Articles Posted in Asset Protection

Families throughout New York who have children with disabilities are frequently questioning how to best provide for their children’s needs–both now and in the future. It can be a complex issue, because relatives must balance their ability to provide help via their own private resources with available support through Medicaid and Supplemental Security Income (SSI). SSI is designed to help those with certain disabilities with basic needs and is funded through general tax revenues, not Social Security taxes.

The government programs hinge on the specific income available to those with disabilities, and so relatives who provide support may unintentionally lead to disqualification of their loved one from Medicaid or lower SSI payments.

Special Needs Trusts in New York
Special Needs Trusts (SNTs) are critical in these situations, allowing parents, grandparents, or others to provide supplemental resources without affecting the individual’s access to important government programs.

SNTs are relatively straightforward in concept, but the specifics of setting them up and using them properly can prove complex. For example, there are two general types of SNTs: First party and third party.

Third party SNTs are usually more common for New York families in situations where a parent, grandparent, or guardian wishes to provide funds for the child. The trust then operates to provide support for the individual with disabilities throughout their life. At death, the remaining assets in the trust are paid out to relatives–the disabled individual’s own children (if there are any), siblings, or other close relatives.

Alternatively, first party SNTs use the disabled individual’s own funds to create the trust–not money provided by others. These are slightly more complicated in that they have a “payback” requirement. The disabled child is able to benefit from the trust funds without losing eligibility in government programs. However, upon the individual’s death, the funds remaining in the trust must be used to pay back the government for benefits received throughout their life.

Because first party SNFs require use of the disabled individual’s own funds and have a payback provision,they are not used as often as third party trusts. However, they may be appropriate in certain situations. Some common examples include: when the child with special needs receives a large inheritance or is granted sizeable funds from a lawsuit verdict or settlement.

Evaluate the Whole Picture
In most cases, the creation of a special needs trust is only done in combination with other planning that may include life insurance, unique inheritance planning, and similar work. Elder law estate planning includes many interconnected parts, and so it is crucial not to view any specific legal tool in isolation. An attorney can explain what combination of steps are needed to best protect you and your family.

A JDSupra post from last month offers a helpful reminder of the changing legal landscape for New York same sex couples who are married.

As virtually everyone knows, in late June the U.S. Supreme Court declared the main portion of the federal law known as the “Defense of Marriage Act” (DOMA) unconstitutional. The crux of the particular case, Windsor v. United States, related to the estate tax. Windsor, a New York resident, was forced to pay over $350,000 in estate taxes following the death of her wife, Thea Spyer. The couple’s marriage was legally recognized in New York, but the federal government treated the pair as strangers.

Estate Planning Options
With the Supreme Courts ruling, issued by Justice Kennedy, the federal government is now required to treat all couples the same who are properly married under state law. This opens up a large number of new estate planning tools for married same sex couples in New York.

Most obviously that includes claiming the marital deduction on gift and estate taxes. As pointed out in the article, this deduction applies both to assets that pass directly (in a will) and those transferred via a trust. In these cases a trust known as a QTIP is common. QTIP refers to “Qualified Terminable Interest Property” trust and is often used to allow a surviving partner to benefit from asset before they eventually pass to another, like an adult child.

In addition, same sex couples can now take advantage of each other’s exemption amounts when making gifts and transfers. For example, the partners can “split” gifts to third parties and double the annual tax-free exclusion amount for federal purposes. Similarly, married same sex couples can now elect portability. This is a legal tool that allows the spouse of one who is deceased to essentially borrow the “unused” exemption amount of the spouse who has passed away. In essence, it is another way that partners can jointly pass on assets to loved ones with as small a tax burden as possible.

As we have previously pointed out, other legal details, like the increased Social Security benefits and the filing of joint tax returns, are also open to same sex couples married in New York.

Critically, the article makes the unique point that as a result of the unconstitutional ruling, section 3 of DOMA is deemed to have been void from the outset. In other words, those adversely affected by the law in the recent past (usually three years), may be able to file amended tax returns and recoup some of their overpaid tax.

