May 2011 Newsletter

Welcome to the Premier Issue of the Schanker and Hochberg Newsletter

Schanker and Hochberg P.C. is a full-service Estate Planning law firm. We offer legal support for simple Will planning, sophisticated Estate Tax and Gift Tax planning, Business Succession Planning, Charitable Giving, Special Needs Planning for people 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.

We intend to provide interesting and useful information in our newsletters, including a section highlighting a member or employee of Schanker and Hochberg P.C. We will also feature a "guest columnist" where a colleague can contribute their own career perspective to our audience. We encourage feedback from our readers, and if you have ideas for topics you'd like us to elaborate on, please reach out.

Tax Relief, Unemployment Insurance Authorization and Job Creation Act of 2010

On December 17, 2010, President Obama signed H.R. 4853, "The Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010" (the "Act"), which significantly impacts Estate Planning. The rules under the Act last until the end of 2012; on January 1, 2013, absent intervening legislation, the Federal Estate Tax and Gift Tax laws would revert to those in effect in 2001. In the meantime, the current $5 million Federal Estate Tax Exemption ($10 million for a married couple who are both U.S. citizens) and $5 million lifetime gift tax exclusion present an unprecedented opportunity to reduce a taxable estate or freeze the value of highly appreciating assets. Key points of the Act include:

1. A $5 million Federal Estate Tax Exemption and Portability
2. A $5 million Lifetime Gift Tax exemption
3. A $5 million Generation-Skipping Transfer Tax Exemption
4. Return of the "step-up" in basis of a capital asset to its date-of-death value

Portability of the Federal Estate Tax $5 Million Exemption

"Portability" is a provision under the Act allowing a surviving spouse to transfer any unused portion of the Federal Estate Tax Exemption to themselves, adding to their own available exemption. For example: John dies in 2011, survived by Jane. John never used any of his lifetime gift tax exemption and left everything to Jane. Jane elects on a Federal form to transfer all of John's unused exemption to herself. Jane dies in 2012 with a taxable Estate of $10 million; her Estate applies both her own $5 million exemption and John's $5 million exemption, for a total $10 million Federal Estate Tax Exemption, so no Federal Estate Tax is due.

However, if John and Jane lived in New York State, there is no portability of the $1 million New York State Estate Tax Exemption. Jane's Estate would therefore owe a State Estate Tax on the $9 million, approximately $1,067,600.

Traditionally, Estate Planners have used a "Credit Shelter Trust" to preserve a deceased spouse's unused exemption. John and Jane might have Wills or Revocable Living Trusts directing that, up to whatever amount can pass free of Federal Estate Tax, assets transfer into a Credit Shelter Trust upon the first death. Upon John's death, $5 million goes into the Trust, and Jane lives off its income for the rest of her life, managing it with a Co-Trustee and accessing principal for health, education, maintenance, and support. Upon Jane's death, the Trust balance passes completely free of Federal and State Estate Tax to their children. Jane still has $5 million in her own taxable estate, not subject to Federal Estate Tax but vulnerable to a New York State Estate Tax of approximately $391,600 — still much better than relying on portability alone.

Before relying on Portability as an Estate Tax planning method, discuss it with your Estate Planning attorney. Planning with a Credit Shelter Trust remains, by far, the optimal method of basic Estate Tax planning: at minimum, it preserves the State Estate Tax Exemption at the first death, and it can also provide creditor protection and shield assets from becoming intermingled in a future marriage. If Jane were to remarry, have more children, and predecease her new spouse, the balance of the Credit Shelter Trust would go to John and Jane's children rather than being inherited by Jane's new spouse — something portability alone absolutely cannot offer.

$5 Million Lifetime Gift Tax Exemption — Opportunity Knocks

As of January 1, 2011 and through the end of 2012, the lifetime gift tax exemption increased to $5 million, up from a previous $1 million — a change with little public discussion beforehand and unexpected even by Estate Tax professionals. What happens after January 1, 2013 remains impossible to predict, but this exemption cannot be taken away once used, so the sentiment is "use it or lose it": reduce the taxable estate, transfer assets during your lifetime, and make a management plan to avoid unnecessary taxation at death. Never before has the idea of the Estate Tax being a "voluntary tax" been more true.

The top concerns people have about gifting include prematurely enriching the next generation, relinquishing all control, and worrying that recipients lack the skill to responsibly manage newly acquired assets. There are several smart ways to gift while retaining security and confidence in the decision, including:

1. Outright gifts
2. Irrevocable Gift Receiving Trusts
3. Grantor Retained Annuity Trusts (GRATs)
4. Family Limited Partnerships
5. Intentionally Defective Grantor Trusts (IDGTs)

Each vehicle carries its own tax considerations and reporting requirements, and should be discussed with your Estate Planning attorney and accountant.

New York Estate Tax on $5 Million = $391,600

An Inheritance Tax is levied on the beneficiary receiving an inheritance and differs based on their relationship to the decedent; spouses are typically exempt, and life insurance is not included in the calculation. In New Jersey, spouses, descendants, and domestic partners are exempt. The details of how each state's Estate Tax applies should be evaluated with a licensed attorney specializing in that state.

