April 2017 Newsletter
Andrea Schanker | Apr 01 2017 14:44
Welcome Back
Schanker and Hochberg P.C. is a premier Estate Planning law firm. We offer legal services for sophisticated Estate and Gift Tax planning, Decedent Estate Administration and Probate services, Business Succession Planning, Charitable Giving, Special Needs Planning for persons with disabilities, simple Will planning, and all aspects of Elder Law planning including Medicaid planning and applications. Our website provides detailed information about our practice and the services we offer. It also is an excellent resource for articles of interest about Estate Planning and Estate and Gift Tax Laws. A copy of each newsletter will always be available on our website.
Estate Planning is so much more than just tax planning. There is a considerable decision-making process. Schanker and Hochberg P.C. has over 30 years of experience in counseling clients for their Estate Planning needs.
As always, we encourage feedback from our readers. If there are any topics you wish for us to specifically address or elaborate on, please email us.
Where There Is a "Will," There Is a Way…
A "Last Will and Testament" (your "Will") is the document that directs how your Estate is managed and to whom it is distributed upon your death. Your Will is a set of directions and is legally enforceable if it is properly executed under the laws of the state in which it has been signed. The Executor (the person you have selected to manage the affairs of your Estate upon your passing) is empowered, after petitioning the Surrogate's Court for "Letters Testamentary." Letters Testamentary are the legal authority empowering the Executor to act; the Executor is then legally bound to act in the best interest of the Estate. This can be both an honor and certainly an obligation, especially if there is family discord or outstanding "loose ends" of the decedent's Estate (pending or ongoing legal actions, for example). "Will-based" Estate Planning is not sufficient to avoid a probate proceeding and can impose unnecessary fees, time delays, and much frustration.
Trust in Your Planning…
A "Trust" is a document that essentially sets forth directives for the management and distribution (or ultimate distribution) of income and principal. There are dozens of different types of Trusts created for all different purposes. There are "Revocable" Trusts, which can be amended or terminated at any time. There are also "Irrevocable" Trusts that essentially (but not absolutely) can never be amended; there are exceptions to almost every rule, and the law provides for certain changes to Irrevocable Trusts, but only under a particular set of circumstances.
Most commonly, a "Revocable Living Trust" is created to be a "Will substitute." This is a common and efficient way for one's Estate to avoid Probate in the Surrogate's Court before the Executor/Trustee can have the authority and ability to manage the Estate and make distributions of assets. Probate imposes frustration, delays, and extra expense. Moreover, Probate means a total lack of privacy as to the matters of the Estate.
Irrevocable Trusts are commonly used for "protective" purposes. Irrevocable Trusts can receive large gifts to hold and manage on behalf of the intended beneficiary. The irrevocability allows the beneficiary to enjoy certain creditor protections. Other Irrevocable Trusts can provide income tax and/or estate tax benefits. Elder Law planning incorporates the use of an Irrevocable Trust to help preserve and protect assets for purposes of Medicaid planning and eligibility. There are other Irrevocable Trusts that provide available assets to "disabled" or "special needs" beneficiaries without interfering with their ongoing "needs based" government assistance (Medicaid or Disability benefits for individuals under 65). A Trust is a magnificent tool in an Estate Planning attorney's collection.
Executors and Trustees… What Are They and What Do They Do?
The Executor manages the general affairs of the Estate and distributes assets pursuant to the terms of the decedent's Last Will and Testament. The Trustee manages the assets inside the Trust and makes distributions pursuant to the directives therein. Both an Executor and a Trustee owe a "fiduciary" duty to act in the best interest of the Estate and/or Trust beneficiaries. Choosing whom to place in these roles is a very important decision and should be considered with careful deliberation. Schanker and Hochberg P.C. can counsel you so that you select a person and/or institution that can serve as both the human touchstone and perform with the prudent skill set required to fill the fiduciary's role.
The Value of an Experienced Executor
By Lee P. Miller, Regional Director, New York, The Glenmede Trust Company, N.A.
The Executor's responsibilities are financial, personal, and legal; they are detailed and time-intensive. Experience, expertise, and resources result in superior outcomes. Executors have a lot to do. The duties of an Executor, both moral and legal, are to unwind and "close up" the business of someone's life — a complex and comprehensive process. Not only does this by definition occur at a time of personal loss and sadness, but it is also a full-time job for approximately 9–12 months.
By law, the Executor of a Will (in some states also called Personal Representative) is a legal role governed by the law of the state in which the decedent has died. The decedent names the Executor in his or her Will, and the Executor is officially appointed by a Surrogate's or Probate Court in order to obtain legal authority to transact business on behalf of the estate or the decedent. Importantly, until the Will has been probated, the Executor has no power and no action can be taken — for example, no sales of stock and no checks written.
