New York Estate Planning Lawyer Blog

December 21, 2011

Preparing Children for Wealth Transfers

Our New York estate planning lawyers ran across a Forbes article last week that began with the provocative claim that “70% of intergenerational wealth transfers fail.” The story was discussing a new Williams Group study which examined the long-term effects of wealth transfers in 3,250 families. “Failure” in the study was characterized as situations where wealth was dissipated by heirs, often with the family assets becoming a source of disagreement and friction.

The researchers were quick to note that poor professional assistance was not to be blamed; estate planning attorneys, financial advisers, and tax experts were not found to play a role in the wealth transfer problems. In fact the researchers noted that “these professionals usually did well for their clients.” Instead, the transfers that ended with problems were usually caused by poor family transition planning. In other words, the authors explained that “no one in the unsuccessful transferring families was preparing their heirs for the multiple kinds of responsibilities they would face when having to take over the reins.”

To combat the problems that arise when large sums of wealth are given to unprepared children and grandchildren, it is important to identify long-term lessons and values that must pass on along with the assets. Some suggest identifying a “family mission” and a strategy to ensure that the family mission is carried out. The heirs should understand that mission and be aware of ways to honor it. For example, it is likely that the mission would include a range of philanthropic goals, family business development plans, and other targets. It is helpful for the heirs to have experience practicing those family duties well ahead of time, perhaps by assisting with a few family business matters or charity efforts.

December 19, 2011

Some Estate Fights Last For Decades–The MLK Example

by Ettinger Law Firm

Many local families create their New York estate plan with potential family feuds in minds. History is replete with examples of siblings, parents, children, in-laws, and others being torn apart following disagreement regarding the passing of assets at the death of a loved one. Legal challenges following a death are very common. The legal fights are even more likely to occur when a significant amount of assets are involved, there is surprise about how they will be distributed, or inadequate estate planning has been conducted forcing the matter to be decided in the courtroom. Many parents have made the mistake of assuming that “the kids will figure it out” when it comes time to pass on assets. Unfortunately, that exact mindset has led to entire families descended into dispute. The fighting can last for years or, in some cases, even decades.

For example, last week Forbes touched on the case of the famed civil rights legend Martin Luther King Jr. MLK had not created an estate plan before he died; he did not even have a will. As a result, the distribution of his affairs was left entirely to the courts with the predictable family fighting that ensued–and still continues. Some time ago the King family children engaged in a series of back-and-forth legal battles following the creation of a corporation to manage King’s estate. The lawsuits lasted for years before a settlement was finally reached between the children.

However, the possession of certain assets continues to be fought by the corporation (The Estate of Martin Luther King Jr., Inc.). Recently the estate sued the son of one of the Reverend’s former secretaries (an old family friend) claiming that the secretary possessed historical documents related to MLK. The documents apparently include handwritten letters, speech transcripts, newsletters, and similar materials. According to the secretary, Dr. King gave her the documents over the years, and she always assumed them to be her personal property. He apparently never asked for them back over the decade and a half that the secretary worked for the Reverend.

December 15, 2011

Holidays Are Prime Time to Discuss Family Estate Planning

by Ettinger Law Firm

Estate planning is about setting ones affairs in order for the benefit of friends and family. In that way, the holiday season is a natural time to discuss these matters, because it is now when many families are getting together and celebrating. Particularly for families that do not live close together, this time of the year may be the only one when everyone is all in one place. For those in our area, it may be an ideal time for adult children to sit with parents and siblings to talk about creating or updating their New York estate plan.

Of course, one need not spend time delving into the specific details of a plan over turkey dinner, but simply mentioning the topic lightly can be important. As a recent article in The Gazette suggested, if parents do not seem willing to get into the details during the holiday, adult children should simply explain that they’d like to discuss the subject at a later time. However, if parents seem receptive, it is helpful to ask them some basic questions. For example, some parents may already have wills drafted. If so, it is important for other family members to know where it is located and how to access it. If a will is used, children should ask who has been named executor. The same is true when more advanced tools like trusts are used, where successor trustees have to be named. Our New York estate planning attorneys know these seemingly simple choices come loaded with problems. Discussing them ahead of time, when everyone is together, is often a good approach. For example, choosing one child over another for either of these duties may create hard feelings.