State Estate Tax Exemptions in New York and Bordering States

State	State Estate Tax Exemption Amount
Connecticut	$3,500,000
Florida	n/a
New Jersey	$675,000, and Inheritance Tax ranging from 11%–16%
New York	$1,000,000
Pennsylvania	Inheritance Tax ranging from 4.5%–15%

Non-Estate Tax Applications of Estate Planning

Aside from Estate Tax and Gift Tax planning, why else develop an Estate Plan? Hollywood always depicts a doctor advising a patient with a terminal prognosis to get their "affairs in order" — not necessarily because they're vulnerable to the Estate Tax, but perhaps because they're a single parent with minor children. It is within our rights to decide who cares for those children and how our assets are administered, and planning in crisis is never wise; we tend to assume there's unlimited time to make these decisions, much like carrying an umbrella — rarely needed when you have it, always needed when you don't. Non-Estate Tax considerations for planning your Estate include:

1. Equalizing and managing the inheritance to the next generation
2. Providing for grandchildren
3. Providing for a special needs beneficiary
4. Planning for the long-term unmarried couple, same-sex marriages, and same-sex partnerships
5. Planning for the international couple and non-citizen spouses
6. Planning for second marriages and the blended family

If you do not make a plan, someone else will make it for you — namely, the State's statute governing Estate Administration, which dictates an outright distribution according to a statutorily designed lineal family tree.

The Basic Estate Plan

1. The Last Will and Testament
2. Springing Power of Attorney with HIPAA Waiver
3. Health Care Declaration, including a Living Will, Health Care Proxy, Organ and Tissue Donation Affidavit, and HIPAA Waiver
4. Guardianship designation for minor children

Elder Law and an Aging Population

Aging is both a natural and inevitable life consequence, and growing older with dignity and grace is something we all desire. Schanker and Hochberg P.C. is proud to announce that, as of January 1, 2011, the Elder Law practice of Carol Scal, Esq. has been merged into our practice; Carol Scal, Esq. continues to provide her expertise on an "of counsel" basis. Andrea B. Schanker, Esq., in addition to her Estate Planning practice, has become the primary contact for Elder Law matters, including Medicaid pre-planning, Medicaid applications, Guardianship proceedings, and planning for people with special needs or disabilities.

A large part of any Elder Law practice includes planning for prolonged care, whether at home or in a nursing home, for senior citizens. It's wise to research the cost of prolonged care in advance; meeting with an attorney can provide valuable information about possible Medicaid eligibility, and if not currently eligible, an attorney can help review a plan to become financially eligible. Planning in advance is essential, since the cost of long-term health care in New York is astronomical — in-home care alone can cost up to $10,000 a month. Whether Long-Term Health Care Insurance is an option is also worth researching in case Medicaid isn't available down the road.

Senior citizens should also make sure their basic Estate Planning documents are in place and reflect their wishes, including a Last Will and Testament, Power of Attorney, and Health Care Directives. Something as simple as a Power of Attorney can prevent the need for a time-consuming and expensive Guardianship proceeding. Knowing what issues and options exist ahead of time saves inevitable time and money later on.

What Is Probate?

Probate is the proceeding through which the Surrogate's Court authenticates the Last Will and Testament, notifies the statutory distributees (the blood family line) of the proceeding, and finally issues the named Executor's "permission slip" (Letters Testamentary) to settle out the inheritances. Probate is also a matter of public record — this is commonly how the press learns detailed information about how the rich and famous left their legacies.

While an Estate is being probated, the decedent's assets are essentially frozen: no real estate can be sold and no accounts accessed until Letters Testamentary (or Letters of Administration, if there was no Will) are issued. Probate is not a swift process, and can easily become long and drawn out, adding unnecessary frustration during an already grievous time.

What triggers the need for Probate? Any asset titled solely in the decedent's name. For example, if a checking account is solely in John Doe's name, it is frozen upon his death, and access will not be granted without Letters Testamentary and a certified death certificate.

Are there assets never subject to Probate? Assets with a designated beneficiary are not subject to Probate. For instance, if John names his wife Jane as beneficiary of his IRA, upon his death Jane submits a certified death certificate, becomes primary on the IRA, and names her own beneficiary. The same is true of a life insurance policy naming Jane as beneficiary, and of investment accounts with Transfer on Death or Payable on Death designations, or accounts held with Rights of Survivorship.

Beware: people are often advised that Probate can be easily avoided by creating joint accounts with rights of survivorship, or accounts with a transfer-on-death beneficiary. Titling is Estate Planning in its most basic form. For example, John and Jane might work carefully with their attorney to direct how their inheritance passes to their young children in their Wills, then separately meet with an investment advisor and add beneficiary designations to each account to avoid probate — but that titling overrides what the Will says. Always review titling decisions to make sure they don't conflict with your Estate Plan.

Revocable Living Trusts

A very common Estate Planning tool is the Revocable Living Trust, commonly referred to as a "Will substitute" because it essentially does everything a Will does. John and Jane might each create their own Revocable Living Trust in addition to their Wills, serving as the primary Trustee of their own Trust with unlimited control over its matters. During their lives, they transfer probate assets into the Trust — a primary residence, a vacation home, an investment portfolio, a savings account — and can buy, sell, and manage those assets exactly as they did when titled individually, with no additional income tax reporting requirement or tax consequence. Upon death, the Trust's named Trustee (playing the same role as an Executor) directs how assets are distributed, just as a Will would.

Probate can be avoided in more than one way, but beneficiary designations on certain assets may actually conflict with how someone intends their assets to be distributed. It's important to review titling on different assets with your Estate Planning attorney and keep an updated inventory, with regular reviews ensuring your affairs remain in order.

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.