The Executor's duties fall into these main areas:
- Identify and take control of all assets owned by the decedent, including investment and brokerage accounts, bank accounts, personal property, and real estate — everything must be transferred into the name of the estate and new accounts opened by the Executor for the estate. Assets have to be safeguarded and insured, and locks on residences may need to be changed.
- Appraise and value all of the decedent's assets, and identify liabilities.
- Determine the estate's cash needs and sell assets to raise necessary funds to pay bills and estate taxes.
- Review the decedent's estate plan to identify post-death tax planning opportunities, including whether disclaimers could be useful.
- Collect benefits due to the decedent (employment benefits, veteran's benefits, life insurance, including life insurance due a trust).
- If the decedent was a business owner, determine the estate's interest in the business and possibly value the business; there may also be ongoing responsibilities for running the business, depending on succession plans.
- Distribute personal property and pay specific cash bequests per the Will; sell any personal property not disposed of by the Will.
- As appropriate, clean out the house(s) and sell the real estate, including developing a marketing plan for the property.
- Fund the Trusts created by the Will, if any.
- File State and Federal Estate Tax Returns, the decedent's final Income Tax Return, final Gift Tax Return, and the Income Tax Returns for the Estate.
- Account to the beneficiaries at the conclusion of the estate process (up to 2–3 years after death).
Who should be named Executor? An Executor can be an individual or a trust company, or a combination of the two serving as Co-Executors. If an individual, the Executor can be a family member, friend, or a trusted advisor such as an accountant or attorney. The decision needs to focus on the expertise and skills necessary to effectively carry out the serious responsibilities of serving as Executor: professional knowledge, objectivity, sensitivity, availability, and honesty. Who to name as Executor depends on the size and complexity of the assets and family dynamics. The more complex and valuable the assets, the more important it will be for the heirs that the estate is properly administered, value maximized, and the many decisions made in light of the tax laws then in effect. The passing of a spouse, parent, family member, or friend is a time of sadness, but also may be a time of stress and financial uncertainty for the survivors. Personal differences among survivors, dormant for years, may also surface, and the Executor has to juggle all these concerns while being an effective communicator.
| Executor | Individual | Corporate |
|---|---|---|
| Who | Spouse, Child(ren), Friend, Accountant, Attorney | Trust Company |
| Expertise & Resources | Varies Greatly | Professional & Vast |
| Perpetuity | Potentially Limited | High |
| Personal Biases | Potentially High | Highly Unlikely |
| Cost (% of asset value) | 0 to 1% | Generally Regulated |
| Bottom Line | For Simple Estates | Large, Complex Estates |
It is this multi-faceted focus on the duties and roles of the Executor that points to the benefits of having a corporate Executor to do the "heavy lifting," while at the same time helping keep the family peace.
Estate Tax Exclusions
As of January 1, 2017, the Federal Estate Tax Exemption increased to $5,490,000. The New Jersey State Estate Tax Exemption is $2 million per person in 2017; the New Jersey State Estate Tax is scheduled to be repealed entirely in 2018 (the inheritance tax in New Jersey will not be repealed). The New York State Estate Tax Exclusion is $4,187,500 for decedents dying between January 1, 2017 and March 31, 2017. As of April 1, 2017, the New York State Estate Tax Exclusion rises to $5,250,000.
Commissions: The Complicated Realm of Paying Fiduciaries
Regarding remuneration of estate and trust fiduciaries, Section 2307 of New York's Surrogate's Court Procedure Act permits an Executor to first collect from the estate reasonable and necessary expenses paid by him or her — for example, reasonable reimbursement for travel expenses, filing fees, and other necessary costs paid out-of-pocket on behalf of the estate. In addition to that reimbursement, Section 2307 allows commissions to be paid to the Executor based on the value of the probate estate (how much the Executor received and then paid out):
| Sum Received/Paid Out | Percent Commission |
|---|---|
| First $100,000 | 5% |
| Next $200,000 | 4% |
| Next $700,000 | 3% |
| Next $4,000,000 | 2.5% |
| Any additional funds | 2% |
For example, the commissions on a $6,000,000 probate estate would be calculated as follows:
| Sum Received/Paid Out | Commission |
|---|---|
| First $100,000 | $5,000 |
| Next $200,000 | $8,000 |
| Next $700,000 | $21,000 |
| Next $4,000,000 | $100,000 |
| Remaining $1,000,000 | $20,000 |
| Total | $154,000 |
Trustees, pursuant to Section 2309, are first entitled to be reimbursed for reasonable and necessary expenses actually paid by him or her. Commissions for Trustees are based on the value of the principal administered by the Trustee, though for the Trustee the commissions are determined annually. The Trustee is also entitled to 1% of all sums paid out of the Trust, so total commissions would be higher if the Trustee made distributions of principal in a particular year.