Beyond subtle prompting to get certain estate planning affairs clear, the holidays may also be a good time for parents to share exactly how certain sentimental objects will be distributed. Of course, the holiday gathering may be inappropriate if it is known that certain decisions will cause family discord. However, it is never a good idea for family members to learn who is set to receive certain objects only after a loved one has passed, particularly items with emotional attachments. Because everyone is together the holidays may be the ideal time for grandparents to clearly explain what steps they’ve taken and to answer any questions that family members may have. The input that the elders receive from family members may also prove helpful in case something has been left out of planning. At times adult children can remind parents of certain assets or family issues that should be incorporated in estate planning documents that had originally been left out.

December 13, 2011

New York Estate Planning Attorney Discusses Beneficiary Designations

by Ettinger Law Firm

This weekend our New York estate planning attorney Bonnie Kraham had an article published in the Times Herald-Record where she explained the importance of beneficiary designations in New York estate plans. These designations are often less well-known than other aspects of an estate plan, such as trusts, wills, health-care proxies, and powers of attorney. The designation is a contractual document that directs where an asset will go upon your death. They are most often involved in IRAs, annuities, and insurance policies. Beneficiary decisions must be made in conjunction with other aspects of any estate plan to protect assets from outside costs and keep them in the bloodline.

For example, Attorney Kraham discussed beneficiary designations in the context of inheritance trusts. These trusts are increasingly popular and useful legal tools to protect a child’s inheritance from the child’s creditors or divorcing spouse. If you have an asset in a qualified plan, it is important for the contingent beneficiary designation to be that child’s inheritance trust, instead of the child as an individual. Essentially what this does is ensure that the benefit of the inheritance trust applies to the qualified asset. A spouse will typically be named the beneficiary with the child’s trust named as contingent beneficiary, ensuring that the funds remain in the bloodline and are protected from outsiders.

Similarly, when your New York estate plan involves use of a Medicaid Asset Protection Trust (MAPT), it is vital that beneficiaries be considered closely. In particular, Attorney Kraham explains that it is helpful to name the MAPT as the beneficiary of a life insurance policy. Life insurance policy proceeds are never assets held in the name of the policy holder, and so when those proceeds are passed directly into the MAPT they do not count toward the “penalty period” that otherwise applies to asset transfers within five years of applying for Medicaid. As the article explained, we recently had a client in this exact situation. The man had a $500,000 life insurance policy on his wife with the couple’s MAPT named as the beneficiary. If the insurance proceeds were paid directly to the surviving spouse, those funds would have been unprotected from possible nursing home costs. In addition, the MAPT funds can still be used to pay for things like real estate taxes, home insurance, and home repairs. However, this option is only logical when the surviving spouse does not need the life insurance policy proceeds while alive for day-to-day living expenses.

December 9, 2011

Tax Litigation Continues to Rage Four Years After Death of Brooke Astor

by Ettinger Law Firm

New York estate planning mishaps and disputes often make headlines when they involve large sums of wealth and larger-than-life characters. Perhaps none has received more publicity recently than that surrounding the “grand dame of New York City society,” Brooke Astor. Ms. Astor died four years ago at the ripe age of one hundred and five. However, inheritance and tax issues continue to rage around her estate and they show no sign of nearing a resolution. As discussed in Forbes, seven new lawsuits were recently filed by her estate refuting IRS demands that she owe an additional $62 million in taxes.

It seems that one of the key issues is the overall size of her estate. Every New York estate planning lawyer knows that the total value of an estate is a fundamental factor in evaluating the overall tax burden. A smaller taxable estate means a smaller tax. In some cases, if an estate is below a certain threshold, then certain taxes need not be paid at all. That is why most tax litigation involves dispute between the government and the individual (or their estate) about the total value of taxable assets. In this case, the government claims that the value of Ms. Astor’s estate is $223 million, but representatives for Ms. Astor say the figure is around $93 million. Tens of millions of dollars in potential taxes hang in the balance depending on what sum the court ultimately decides is accurate. The tax bill could be anywhere from $35 million to $97 million. The disagreement between the parties centers mostly on charitable bequests (totaling $96 million) that the estate claims can be deducted but which the IRS disputes. In addition, the IRS claims that there was $20 million in lifetime gifts which should have been included. Part of the IRS request includes over $2 million in penalties for the failure to file and pay those gift taxes properly.

The estate admits that certain gift tax returns were not filed. However, many of those gifts were to her son, who was earlier convicted of 14 different crimes related to neglecting her care and stealing from her estate. Many estate planning attorneys have used the drama surrounding Ms. Astor’s estate and her son’s crimes as an example of what can go wrong when a Power of Attorney is in the wrong hands. As the Forbes article author noted, “the Astor case is a reminder to families that it’s important to make sure you get these basic estate and disability planning document right.”