Following the Windsor decision, it is critical that all New York same sex couple visit with an estate planning attorney to update their current documents or have new plans created to account for the new legal options open to them.

You’ve built a nest egg after years of consistent work, prudent planning, strategic risk, a lot of focus, and a bit of luck. You want to retire peacefully and provide a legacy that will hopefully secure some degree of wealth for you family for generations to come.

But what are the odds of wealth making it decades (or even centuries) after you are gone? If history is any indication, most inheritances won’t make it long at all. Wealth surviving into the third generation only happens in one out of ten cases. As a recent Senior Independent story on the subject reminded, this principles takes the form of an often-used refrain: “Shirtsleeves to shirtsleeves in three generations.”

The story points out that over the course of their lifetimes about two-thirds of Baby Boomers in the United States will inherit about $7.6 trillion. Yet, those same individuals will lose about 70% of that wealth before passing any of it on to their own children or other relatives.

Can you do anything to prevent this rapid dissipation in your case?

While it is usually impossible to have a 100% guarantee that wealth will survive indefinitely, there are many different steps that can make it far more likely. Those steps usually take two forms: (1) Taking advantage of legal tools that structure the inheritance in smart ways; (2) Having open conversations with beneficiaries so they understand money management and the importance of financial acumen.

In the first regard, various legacy trusts and “spendthrift” trusts exist which may be able to insulate wealth from beneficiaries who are not prepared to handle too much wealth too early (or all at once). An estate planning attorney can explain the prudent moves in your case. It usually depends on the size of your assets, type of assets, and unique family situation.

Regardless of specific legal planning, it is also critical to have honest conversations with family members about money management and financial responsibility. Also, it may be helpful to provide some inheritance early on, to get a feel for how the children will handle it. This may serve as a lesson for them in prudent financial smarts as well as provide you an opportunity to evaluate if safeguards needs to be put in place to protect their inheritance down the road. If family businesses are involved it may similarly be helpful to allow a second-generation family members to exert some control early on, so that are not completely blindsided by the decision-making process when you are not there to provide guidance and support.

Do I have enough to retire? Countless New Yorkers ask their financial advisers, estate planning attorneys, and other professionals that very question each and every day. There is no one-size-fits-all response, as retirement is a personal matter based on individual expectations, goals, and perspective.

Mountains of pages have been written about how much money you should have before retiring and what you should do with it. Perspectives abound.

Interestingly, there is less disagreement about general characteristics that make one more or less likely to be financially secure enough to retire. For example, the Wall Street Journal pointed to a new study last week which found that married couples are far better positioned to make the leap and officially enter retirement.

Couples Save More
Fights about money are common. Many relationships are made of one partner who is more frugal than the other, and disagreements about what to buy and when to buy it are persistent. The frugal partner in the relationship might daydream about the amount of money that they could save if they were on their own, without the compromises necessary for any healthy relationship.

But according to a new study from the National Bureau of Economic Research (NBER), on a system-wide scale, married couples are significantly better prepared for retirement than single individuals.

According to the NBER study, married couples who may be considering retiring (between 65 and 69 years old) on average have a nine-times larger nest egg than their single counterparts. That “nest egg” includes IRAs, 401(k)s, savings, and investments for the purposes of the study. Excluded were housing wealth and available Social Security.

The disparity is even more stark in raw numbers. In 2008 (the year that the study data was culled) married couples had saved, on average, $111,600. That compared to only $12,500 in savings for singles.

The Causes
The NBER did not delve into actual causation. But many different ideas are speculated about regarding the root reason for this disparity. For example, single parties are unable to take advantage of the “economies of scale” that allow married couples to pool resources and split costs that each would otherwise have to pay wholly on their own.

Divorce is also a costly endeavor, and it often takes years before divorced partners have the same income level they did during the marriage. Similarly, single parties are usually hit harder by tough economic times or catastrophic events. Whereas a couple can rely on one another for aid during difficult times, a single party may be decimated, requiring years (or decades) to deal with all of the financial ramifications.

