September 2010 Archives

55% Federal Estate Tax Rate Returns on 1/1/11

September 22, 2010,

by Michael Ettinger, Esq.

The year 2001 was a space odyssey in more ways than one. It was also the last time we faced Federal estate tax rates as high as 55%, and exempt amounts as low as one million dollars. Nevertheless, this appears to be what we are going to see take effect on 1/1/11, due to the expiration of Bush era tax cuts enacted in 2001. No one would have predicted what has come to pass.

Taking effect on January 1, 2002, The Economic Growth and Tax Recovery Act was to be amended at some point during the next nine years. It was widely expected that something close to the high water exemption of 3.5 million dollars, existing at the end of 2009, would be made permanent. Health care reform, however, dominated the legislative agenda at the end of 2009, pushing estate tax reform to the sidelines. Political bickering then prevented an extension of the 2009 exemption, at least until a solution was found.

Then came 2010, the year of no Federal estate tax. This saved, amongst others, the late George Steinbrenner's family an estimated 500 million dollars in estate tax and probably allowed the Steinbrenners to keep ownership of the New York Yankees in the family as well.

The predictions of the majority of pundits, of a fix occurring in 2010 with retroactive application to January 1 of this year, have not panned out. Instead, over the past summer, one poll of attorneys, accountants and trust officers found that 68% believe that nothing will happen in 2010 to remedy the estate tax problem with one wag adding "nothing is what they do best".

Some commentators feel that each party now has a stake in the reversion to the one million dollar exemption. For the Democrats, they say, it is a "revenue raiser" without a tax increase. For the Republicans, they say, it is both a campaign issue and a significant fund raising issue.

The latest news from is that Senate Majority Leader Harry Reid (D-Nev.) will bring the issue up this month with a possible package hitting the floor in late September. Nevertheless, one sticking point unlikely to be resolved are the opposing forces of those in favor of extending Bush era tax cuts for income earners over $250,000, on the basis that this group tends to prop up solely needed consumer spending, versus Obama's campaign pledge to raise tax rates for families earning over $250,000.

With the added tumult of the run up to the mid-term elections, it is difficult to see how issues as polarizing as income and estate taxes, unresolved for nine years, will suddenly be settled.

With a 55% Federal estate tax looming, now is the time to be talking to your estate planning lawyer. If you are married, you may double the one million dollar exemption by splitting your estate with your spouse into two estates, preferably using trusts to avoid having to probate the estate twice. Keep in mind that your estate consists of all of your assets, including any life insurance that you own. On a two million dollar estate, your tax savings for planning ahead would amount to $550,000. This type of estate planning must occur before the first spouse dies to maximize the amount that may be sheltered.

Charitable Remainder Trust (CRT) as an Estate Planning Tool

September 14, 2010,

Historically, charitable giving rises about one-third as fast as the stock market. While the stock market gains of 2010 remain slight (Dow is up 1.13% at the time of this writing), New York residents may still want to consider using the charitable remainder trust (CRT) in their estate planning.

This trust works well for those who:
• hold highly appreciated assets
• desire an income stream off of the assets
• want to donate to charity; and
• achieve tax benefits.

Because the CRT is irrevocable, this planning should be done with an experienced estate planning attorney.

How the CRT Works, in brief
Your assets and/or property are transferred to a CRT whereby your charity administers the trust. The charity serves as trustee, managing or investing your assets.
The charity pays you and/or your beneficiary a portion of the income generated by the trust for a certain number of years, or for the remainder of your life. At your death or the end of the set period, your charity receives the trust's remaining principal.

CRT Tax Benefits
By establishing a CRT, you avoid capital gains tax on the donated assets, because the charity is exempt from taxes. An income tax deduction may also be declared on the fair market value of the remainder interest in the trust. Additional savings are effected by removing these assets from your estate, reducing subsequent estate taxes.

Two Types of CRTs:
With the charitable remainder unitrust, the percentage rate on the value of the assets determines your and/or beneficiaries' annual payment. If the trust value changes, the payment to you and/or your beneficiaries changes.
A charitable remainder annuity trust is set up to pay a fixed rate of return based on the initial valuation at the time the property is placed in the trust. The trust's assets are never re-valued, so if the assets of the trust increase, the income portion does not change.

The remaining principal of the trust reverts to the charity of choice upon death and/or the end of the set term. (The trust life may be based on the life expectancy of the income beneficiary). Because some grantors may object to the loss of principal, they may purchase life insurance to replace the principal assets. An estate planning attorney then uses an Irrevocable Life Insurance Trust in conjunction with the CRT to assure the trust's value is also distributed to the income beneficiaries.

Online resources to charitable giving:
The National Center for Family Philanthropy

This website promotes philanthropic values, vision and excellence across generations of donors.

The American Institute of Philanthropy

This website rates and grades public charities to help donors make informed decisions.

The Foundation Center

This website provides news on charitable activities and links to private and public foundation websites.

What is Elder Law Estate Planning?