December 7, 2011

Favorable Tax Rates and Tools May Soon End

by Ettinger Law Firm

This week Barron’s–a publication of the Wall Street Journal–discussed how many favorable tax breaks, rates, and regulations are either set to expire or may soon be eliminated by policymakers. It was explained how those at the top of the income ladder have seen a steady stream of tax cuts over the past ten years. Under President Bush the top income tax level was cut, the capital-gains tax was slashed, and dividend tax rules were changed. Our New York estate planning lawyers know that there were also many alterations to trusts, gift rules, and other wealth transfers issues over the past decade.

However, many speculate that changes will now be made in the other direction as policymakers look for ways to tackle growing debt and budget deficits. As one observer explained, “acting now on any kind of tax break is wise given the mood in Congress these days.” For example, perhaps that largest benefit set to expire is the $5 million gift and estate tax exclusion. The exclusion allows couples to essentially give away $10 million tax-free. The rates are currently set to revert back to $1 million at the end of 2012 unless legislative action is taken. This alone should be motivation for some families to focus immediate attention on their estate planning.

Other tax-saving tools may also not last indefinitely. For example, Grantor Retained Annuity Trusts (GRATs) are popular for some. GRATs are created for a set term (often two to five years) with an annuity stream from the trust being given to the one who set it up over that term. When the term expires the remainder above a set interest rate goes to heirs. When an experienced estate planning attorney helps create the trust, it can be “zeroed out” so that the annuity stream is set such that there are no gift tax consequences. However, there are currently discussions about changing GRATs. They may soon require a ten year term and zeroing out may no longer be allowed.

December 5, 2011

Art and Antique Succession Planning Should Not Be Overlooked

by Ettinger Law Firm

In many cases the most difficult aspect of conducting proper New York estate planning is ensuring that everything necessary is taken into account. Experienced New York estate planning lawyers usually know what options make the most sense in any given situation, but those plans are less effective if certain aspects of a community members’ situation are not accounted for within the overall plan. Few individuals forget to discuss assets like bank accounts and real estate. Fewer take the time to conduct less common planning needs, such as ensuring proper business succession details are in place.

Another often overlooked planning area involves art and antique collections. Last week Wealth Management discussed some tips for art succession planning. The authors noted many families have considerable wealth invested in their antique or art collections, but many fail to take much planning care with these items. The articles notes that “Many don’t realize the true value of their ‘stuff,’ thinking that the antique toy collection, family jewelry, or painting passed down by grandpa have no significant worth for which succession planning is essential.” Often that idea is misguided. A new Social Welfare Institute study from researchers out of Boston College found that in a few decades inter-generational asset transfers will total $41 trillion, of which roughly 10-13% will be art and antiques.

Considering that sizeable sum, it is incumbent that these objects be properly accounted for in all estate plans. Failure to do so is a serious preparation mistake. Not accounting for these assets may result in significant tax liabilities. Also, without proper evaluation there may be large discrepancies in the asset allocation to heirs–with one child getting much more than another accidentally. Even worse, heirs may dispose of collectibles at rates much less than their actual worth if they do not suspect something is valuable and are not given any guidance on its worth.

December 2, 2011

Editorial Calls for Repeal of the Estate Tax

by Ettinger Law Firm

Local residents with a taxable estate over $5 million need to conduct New York estate planning to ensure that they are best positioned to save on estate taxes. The estate tax is essentially a tax on one’s right to transfer property at death, and it can result in substantial liability for those with large estates. However, there are seemingly endless political debates about who should be taxed and at what level. The law in this area changes with surprising regularity. For example, in 2004 the tax applied to all those with taxable estates over $1.5 million. A few years later that threshold amount was increased to $2 million. In 2010 the tax was eliminated altogether. While it currently stands at $5 million, it is unclear whether policymakers will change that figure in the coming years. Of course, our New York estate planning attorneys closely monitor all estate tax developments, as these laws are important factors in our work helping residents conduct inheritance planning.

Criticism of the estate tax and the political wrangling around it is common. For example, a Forbes editorial last week called for repeal of the tax entirely. Pointing to the seeming randomness of the rates, the article author noted that “over the past ten years the federal estate tax rules have bordered on the ridiculous.” The author explained that planning plays a crucial role in helping residents legally avoid much estate tax liability. Proper planning can actually pay dividends for entire families. He wrote that “with a little bit of planning, not only would the estate of a person who died in 2010 be excludable from estate tax, but the future estate of the surviving spouse would be free of estate tax as well.” At the end of the day, the amount of tax paid often hinges on whether or not an individual has prepared a proper estate plan ahead of time or not.