Digital estate planning has attracted more and more attention in recent years as online assets become more central to our lives. On a legal front, the rules regarding inheritance destruction, and/or preservation of these online accounts remains unclear. That is because most rules are based on the terms and conditions of each individual social network or online program. For example, the process of taking down a Facebook page of someone who has passed away is not the same as taking down a Twitter account. There is little uniformity.

However, as the issues related to passing on access to these accounts grows, more social networking companies are working to enact different procedures and protocols to make the transition easier.

Passing on Google Account Data at Death
For example, last week the internet giant Google announced a new plan to help account users pass on access to their account in a seamless manner. According to reports on the policy change at the Wall Street Journal, this means that Google “became one of the first major Internet companies to put control of data after death directly into the hands of its users.”

Per the policy changes, users of various Google services can now use a dashboard to set up a plan to take effect upon a certain period of inaction. Specifically, users can either delete account data or pass on data to a third party after either 3, 6, or 12 months of inactivity. This service is known as Google’s “Inactive Account Manager,” but most have colloquially begun referring to it as setting up your “Google heirs.” The manager allows one to set up this process for most of Google’s major services, including Gmail, Google Drive (cloud storage system), the Google+ social network, and more.

Importantly, even under this new protocol, Google does now allow a third party to actually control access to these accounts. This only refers to passing on data (emails, messages, pictures, etc.). That means that if you’d like to ensure your heir has actual access to manage these accounts, you will need to come up with alternative arrangements. Those alternatives might include having a running list of passwords and account names to be given to a set party upon death. There are many online versions of these “password lock boxes” which one can use. Some are free while others offer more advanced dissemination of online account for a fee.

At the end of the day, it is a good sign that Google is taking step to address the digital assets issue. Hopefully more and more networks take the same steps, preventing what is becoming a clear estate planning problem that many families must deal with in the midst of grief.

Earlier this year we touched on the possible estate planning implications of the compromise law that averted the so-called “fiscal cliff” in early January. As with many of these issues, the full implications are hard to evaluate immediately, only playing out as planners get to work crafting options for clients. In the first few months of the year, many estate planning attorneys and financial advisers have done just that, getting a better understanding of how the altered legal landscape will affect common techniques to pass on assets securely and with minimal tax implications.

For example, an “On Wall Street” article last week explored a few of these issues, noting how the fiscal cliff deal actually has widespread implications. The main issue, claims the article, is that the apparent permanent federal estate tax will limit the need for many families to engage in complex maneuvers to avoid the significant tax bite. Bypass trusts are pointed to as a tool which may be less necessary because many families will fall well below the federal estate tax exemption level ($5.25 million, pegged to inflation). Yet, one must not forget that this permanently high estate tax level has no impact on estate taxes levied by the state. New Yorkers must still pay that state rate, and it hits far lower than the federal level. In addition, these sorts of trusts are often crucial in addressing other risks, like divorce, remarriage, etc.

The article also touches on potential effects on charitable giving. The fiscal cliff law also calls for a phase out of itemized deductions and personal exemptions for all income over $250,000 annually ($300,000 for couples). This may alter some previously common charitable planning. Though the article points out that it may make charitable remainder trusts more common. These trusts are particularly useful for gifting assets which will appreciate, allowing the defference of capital gains taxes.

In addition, the permanent tax increases for high income earners may make the tax benefits of certain life insurance protections even more popular. The story notes how the fiscal cliff law “substantially enhance the benefit of investment buildup inside the protective skin of an insurance policy.”

Of course these issues barely scratch the surface of specific financial planning changes caused by the tax rules in the fiscal cliff bill. Ensure that you speak with an experienced estate planning attorney and other professionals for more tailored advice on your own situation.

Some mistakenly assume that estate planning only deals with minimizing taxes. With all of the focus on the estate tax in recent weeks it is easy to see how this assumption might gain ground. And it is true that for some families, significant planning must be conducted to ensure that as large a portion of an estate as possible makes its way to the intended beneficiary instead of the pockets of Uncle Sam.