September 8, 2010,

by Michael Ettinger, Esq.elderlaw.JPG

"Elder Law Estate Planning" is a niche area of the law which combines the features of elder law and estate planning that pertain most to the needs of the middle class.

Estate planning was originally for the wealthy few. Middle class families did not consider themselves as having "estates" to plan. During the Reagan years (1980-1988), a great economic expansion occurred, raising the asset level of the middle class into the realm of estate planning. With middle class people suddenly exposed to "estate taxes", the need arose for estate planning, to reduce or eliminate those taxes. A few years later, in 1991, the American Association of Retired Persons (AARP) published "A Consumer Report on Probate" which concluded that probate was a process to be avoided, in all but the most exceptional cases. This marked the beginning of the end of traditional will planning and started the "living trust revolution". AARP recommended that families start using trusts rather than wills, to avoid probate and save their beneficiaries tens of thousands of dollars in the estate settlement process.

Since then, millions of people have set up trusts to:

• Save time and money in settling the estate

• Avoid legal guardianship if they become disabled

• Avoid having their personal and financial matters made public

• Reduce the chance of a "will contest"

• Keep control in their family and out of the court system

At about the same time as living trust planning became popular, the field of elder law emerged to help people navigate the increased complexity of state Medicaid rules and regulations, the soaring costs of nursing home stays, and the fact that people were living considerably longer.

Historically, estate planning was handled primarily by "white shoe" law firms in the deep canyons of downtown Manhattan, while elder law planning emerged out of the Department of Social Services. State employees began to take their expertise in Medicaid rules and regulations into the private sector.

To this day, these two fields continue to grow independently of each other, sometimes to the detriment of the clients lawyers are meant to serve. Estate planning lawyers mostly see estates averaging from the low hundreds of thousands to about two million dollars. Families with estates under one million dollars often cannot afford long-term care insurance. They may now or later need a Medicaid Asset Protection Trust (MAPT) to protect their estates from being depleted in the event a nursing home is required. Since the estate planning attorney is often unfamiliar with elder law, the client never gets the MAPT they need, and the estate plan to avoid probate proves useless when a nursing home stay ends up consuming all of the assets.

For the couple with over one million dollars in assets, estate planning is essential to reduce or eliminate estate taxes. In this case, they should split their assets into two trusts, thereby creating two estates, and doubling the exemption from one million to two million dollars. Still, this couple, while they may be able to afford long-term care insurance, may find one or both of them uninsurable due to health reasons. Perhaps what they really need are two MAPT's, not just to save estate taxes but to also protect the assets from nursing home costs, but they never get them because the estate planning lawyer is not experienced or trained in drafting these documents.

What happens when the estate planning client actually becomes disabled and needs long-term care? They, or the family, often consult with the estate planning lawyer who prepared their plan, but who may be unable to help them, due to his or her unfamiliarity with state Medicaid rules. Many families lose assets that might have been saved. Unknown to the estate planning attorney, elder law attorneys have developed numerous techniques to protect hard won assets, even when the nursing home is imminent, such as "spousal refusal" and the "gift and loan" strategy.

On the other side of the coin, what happens when the older single or couple meets with an elder law attorney instead of an estate planning attorney? These clients are usually sixty-five or over, and are looking for asset protection. The elder law attorney knows how to create a MAPT and often recommends them. However, on the estate planning side of matters, the elder law attorney may miss the need to set up two trusts for the couple to avoid the estate tax. He or she may have little knowledge about estate planning for second marriages, a growing segment of the population, or using Inheritance Trusts to keep the assets in the blood and protect the inheritance from children's divorces, lawsuits, and creditors.

While some of the family's needs may be met, such as asset protection, other needs are left unserved, often because the clients are unaware that these two fields of law complement and overlap one another. In other words, they may get what they want but
not necessarily what they need. These oversights are often visited on the heirs.

Your writer made the conscious decision twenty years ago to develop expertise in these two fields of law simultaneously. This has proven to be invaluable to thousands of families. Clients who originally came in for estate planning services later became elder law clients, converting their revocable living trust estate plans into MAPT's as they got older, or through the use of Medicaid planning services to protect assets when the need for nursing home care actually arose.

Looking back on our experiences in over ten thousand cases at Ettinger Law Firm, we conclude that we have assisted in the creation of a new niche, "Elder Law Estate Planning".

We define this area of law as:

• Getting your assets to your heirs, with the least amount of taxes and legal fees possible

• Keeping those assets in the blood for your grandchildren and, in the meantime, protecting those assets from your children's divorces, lawsuits, and creditors

• Protecting your assets from the costs of long-term care and qualifying for government benefits available to pay for care

While estate planning involves tools for well-to-do families, with acronyms like GRITS, GRATS, and GRUTS, and where elder law serves the diverse needs of our growing senior population, including the less fortunate, through Medicaid, Medicare and Social Security, "Elder Law Estate Planning" addresses the concerns of the vast majority in the middle.