Estate Planning

November 3, 2010

The IRA Contract

Pioneered by Ettinger Law Firm, the IRA Contract solves a technical problem that arises when a spouse in a second marriage wishes to leave their IRA, or other qualified plan, to the husband or wife but also wants the unused funds to go to their children from a previous marriage after the spouse dies.

Many lawyers recommend a trust for this purpose. For example, husband dies and leaves the IRA to a trust which names the wife as beneficiary for her lifetime and, after her death, to his children from the previous marriage. Although leaving an IRA to a trust is perfectly legitimate and solves the problem, it has one major drawback. Since a trust has no “life expectancy” on which the IRS can calculate the required minimum distribution (RMD), when you leave an IRA to a trust, the Service looks through the trust to find the oldest trust beneficiary. They then calculate the RMD based on the life expectancy of that person, usually the second wife. The first issue is that even if the wife is under 70 1/2, the age at which you are required to start withdrawals, she cannot wait until then. Since the IRA was left to a trust, it is not a spousal rollover and does not become the wife’s IRA. As such, she cannot defer taxes until 70 1/2 but must start withdrawing the year following her husband’s death. The larger problem is that the IRS will establish a “term certain” for the payout based on her life expectancy which may be two decades or more less than the husband’s children. In other words, when she dies, his children must continue to withdraw based on her life expectancy, instead of based on their own life expectancies. Two decades or more of deferred taxes on the IRA are lost.

To solve this problem, we prepare a fairly simple contract. Wife agrees, in consideration of husband’s naming her as beneficiary on his IRA, to name husband’s children irrevocably as her beneficiary when the IRA rolls over to her. She also agrees not to take any more than the RMD, except on consent of the attorneys appointed by the husband. This prevents someone perhaps unduly influencing the wife in her later years to simply withdraw all the funds and give them to her children or others.

October 25, 2010

The Race to the Courthouse

by Ettinger Law Firm

We received a call last Friday from a woman who said that her father had died but her stepmother was claiming that he did not have a will. The daughter was certain that he did, in fact, have a will.

What happens in such a case? Regardless what the daughter believes, unless a will can be produced there is no will. A check of the county probate court would be in order as some clients traditionally filed their wills in court for safekeeping, but this is rarely done today. There is also the possibility that the father destroyed the will he had, for whatever reason.

Another possibility is that all of the assets may have been made joint with the father’s second wife and that she was also named beneficiary of any other assets, such as IRA’s, annuities and insurance policies. In this case, all of the assets pass to the surviving spouse without any court proceeding and there is no need for a will or, if there is a will, there is no need to file it.

October 18, 2010

Estate Planning for Art Collections

by Ettinger Law Firm

With the economy improving, seasoned collectors are now watching the fine art estimates in New York’s upcoming auctions. Collecting art, a passion and hobby for many, is also a way to accumulate and transfer wealth for next generations. The disposition of art, however, should include careful planning with a trusted and experienced New York estate planning attorney.Families often employ the “empty hook” method when it comes to art collections. When a collector dies, heirs quietly take valuable art work out of a home, sometimes claiming what is “theirs” by name tags placed on the objects. This creates an “empty hook.”

There are many potential pitfalls when attempting to avoid the Internal Revenue Service’s various taxes on the purchase, sale and transfer of fine art. The first and most dastardly is the limitless statute of limitations on estate tax fraud or on a taxable gift for which no return was ever filed (Internal Revenue Code Section 6501(c)). Because art never truly “disappears,” one does well to remember that neither does a tax liability. An error of disclosure, e.g. not properly planning to gift art in adherence to IRS rules and regulations, may become a costly legacy to bestow on the next generation. (Tax fraud is not something to pass on.)

Heirs can also be liable for a penalty of 20 percent of the tax due if there is an underreporting of an asset’s value by 50 percent, and a penalty of 40 percent of the tax due if the value of the property is underreported by 75 percent (IRC Section 6662). Failure to report assets at all subjects the owner to a fraud penalty set out in IRC Section 6663. These fines can also raise the transfer cost on an unreported piece of artwork to over 80 percent.

September 22, 2010

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

by Ettinger Law Firm

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.

September 14, 2010

Charitable Remainder Trust (CRT) as an Estate Planning Tool

by Ettinger Law Firm

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.

September 8, 2010

What is Elder Law Estate Planning?

by Ettinger Law Firm

by Michael Ettinger, Esq.

“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.

August 13, 2010

The Irrevocable Life Insurance Trust (ILIT)

by Ettinger Law Firm

by Michael Ettinger, Esq.

Many clients are surprised to learn that the death proceeds of their life insurance are subject to federal estate taxation. They believe that life insurance escapes estate taxes and passes to their loved ones intact.

This confusion probably began when the client was told that life insurance is income tax-free. For married clients, the confusion is compounded by the belief that the unlimited marital deduction somehow magically insulates the client’s death proceeds from ever being taxed. Often the marital deduction merely postpones the heavy tax burden on such death proceeds until the second spouse dies.

August 9, 2010

The Worst Estate Plan I Ever Saw

by Ettinger Law Firm

by Michael Ettinger, Esq.

Recently, a couple came in to see me. They were people of means, having accumulated an estate in excess of two million dollars. Sadly, the husband, a fine gentleman, had contracted an incurable form of cancer. They knew it was time for a review of their estate planning documents.

The couple had two sons, both in their fifties. One was an established professional, the other a successful entrepreneur.

June 28, 2010

“You Give Lawyers a Good Name”

by Ettinger Law Firm

By Michael Ettinger, Esq.

Reflecting on this comment made to us by a client recently, the following thoughts came to mind. What do we actually do at Ettinger Law Firm?

All we do is save our clients a lot of time, many thousands of dollars and the not so petty annoyances they might otherwise have in settling their family’s affairs on the death of a loved one. We help them reduce or eliminate taxes on the estate so that more passes down to help their children and grandchildren. These days, we also protect the inheritances our clients leave so that it is not lost should the heirs get sued or divorced and, better yet, we assure them that their wishes will carry on for decades after they are gone, by passing the inheritance on to their grandchildren one day. Should disability occur, our clients have had their assets protected years earlier through asset protection planning. For many who come to us in their hour of need, without preparation, we take on the burden of helping them through the Medicaid maze and help them save and protect much more of their assets than they ever thought possible.

June 14, 2010

Singles and Couples Without Children – The Lawyer as co-Trustee

by Ettinger Law Firm

by Michael Ettinger, Esq.

Previously we wrote about the lawyer as co-trustee in the second marriage setting. The main concern there was to protect the share and the interests of the deceased spouse and their family. This was a situation ideally suited for the lawyer as trustee due to inadequate protection if one of the surviving spouse’s children acts as co-trustee, and the inevitable conflict that arises if one of the deceased spouse’s children acts as co-trustee.

For singles and couples without children, the lawyer as co-trustee fulfills an entirely different function. In the couples setting, we are really referring to the issues that arise after the first spouse dies. From an estate planning point of view, couples without children ultimately have the same issues as singles.