Articles Posted in Trusts

We often discuss the importance for local families to account for the New York estate tax. Far more media coverage is given to the federal tax, and some local residents are under the mistaken assumption that the state law mirrors the federal. It currently does not. Even families who do not have asset to trigger the federal tax may still need to plan appropriately for the New York tax on estates.

However, if current plans are carried out, in a few years .there may be much more congruence between the state and federal rules. That is because earlier this month New York changed exemption levels for the estate tax. Previously, assets over $1 million were exposed to the tax at a 16% top rate. Now, however, the exemption level is raised to slightly more than $2 million ($2,062,500). Not only that, but that level is set to steadily increase or five years until, in 2019, the exemption level matches the federal exemption amount at that time (projected to be $5.9 million).

Important Provisions in the Estate Tax Law

Intricate financial and estate planning details are understandably hard for many residents to wrap their head around. There are hundreds of thousands of page written in federal statutes, case opinions, and regulations dictating what can be done and what cannot. Making matters even more complex is that fact that even professionals can disagree on how certain rules should be applied.

For example, many financial planners are up in arms following a recent opinion by a U.S. Tax Court related to IRA rollovers.

The Case

Much of estate planning involves preparations that can streamline matters in the aftermath of a death. The probate process can be long and drawn-out, forcing families to wait months before working out the basic details of asset transfer. Alternatively, by using trusts, the process can be far more seamless, saving time and taxes. Trusts are important for all New York families, not just those with significant assets.

While it is prudent to handle legal and financial details in a timely fashion following a death, as a practical matter, it is important to not “overdo” it. A helpful article from Mondaq offers a few thoughts on ways that family members can “jump the gun” and cause more complications by rushing to deal with various matters.

Causing More Complications

A headline-grabbing story last week in the New York Post offers a good reminder of the need to be crystal clear in certain estate planning situations to avoid drawn-out legal battles.

According to reports, two siblings are engaged in a dispute over how to divide up an inheritance that they are to split from their uncle. The two men are the nephews of David Barrett, a well-known Manhattan interior designer who passed away in 2008 at the age of 85. Per the terms of Barrett’s estate planning, his $5.6 million estate is set to be split between the two men.

However, the division of those assets into two is apparently not going smoothly.To help determine how the various assets are to be split, an executor of the estate apparently recommended that a coin toss be used. For example, to determine ownership of a painting valued at around $45.000 a coin toss was performed, with the younger brother winning.

It is impossible to predict exactly how every family member will respond in the aftermath of a passing. However, as experienced will and trust lawyers know all too well, there are many situations that dramatically increase the likelihood of controversy that leads to a contested estate. Mixed families, a large age-gap between spouses, and secrecy are often signs of family tension that may erupt after a death.

A high-profile New York estate feud offers an example of that very situation.

NY Photographer Bern Stern’s Estate Fight

Earlier this week we discussed the tragic death of New York actor Philip Seymour Hoffman. There are many estate planning lessons to take away for Hoffman’s situation, including the need to update a will after every life event. Hoffman unintentionally left out two of his children by not updating his will to include them specifically–his oldest son is named directly as a beneficiary of a trust.

Yet another lesson that fellow New Yorkers can take from the case is the role that marriage can play in these matters.

Companions vs. Spouses

Property rights and rules are some of the most complex (and arcane) areas of the law. Of particular importance for estate planning purposes, property rules allow different individuals to each have different “interests” in the same piece of property. It is not necessarily as simple as one person owning each piece property. This presents unique opportunities for estate planning, often providing different options to structure an inheritance, save on taxes, and otherwise best protect the varying interests of all those in a family.

For example, consider the possibility of a “life estate” to pass on real property (a home or land). This tool is easiest to understand in the context of property interests in a family home. The family home is often the largest asset within one’s estate. Protecting the home from potential estate taxes or being spent down to qualify for Medicaid is an important part of many New York estate plans.

Beyond simply transferring ownership to a family members or putting provisions in a will to pass it on to another. One option is the life estate. The life estate is a deed that essentially breaks up the interests in the home–at least for a time. The senior passes on ownership of the home, but they retain the right to live in the property for the remainder of their life. In other words by using a life estate deed, seniors keep some interest for themselves.

Creating a will and drafting trust documents are forms of “transactional law.” That means that, unlike litigation, the purpose is not necessarily to “win” in a conflict over another. Instead, the purpose is to put plans into place that explicitly avoids conflict down the road.

When doing this work it is critical to understand the details of the law to ensure documents are crafted and structured in ways that meet legal requirements and have the intended legal effect. But, in many cases, particularly estate planning issues, knowledge of the law alone is often insufficient to help prevent conflict. That is because, these issues are wrought with emotions. The interplay of family values, personal relationships, resentments, financial stress, and other matters are all wrapped up in the process. Working to prevent conflict therefore requires consideration of all of these issues in addition to simple knowledge of the letter of the law.

Feuding Siblings

Discussion about the estate and trust tax issues usually centers on political debate about the rates and exemption levels or case-studies of the tax burden for famous or wealthy individuals. Far less often discussed is general information about the tax, including how much was actually collected, the total number of individuals affected, and similar details.

Fortunately, to fill in that gap, every year the IRS releases statistics, including those affected trusts and estates. A rather detailed list of information can be found in various spreadsheet on the IRS website. Also provided is a handy sheet offering a “snapshot” of many interesting trust and estate tax details. The most recent year’s tally was just released, providing a helpful primer for those interested in how these federal taxes actually affect residents.

The Data

In December we shared information on proposed changes at the federal level which might limit the tax-saving benefits of charitable deductions. President Obama previously suggested limiting certain charitable tax breaks for high earning individuals. This possible change was just one part of large ideas about re-writing significant portions of the U.S. tax code. Many are hoping to simplify the code in an effort to increase transparency.

The charitable deduction change proposal in particular drew the ire of many when first suggested. Now a large group of sitting U.S. Senators are adding their names to the effort to protect the charitable deduction status quo.

The Senate Letter

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