| Principal | Percent Commission |
|---|---|
| First $400,000 | $10.50 per $1,000 |
| Next $600,000 | $4.50 per $1,000 |
| Any additional principal | $3.00 per $1,000 |
Thus, the commissions on a trust having $6,000,000 in principal would be calculated as follows:
| Principal | Commission |
|---|---|
| First $400,000 | $4,200 |
| Next $600,000 | $2,700 |
| Remaining $5,000,000 | $15,000 |
| Total | $21,900 |
It is important to keep several important ideas in mind. First, commissions are income taxable to the Executor and/or Trustee, meaning they must report commissions each year and pay income tax on them. Second, because the Executor and/or Trustee is often a beneficiary under the decedent's Will or Trust, and because commissions are paid "off the top," an Executor-beneficiary and/or Trustee-beneficiary could in effect be "taking money from himself" by taking commissions. Third, the Testator of a Will or Settlor of a Trust can deactivate (prohibit) commissions or specify a commission rate different from the statute. Fourth, any bank or trust company acting as Executor and/or Trustee will collect a higher fee based on their commissions schedule. Finally, if an attorney is serving as Executor or Trustee, the attorney is also entitled to legal fees in addition to commissions, provided a particular affidavit was signed by the Testator or Settlor.
How to Save Your Sanity and Avoid Probate: A Simple Guide
The word "probate" stems from the Latin verb probare, meaning "to prove." Indeed, a probate proceeding is the process by which one "proves" that a decedent's Last Will and Testament is a valid Will. As simple as that may seem, much like the Latin root of the word, the entire probate process still seems stuck in ancient times. The process is plagued with unnecessary delays, cumbersome procedures, and needless costs such as filing fees. Considering all of that, it is important, as part of a carefully crafted estate plan, to ensure that the probate system is avoided entirely.
The easiest way to avoid the probate system is to have a "trust-based" plan as opposed to a "will-based" plan. The centerpiece of the trust-based plan is the Revocable Living Trust — a "will substitute," meaning that the Trust does everything a Will does (passes property on to your surviving heirs) without the need to involve the probate system.
But how does the Revocable Living Trust work? At the onset, the Trust needs to be drafted and signed by the Settlor. The Trust must then be funded with all of the assets owned by the Settlor individually or without named beneficiaries. For instance, joint accounts or accounts with payable-on-death designations, while they avoid the probate system, can cause problems if the beneficiary or joint owner predeceases the other joint owner; these scenarios could ultimately involve the probate system as well.
Upon the Settlor's death or incapacity, control automatically vests in the Alternate Trustee, who takes over management responsibility. In the case of death, the Alternate Trustee must then administer the Trust according to the directives written in the Trust (i.e., distribute the assets). Again, this all happens in a streamlined manner without having to involve the probate process — saving time, money, family privacy, and, in some cases, sanity!
If you still have a will-based plan, it is important to revisit your existing plan and take the necessary steps to avoid the probate process. Schanker and Hochberg, P.C. has nearly 40 years of experience in estate planning, including probate avoidance; if you are concerned about your estate plan and the probate process, contact us to discuss the planning that can be done to save your surviving heirs time, money, and privacy.
Nick Klingenberg: Distinguished Young Professional
Schanker and Hochberg, P.C. is pleased to announce that its associate attorney, Nick Klingenberg, is an award recipient for the "Celebrate Long Island's Young Professionals" recognition event through the Huntington Chamber of Commerce. The event honors thirty young professionals under the age of thirty who demonstrate commitment to the business and civic communities and to achieving success. Congratulations, Nick!
Highlighted S&H Attorney: Andrea B. Schanker
Andrea B. Schanker, Esq. — Partner, received her Bachelor of Arts degree in Clinical Psychology from University of Rochester in 1999 and her Juris Doctor from New York Law School. Andrea is a licensed member of the New York and New Jersey Bar Associations. She is the 2016–2017 President of the Huntington Lawyers' Club, a member of the Suffolk County Bar Association, and a member of the New York State Bar Association where she is an active member within the Trusts and Estates Section and the Elder Law and Special Needs Section. Ms. Schanker is also a member of the American Bar Association.
Ms. Schanker joined Schanker and Hochberg P.C. in 2004 as an Associate Attorney specializing in Estate Planning, Estate Administration, Business Succession Planning, and Elder Law. She regularly delivers Estate Planning presentations to professionals in the financial industry and their clients, and advises accountants, financial advisors, and insurance advisors in connection with her areas of expertise.
Andrea lives in Huntington with her husband, Michael Abruzzo, and their daughters, Patricia Gertrude Abruzzo and Sylvia Grace Abruzzo.
Our main office is housed in an elegantly restored Victorian structure in the heart of Huntington Village. Here, we welcome you and your family into a relaxing, warm setting where we will work together to improve your circumstances and achieve your goals.
To better serve our clients and their families, we also have convenient office locations in Midtown Manhattan and New Jersey; we also offer our services to clientele in Florida and California.