Currently the estate tax generates about 2% of the annual federal revenue. The editorial author suggests that it would be logical to shift the tax system so that the 2% is paid as part of a more progressive income tax system. He specifically suggests increasing tax rates for capital gains and qualified dividend income. It is argued that even slight alterations to these taxes could generate $200 to $250 billion in additional revenue from those making more than $300,000 annually. The goal of this tax shift, claims the proponent, would be to provide a more logical taxation system that is easier to administer without sacrificing much needed public revenue at a time of tight budgets.

November 30, 2011

New Twist in Huguette Clark Estate Plan Controversy

by Ettinger Law Firm

Yesterday there was a new twist in the high-profile New York estate planning story involving Huguette Clark, the woman who died this year leaving behind a $400 million Gilded Age fortune. As we discussed earlier this week, the woman’s family was not provided for in her will. Instead her fortune was given mostly to a newly created art charity with some benefits going to her long-time nurse, attorney, and accountant. Instead of using various trusts to ensure the woman’s estate was transferred seamless per her wishes, her New York estate planning attorney surprisingly utilized only a will. Expectedly, the will has been challenged by the woman’s family.

However, new information was just released revealing that Ms. Clark actually signed two wills, one only a few weeks before the other. According to a report by MSNBC, both wills were genuine, meaning that they were properly executed. The first will, seemingly revoked by the signing of the second will, would have left her fortune to her family. The family filed the first will with the court yesterday–the first step in what will assuredly be a prolonged battled over the Clark family millions. The attorney representing the disinherited family members claimed that the case involved “undue influence and exploitation of a very elderly and extraordinarily wealthy woman at the hands of two professionals who, with the help of certain others…ultimately stripped her of her free will, as well as millions of dollars.”

As this situation demonstrates, it is incredibly ill-advised for any family to rely solely on a will to conduct inheritance planning, especially for families with large amounts of wealth. Like clockwork they almost always cause more problems than they solve. Will contests are common and virtually guaranteed to occur when two wills are signed in short succession with family members being cut out between them. In this case, while twenty one relatives would have split the fortune in the first will, the second gave a large amount to a nurse, small sums to an accountant and lawyer, and then put the rest in an art foundation that was to be managed by the same lawyer and accountant. That chain of events raises many red flags about the influence that the small group of individuals who benefitted from the second will had on the woman. It is made even more suspect by the fact that the estate planning attorney who was to benefit from the will was the same one that drew it up.

November 28, 2011

Questions Remain About Huguette Clark’s $400 Million New York Estate Plan

by Ettinger Law Firm

New York estate planning is a necessity for virtually all local residents, no matter where on the income scale one falls. Easing the emotional, social, and financial burden on one’s family and ensuring wishes are carried out upon one’s death is important if one has $400,000 or $400 million to pass on. Unfortunately, New York estate planning mistakes are made at all income levels, often with serious results for the individuals involved. The most common mistake includes not taking advantage of all of the legal tools available. For example, while wills are still commonly thought of as a basic estate planning necessity, in truth they are becoming obsolete for many families. Trusts are much more useful in that they can avoid probate and provide for substitute decision-making if disability strikes. Yet, many local residents, including those with vast fortunes, still fail to take advantage of the benefits that trusts bring.

One high-profile local example is that of Huguette Clark. The reclusive heir to her father’s copper and mining fortune died earlier this year at the age of 105. She was rumored to have more than $400 million at the time of her passing–an estate she inherited upon her father’s death over eighty five years ago in 1925. Ms. Clark had been a mysterious figure, having lived in a hospital room since the late 1980s. She left her Fifth Avenue apartment empty for over twenty two years even though she was in relatively good health until just before her passing. Ms. Clark was long estranged from her family, and only a very small and intimate group of advisors had any contact with her for the last quarter century.

Surprisingly, even though she had such a large estate, Ms. Clark’s advisors never had her create a trust to protect her long-term financial affairs. An article about her story published today by Forbes explains how most estate planning attorneys would have at least advised the client to utilize a revocable living trust, instead of a will. The need for a trust was made even more necessary considering the size of Ms. Clark’s wealth. In addition, there are questions about the terms of the will–drafted and signed when Ms. Clark was ninety eight years old. The will left most of the woman’s fortune to a newly created art fund and gave a significant amount to Ms. Clark’s long-time nurse. However, the will also named a partner in the very law firm that drafted the will as a beneficiary. Even if this was the exact intent of Ms. Clark, the potential conflict of interest issues would usually counsel the firm in question not to prepare the will. Many other questions remain surrounding her advisors spending over $100 million of her estate in the last two decades of her life.