July 2012 Newsletter

Welcome Back

Schanker and Hochberg P.C. is a full-service Estate Planning law firm. We offer legal services for simple Will planning, sophisticated Estate and Gift Tax planning, Decedent Estate Administration and Probate services, Business Succession Planning, Charitable Giving, Special Needs Planning for persons with disabilities, 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. This 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.

Gift Now or Forever Hold Your Peace

Unless Congress took action before January 1, 2013, the Federal Estate Tax, Generation-Skipping Tax, and Lifetime Gift Exemptions were set to be drastically reduced from $5,120,000 to $1,000,000. That made this a critical time to seriously evaluate making a large lifetime gift.

Large lifetime gifts should first be made using assets likely to substantially increase in value, since the gift not only reduces the taxable estate by the value of what was gifted, but also removes future appreciation from accumulating inside the taxable Estate. The objective is to strategically transfer valuable assets so your quality of life remains intact while preserving as much as possible from Estate Taxation. These gifts can include all or part of a family business, investments, and/or real estate.

Lifetime gifts can be made using various Trusts, or by creating Family Limited Partnerships or Limited Liability Companies (LLCs), with sophisticated methods allowing the donor to even retain limited control over the assets. A few examples:

Grantor Retained Annuity Trust ("GRAT"). The Grantor makes a gift of assets with income and appreciation potential to the GRAT while retaining an annuity (income) interest for a term of years; at the end of the term, the Trust balance goes to the designated beneficiary. There is an IRS-prescribed formula, using a fixed interest rate that fluctuates monthly, to calculate the value of the gift and the annuity retained. A GRAT is most attractive when this rate is low and valuable assets with appreciation potential are available to gift.

Family Limited Partnerships/LLCs. The partnership exists between family members, with donors as General Partners holding managing control and beneficiaries or Limited Partners holding ownership without control. Because of this, gifts of Partnership interests to Limited Partners can be valued at a discount for gift tax purposes, allowing donors to significantly reduce Estate Tax liability while maintaining control over the Partnership's assets and protecting them from creditors.

Life Insurance. A life insurance policy should be purchased inside an Irrevocable Trust, which can then be front-loaded to pay a significant portion of the premium using the increased lifetime gift tax exclusion.

New York and New Jersey do not have a gift tax, but both have a State Estate Tax (New York's exemption was $1 million and New Jersey's $675,000 at the time). Maximizing gifting opportunities in a limited window with an increased gift tax exemption generates large savings at the State Estate Tax level.

There is significant work involved in making a lifetime gift — an appraised value of the gift must be formalized, required documentation drafted and executed, and a gift tax return prepared and filed with the IRS. This is sophisticated planning with many options depending on your assets, how much is being gifted, to whom, and how beneficiaries should receive it. Please contact us to arrange a complimentary consultation to determine if this is appropriate for you.

The Estate Planning "Dear John"

Consider writing a letter reciting specific wishes and intentions for the person(s) designated as fiduciaries in your Estate Plan. This is not a legal document; it should be kept with your original Last Will and Testament, and you should always discuss it with your Executor/Trustee(s) during your lifetime. Such a letter might explain where a completed "Critical Information" worksheet can be found listing your assets, accounts, real estate, investments, insurance policies, and important personal property, along with digital assets and debts. It can also serve as a memorandum of personal wishes about how household and personal items should be distributed, and any special instructions for a Trustee about the discretion given to release money to beneficiaries.

Safekeeping of Documents

The preparation of estate planning documents is an important step in leaving your assets as you desire while minimizing taxes and other costs. Once prepared, clients often wonder where they should be kept and whether copies should be distributed to family members.

The most important original document to safeguard is your Last Will and Testament, since the original must be probated if there are assets in your own name alone at death. Storing the original in a safe deposit box is inadvisable, since the box will be sealed when the bank learns of the owner's death, requiring your executor to obtain a court order to retrieve it. For this reason, we invariably recommend leaving the original Will with us for safekeeping, while making sure family members, especially your named executor, know that we have it.

For Trusts, such as Revocable Living Trusts and Life Insurance Trusts, we make multiple copies and suggest you keep one and give others to those named as trustees, since they will be called upon to administer the trusts and should have these documents in hand. We similarly make multiple copies of Powers of Attorney, suggesting you give at least one to your named agent, since it does no good for an agent to be named but lack access to the document (financial institutions often require an original be left with them).