But it is a mistake to suggest that taxes are the only or even the most important factor for most long-term planning for New Yorkers. The reality is that many tangential issues are just as important and often even more important. A recent WRALTechwire article reminds readers of several “non-tax” issues that are critical and must be addressed in estate planning efforts.

Some of those issues include:

***Protecting assets in subsequent generations. Far from being taken by the government, many have concerns that an inheritance might be taken by a relative’s creditors, angry spouse, or other. Fortunately, in certain situations steps can be made to provide protection so that any inheritance is secured from the uncertainties of the future. After all, if an asset is properly passed on only to be snatched away by a third-party, then it makes no difference if taxes were paid on the inheritance or not.

***Protecting confidentiality. One overlooked aspect of the planning is simply the speed at which it allows the process to unfold. When all assets must pass through the court’s probate process, then the timelines to resolve everything are dragged out. In addition, probate records are public, and so anyone can learn of the details of the situation Keeping this private requires use of trusts and other tools that an estate planning attorney can explain.

***Plan for incapacity. Estate planning is not just about passing on assets. It also involves planning for possible disability or incapacitation. Who will make end-of-life medical decisions? Who will handle family finances if you cannot? It is a grievous error to assume any sort of “default” rules for this decision-making are sufficient. They usually are not. That is why a power of attorney and health care proxy need be used to leave no doubt about your wishes in these situation. Often family members remark on how grateful they were for these legal documents so that they were not required to make difficult choices in the midst of the stressful situation.

Late last year the U.S. Supreme Court agreed to hear two separate cases impacting various same-sex marriage issues. As we have frequently discussed, in ruling on these issues the Supreme Court may set precedent which impacts marriages across the country, including in New York. In so doing the Court may set in motion legal changes that impact estate planning issues for all of the thousands of same sex couples living throughout the state.

However, we will have to wait a while longer before anything is finalized. That is because agreeing to hear the case was just the beginning of the process. The next step was the setting of specific dates for hearings in which both sides argue their case and answer questions posed by the nine justices.

This week the Court released its schedule for those gay marriage cases. As reported in the Huffington Post, the hearings will take place over two days in late March. First, on March 26th the court will hear arguments in Hollingsworth v. Perry. Perry is the case related to Proposition 8 out in California. Beyond “standing” issues, this legal matter may clarify what the U.S. Constitution has to say about the substantive right to marry for same-sex couples. Depending on what they decide, nothing can change, gay marriage may be allowed in California, or, theoretically, gay marriage could become the law of the land across the country.

On the following day, March 27th, the Court will conduct hearings on the second case, United States v. Windsor. This is the legal matter that originated with a New York couple and has more direct bearings on the rights of local same sex couples. The Windsor case, if it survives past the standing issues, will decide whether or not the Defense of Marriage Act (DOMA) is constitutional. As readers know, DOMA acts a bar that prevents federal recognition of even state marriage for same sex couples. This has implications on issues like estate taxes and qualification for federal benefits, including Social Security.

Obviously it is important for all couples who may be affected to follow as these cases are argued and then decided. Following these March hearings, it will likely be several months before the justices reach their opinion and release it to the public. While the final date is impossible to predict it is likely that the judgement will be issued sometime in late June. Also, the changes may not take effect immediately. Depending on what is decided it could be weeks or even months before the implementation date of certain components. In any event, it remains critical for same sex couples to be diligent about their planning so that they are protected right now, no matter what the future holds.

The heirs of art dealer Illena Sonnabend faced a very unique problem after the woman’s death in 2007. One the most valuable pieces of her estate was a work by Robert Rauschenbeg known as “Canyon.” The 1959 piece of art is a collage that include various three dimensional materials, including a stuffed bald eagle. Canyon would prove to be a sticking point in the heir’s attempt to settle the estate–a process which ultimately dragged on for five years.

Taxes Always Due
For estate tax purposes, the value of artwork in an estate is appraised and the tax is owed based on the total appraisal value. Sonnabend’s estate had a significant number of pieces and the artwork taken together was valued at over $1 billion. According to a Wall Street Journal story on the case, this led to an estate tax bill of about $471 million. The two heirs to the estate sold about $600 million of the artwork to pay for that bill.

