May 2013 Newsletter

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.

Estate Tax Planning Update

The American Taxpayer Relief Act was enacted into law as of January 1, 2013. It provides for permanent Federal Estate Tax, Gift Tax, and Generation-Skipping Tax exemptions of $5 million, indexed for inflation. The top Estate, Gift, and Generation-Skipping Tax rate increased from 35% to 40%, and the "Portability" of a first-deceased spouse's unused Federal exemptions was made permanent. The current exemptions are $5,250,000.

Portability, beware: Portability is a Federal rule and does not apply to State Estate Tax. New York still has a $1 million exemption, Connecticut has a $2 million exemption, and New Jersey has a $675,000 exemption. Without proactive Estate Tax planning, a married couple will lose the State Estate Tax exemption of the first deceased spouse. Portability requires the deceased spouse's Estate to affirmatively file a timely Federal Estate Tax return electing to preserve the unused exemption for the surviving spouse, but it doesn't provide asset or spendthrift protection, and doesn't freeze appreciation on the unused exemption's value — all of which a Trust can provide. It remains important to consider Estate Tax planning if you live in a state with an Estate Tax.

2013 Estate Tax Thresholds

Federal Estate Tax and GST Exemption	$5,250,000
Top Estate (and GST) Tax Rate	40%
Lifetime Gift Tax Exclusion	$5,250,000
Gift Tax Annual Exclusion	$14,000 per donee
Top Gift Tax Rate	40%
Annual Exclusion, Non-U.S. Spouse	$143,000
NYS Estate Tax Exemption	$1,000,000
NYS Estate Tax Rate	approx. 10%
CT Estate Tax Exemption	$2,000,000
CT Estate Tax Rate	2%
NJ Estate Tax Exemption	$675,000
NJ Estate Tax Rate	approx. 10%

New York and New Jersey do not impose a Gift Tax. Connecticut does, applying a $2 million gift tax exemption. Gifting remains available and, with the lifetime Gift Tax Exemption indexed for inflation, continues to be a very effective method of minimizing the Estate Tax.

Keeping Your Estate Plan Up to Date

Estate Planning is not a static process. It changes as family circumstances change, as tax law changes, and as other changes in the law and society occur. Consider the following as you keep your plan up to date:

1. Be certain that those named as executors, trustees, and guardians under your estate planning documents remain suitable choices you still want to serve. As children and parents age, continually review your choices for these important roles.
2. Tax law has changed significantly, with more generous federal estate and gift tax exemptions than existed previously, so review your tax planning provisions. The federal exemption is now $5,250,000 and indexed for inflation, while the New York exemption remains $1,000,000 and the New Jersey exemption remains $675,000.
3. Double check beneficiary designations on IRAs, 401(k)s, 403(b)s, pensions, and profit-sharing plans, since qualified plan monies go to whoever you designate regardless of what your Will states, or even if you have no Will at all. Update designations after divorce, remarriage, or other life changes.
4. Check the titling of bank and securities accounts to ensure it's correct, whether held jointly with rights of survivorship or in trust/payable on death to someone — otherwise the account may not go where you intended.
5. Update your living will, health care proxy, and power of attorney, and confirm the agents named are still the ones you want to serve. As the population ages and incapacity becomes a greater issue, these documents grow even more important to keep current.

How to Be Charitable with Benefits: The Charitable Remainder Trust

If you are charitably inclined, there are Estate Planning options to consider beyond simply being a "do-gooder" — income tax and estate tax benefits can be enjoyed by structuring a charitable plan. A Charitable Remainder Trust ("CRT") can be created during your lifetime or upon your death, and must be carefully designed to qualify for the exclusion from the taxable estate and the available income tax deduction.

A Testamentary CRT (funded upon death) results in a charitable estate tax deduction for the present value of the remainder interest earmarked for charity, a great benefit for your heirs. A lifetime CRT (created and funded during your life) results in an income tax deduction, a flow of income during your lifetime, and a charitable deduction on the Estate Tax. The primary requirement is that the CRT's assets must eventually reach a public charity or charities; before then, you retain the right to a reasonable rate of income from the CRT's assets.