For your Living Will and Health Care Declarations, it's important that both your agent and your personal physician have a copy and clearly understand your health care directions, including that you do not want to be kept alive by artificial means. Safeguarding these documents is as crucial a step as any other in ensuring your intentions are carried out as planned.

The Aging Population: Planning for Long-Term Care

The cost of prolonged health care for the aging population is most commonly paid through Medicare insurance, Medicaid assistance, Long-Term Care insurance, Veterans' Benefits, or private out-of-pocket expense. There is a fundamental misconception about Medicaid eligibility and how it works, along with a negative stigma about Long-Term Care insurance being too expensive, and together these often cause a paralysis that delays planning until the last minute, when the fewest options remain.

Medicaid is a financial, needs-based, joint Federal and State program covering prescription drugs, home care, nursing home care, hospital care, and physician services. To be eligible, an individual must meet stringent income and resource thresholds, with strict transfer rules and even stricter administration requirements to qualify and remain qualified. Medicaid should absolutely not be considered a default method of providing prolonged health care coverage.

The U.S. Department of Veterans Affairs offers the Aid and Attendance (A&A) Pension to a Veteran or their surviving spouse, with a required application process similar to Medicaid, though generally less complicated — careful consideration must still be paid so future Medicaid eligibility is not negatively impacted.

Long-Term Care Insurance offers a range of tailored benefits regarding coverage amount, waiting periods, and inflation protection, either as a stand-alone policy or with a death-benefit rider. It doesn't cost anything to evaluate options that provide coverage beyond general Medicare, and "Medigap" insurance is also worth exploring to cover expenses Medicare will not. Although we are generally living longer, we require more health care coverage than ever, so it is smart to build planning for prolonged health care into an Estate Plan before the last minute.

Executor and Trustee Commissions

Under Section 2307 of the Surrogate's Court Procedure Act, Executor Commissions are based on the value of the Probate Estate:

• 5% on the first $100,000 of Probate Estate assets
• 4% on the next $200,000
• 3% on the next $700,000
• 2.5% on the next $4,000,000
• 2% on any sums over $5,000,000

For example, on a $2,000,000 Gross Probate Estate: 5% on the first $100,000 ($5,000), 4% on the next $200,000 ($8,000), 3% on the next $700,000 ($21,000), and 2.5% on the remaining $1,000,000 ($25,000), for a total of $61,000. Commissions for a Corporate Executor/Trustee are usually set forth outside the Will and fixed by the financial institution's own schedule.

Under Section 2309, annual Trustee Commissions are based on the Trust's principal:

• $10.50 per $1,000 on the first $400,000 of principal
• $4.50 per $1,000 on the next $600,000
• $3.00 per $1,000 on any additional sums exceeding $1,000,000

For example, on Trust principal valued at $2,000,000 as of 12/31: $10.50 per $1,000 on the first $400,000 ($4,200), $4.50 per $1,000 on the next $600,000 ($2,700), and $3.00 per $1,000 on the remaining $1,000,000 ($3,000), for a total of $9,900. The Trustee is also entitled to a 1% commission based on the value of the final distribution paid.

Extensive Services at Schanker and Hochberg P.C.

1. Complimentary Initial Consultations for Estate Planning, Probate, and Estate Administration matters
2. Complimentary Annual Review meetings for existing clients
3. Complimentary Family meetings for existing clients
4. Tax alert services for existing clients

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.

Highlighted S&H Attorney: Steven Schanker

Steven Schanker received a Bachelor of Arts degree from the University of Rochester and his Juris Doctorate from St. John's University School of Law. He is admitted to practice before the Courts of the State of New York, the Eastern and Southern Districts of the U.S. District Courts, and the Supreme Court of the United States.

Mr. Schanker is an accomplished public speaker and has lectured before both lay and professional audiences nationally, and has been retained by several large financial institutions, including life insurance companies and stock brokerage firms. He is an active member of the Society of Chartered Life Underwriters Speakers Bureau and the Estate Tax Planning Council of Long Island, among other affiliations, and a quoted author, including articles in Forbes and Fortune magazines.

Mr. Schanker resides in Huntington with his wife, Carol, an accomplished artist.

GENERAL DISCLAIMER: While we hope this newsletter provides useful information, please know that this newsletter does not predict or guarantee the outcome or result in any particular situation, and no attorney-client relationship exists or is established as a result of this newsletter or its receipt.