself costs money. When an estate is insolvent, the creditors will surely examine every expenditure by the administrator to determine if they acted appropriately. On the other side of the ledger, the administrator must determine if the claims are valid or overpriced and inflated. The estate administrator has an obligation to dispute all claims, except properly owed, legally enforceable obligations. Since the final accounting by the estate administrator presupposes that all parties are already involved in litigation and there is a Court already scrutinizing all credits and debits, the likelihood that a party will enforce their rights, or, more specifically, object to the final accounting, is all the much greater. The balancing act that the estate administrator must engage in can be a complicated endeavor.

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