Your charitable income tax deduction for establishing a lifetime CRT depends on the amount and type of assets contributed (50% of Adjusted Gross Income for cash, or 30% for appreciated property), your age, and the IRS's Applicable Federal Rate. The older you are and the larger the contribution, the larger the deduction. At death, the remaining balance is excluded from your Estate's value for Estate Tax purposes.

The CRT works particularly well with appreciated assets: being tax-exempt, it can sell appreciated assets without capital gains tax and invest the proceeds without erosion by taxation. For example, assume you purchased stock in 1990 for $100,000, now worth $300,000, and you're 70 years old subject to a 20% capital gains rate. Selling it yourself would leave you $240,000 after taxes to invest. Transferring it to a CRT designed to give you a 6% return instead gives you the full $300,000 to invest, a 6% return ($18,000 per year) for the remainder of your lifetime, and a charitable income tax deduction of $80,000 (with a five-year carryforward for any unused portion). At your death, the CRT's assets are not part of your taxable Estate — smart from a tax perspective, fulfilling from a charitable perspective, and strategic from an Estate Planning perspective.

President Obama: 2014 Budget Proposal and Estate Planning

President Barack Obama released his 2014 budget proposal on April 10, 2013, notably proposing a $3.4 million cap on retirement accounts and requiring those who inherit IRAs to take taxable distributions within five years, rather than "stretching" the distribution over their lifespan. The proposal also called for lowering the Federal Estate Tax exemption back to 2009 levels ($3.5 million). Legislation is rarely permanent and indefinite, and good planning incorporates the risk of changes in tax law; we closely monitor such proposals and will publish updates and distribute relevant mailings as needed.

Planning Considerations with Retirement Benefits

It is not at all uncommon for retirement benefits (IRAs, 401(k)s, 403(b)s, Qualified Retirement Plans) to comprise a major portion of one's assets. Planning with retirement benefits includes the accumulation phase, the lifetime distribution phase, and the post-death distribution phase.

Qualified Plans and IRAs are income-tax deferred during accumulation; ordinary income tax applies only upon distribution. There's a 10% IRS penalty on withdrawals before age 59½, and a 50% tax on amounts that should have been withdrawn but weren't once you exceed the Required Beginning Date (age 70½), at which point you must take your Required Minimum Distribution, determined by the plan's value and life expectancy factors under a uniform lifetime table.

Upon your death, plan assets are distributed to named beneficiaries. A spousal beneficiary can roll over the benefit into a new IRA, using their own life expectancy (and a new contingent beneficiary's) for RMD calculations, and naming their own beneficiaries; this rollover can also occur into a qualifying Trust for the spouse's benefit. A non-spouse beneficiary can withdraw the plan over their own life expectancy, but if the beneficiary isn't a "qualified beneficiary" under IRS rules (an estate, for example, has no life expectancy), the assets must be paid out within five years of death — a rule that also applies if a qualified beneficiary misses their first required distribution by December 31 of the year after death, or if no contingent beneficiary is named.

Make sure your beneficiary designations are up to date and appropriate, and keep a record of them — the beneficiary form, not your Last Will and Testament, governs who receives plan assets. Never name a minor as a beneficiary, since this requires a custodian to hold the asset until age 18, which may not be an appropriate age to inherit a potentially valuable asset. Retirement benefits are also included in the value of your taxable estate, so they must be considered carefully in your overall Estate Tax evaluation.

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: Andrea B. Schanker

Andrea B. Schanker received her Bachelor of Arts degree in Clinical Psychology from University of Rochester in 1999 and her Juris Doctorate from New York Law School in 2002. Andrea is a licensed member of the New York and New Jersey Bar Associations, a Trustee and member of the Huntington Lawyers' Club, and a member of the Suffolk County Bar Association, the New York State Bar Association, and the American Bar Association.

Ms. Schanker joined Schanker and Hochberg P.C. in 2004, specializing in Estate Planning, Estate Administration, 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 on estate tax issues.

Andrea lives in Huntington with her husband, Michael Abruzzo, and their daughters, Patricia Gertrude Abruzzo and Sylvia Grace Abruzzo.

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.