However, the Canyon piece was a different story. Because the work featured a stuffed bald eagle, it could not be sold under U.S. law. That is because the 1940 Bald and Golden Eagle Protection Act as well as the 1918 Migratory Bird Treaty Act prohibited sale of the items. Since Canyon could not be sold, the three appraisers for the estate gave the artwork a value of zero for estate tax purposes.

But the IRS disagreed.

The IRS sent the family a report valuing the artwork at $15 million-even though it couldn’t be sold for $5, let alone $15 million. The family rejected the IRS valuation. This drew the ire of the government tax collectors who responded by re-appraising the art as worth $65 million. On top of that, they claimed that the intial appraisal by the family of zero dollars triggered an “undervaluation penalty” of 40%. All told, the family was being asked to pay $40.4 million in taxes on an object that they could not make a dime from selling.

Few Options
Confused logic aside, the family had few options. Eventually, they chose to donate the piece to the New York Museum of Modern Art. This allowed them get around having to pay the hefty estate tax–charitable donations (like inheritances to spouses) generally fall outside the purview of the estate tax. Unfortuantely, however, the family was unable to use the gift for charitable deduction purposes as happens in most cases. That is because, even though the gift was made to get around estate taxes, at the end of the day it still had no value because it could not be sold.

This bizarre case is a testament to the lengths that the IRS may go to collect what it deems it is owed, even when logic suggests otherwise. It’s a reminder that local residents should never try to plan for these details or handle long-term financial affairs without experienced professional assistance.

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DNA Info in New York shared an interesting story on the intersection of a custody dispute, estate planning, and a one billion trust fund waiting in the wings. The tale is a reminder of how money and the emotions following a death are a breeding ground for feuding and conflict among many different parties. It is always best to proceed with the assumption that strong disagreement will arise and to crafts plans and take those into account. Perhaps those worst fears won’t materialize, but, if they do, they must be accounted for.

The situation in this story concerns two teens who are set to inherit the $1 billion inheritance from their great aunt’s fortune–the New York philantropist Doris Duke. Duke was a tobacco heiress andspent much of her time in a $44 million Upper East side apartment. Duke obtained the fortune after the death of her husband–Lucky Strike cigarette magnante “Buck” Duke–and holding from her own mother’s fortune. Upon Doris’s death in 1993, the fortune passed down to her nephew with whom she was close–the father of the twins. Sadly, he died in 2010 at age 57 due to a methodone overdose. He had divorced the teens’mother in 2000 and was awarded custody at that time.

As one might expect, confusion broke loose following the father’s death. The children’s biological mother was given custody at first, though serious concerns have been raised about her ability to raise the children, with past reports identifying her as suffering from paranoia and post-traumatic stress disorder. The twins’ stepmother has been trying to obtain custody of the children but has thus far been unsuccessful.

In this midst of this tragedy and custody fighting, the children’s mother has been making strange requests of the $1 billion trust fund that the two teens will inherit when they turn 21 years old. The large fund is currently managed by JPMorgan with specific rules about how much funds are dispersed to the children while they remain minors. Recently, the mother has been making large, somewhat bizrre requests of the trustees, claiming that the children “feel like they are poor” because of the trustee’s denial of many of the requests.

Right now the family received a range of monthly allotments, including $8,000 for housing, $1,800 for food, $3,600 to rent a car, $500 for gas, $2,000 for random monthly expenses, and pre-pad nanny service, tuition, medical insurance, and more. All of this, however, is apparently not enough and the mother has been making repeated calls for more money. For example, $6,000 was requested for a Halloween party, with the trustee providing only $2,800. At Christmastime, the mother asked for $50,000 to cover expenses for gifts and several trips. That request was denied.

In the midst of all of these financial requests, the trustee asked a Manhattan Court for guidance on how to respond to the financial requests. As often happens in these cases, the court has appointed an independent guardian to act in the children’s best interest in the matter. It is still pending with the court.

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