May 2021 Newsletter
Andrea Schanker | May 03 2021 14:00
Planning to Save Estate Taxes
We now have a new administration in the White House and a new Congress. It seems inevitable that there will be some major tax legislation forthcoming that will affect anyone of greater than average wealth. Following is a summary of planning techniques that Schanker and Hochberg P.C. can help you with in order to minimize the impact of this potential legislation:
- Spousal Lifetime Access Trusts (SLATs) – These are irrevocable trusts that name a spouse as the primary beneficiary during his or her lifetime. The spouse would have access to all of the income and so much of the principal as is necessary or desirable for health, maintenance and support. Upon the death of the spouse, the children and/or grandchildren would be the beneficiaries of the trust. The main advantage is that contributions to the trust are lifetime gifts, which are not brought back into the estate of the donor. In addition, any appreciation in value from the date of the gift onwards will escape estate taxation.
- Claw Back Trusts – These are irrevocable trusts that are also completed gifts when they are made. The donor can retain control of the income and, at the discretion of an independent trustee (i.e., not a subordinate), can also have access to the principal. Other family members can be permissible beneficiaries during the donor’s lifetime, and the primary beneficiaries after death. This trust does not keep the assets out of the donor’s estate but will “lock in” the current gift tax exemption even if it is diminished at a later date.
- Discounted Valuation Techniques – Family Limited Partnerships (FLPs), Family Limited Liability Companies (FLLCs) and Corporate Recapitalizations involving non-voting stock are all devices to make lifetime gifts to family members at a reduced (“discounted”) gift tax cost. These techniques have been on the IRS radar screen for quite some time. The prior administration halted any action to eliminate them by executive order, but that can be lifted at any time.
- Grantor Retained Annuity Trusts (GRATs) – These are irrevocable trusts that allow the donor to contribute assets and retain an income stream for a period of years. The longer the time period, the less of a gift to the remainder beneficiaries (i.e., children and grandchildren). The value of the gift is actuarially determined, so there is little opportunity on the part of the IRS to argue about the discounted value of the gift.
- Charitable Remainder Trusts (CRTs) – These trusts allow a donor to contribute appreciated assets to an irrevocable trust, retain an income stream and receive a charitable income tax deduction at the same time. The assets can then be sold by the trust without incurring capital gains taxes, providing an enhanced income stream for the remainder of the donor’s lifetime. The ultimate beneficiaries of the trust are charities. With the strong possibility of increased capital gains tax rates along with possible loss of the “stepped up basis,” the CRT becomes even more appealing.
Another Reason to Avoid Probate
Probate is the process of proving the validity of a Will to the Surrogate’s Court, after which the Surrogate issues a certificate called “Letters Testamentary” empowering the Executor to act. Probate imposes unnecessary time delays, added costs and lack of privacy. Probate causes your beneficiaries to be at the mercy of the Surrogate’s Court when it comes to critical decisions.
For example, what if any next of kin (children as beneficiaries) is under the age of majority (18) and Probate is required? There is a required special proceeding to appoint a Guardian ad Litem to represent their interest in the Estate as minors are incompetent and can’t consent to legal proceedings in which they are a necessary party. The Guardian ad Litem is an attorney chosen by the Court and the Estate is charged with their fees in addition to the general costs of administering/probating the Estate.
Prior to the COVID-19 global pandemic, Probate was exactly as described above. The Pandemic imposed further unexpected delays and complications, all while the volume of Probate and Estate applications drastically increased.
There are many ways to avoid probate while you are alive. We recommend “Revocable Living Trust” based Estate Plans (instead of solely a Last Will and Testament) and strategically title certain assets to the Trust and/or name the Trust as a beneficiary of certain assets. You relinquish no control over your assets and there is absolutely no income tax consequence. If you are uncertain as to whether you are set up to avoid Probate at death, we recommend you meet with one of the attorneys at Schanker and Hochberg P.C. to have a complimentary review of the titling of your assets and/or a change to a Revocable Living Trust based Estate Plan.
Wills and Safe Deposit Boxes
A will is a very important document that needs to be secured and kept safe from fire and flood. That being the case, the natural inclination of many clients is to keep the original will in a safe deposit box. For the reasons addressed below, a safe deposit box is probably the worst place to maintain a will for safekeeping.
Before a Probate Petition can be filed, the proposed executor has to certify to the Surrogate’s Court that a thorough search has been made for a safe deposit box in the name of the deceased and that one could not be found. If a safe deposit box does exist, it must be opened and examined to ascertain if it contains a will.
Before the box can be opened, however, a formal application must be made to the Surrogate’s Court for the box to be opened and examined. The court order will specify that the box may be opened in the presence of an authorized bank employee and any will that is found is to be delivered directly by the bank to the Surrogate’s Court. The box must then be re-sealed until an executor is appointed who is authorized to remove its remaining contents.
To solve these problems, Schanker and Hochberg P.C. recommends that clients leave their original wills with us. We will hold them in our fireproof cabinets for safekeeping, with no storage fee.
Spring Has Sprung: Spring Cleaning for Your Estate Plan
Spring has arrived which means warmer weather, longer days, blooming flowers, cleaning out the house and generalized freshening up. Part of this Spring cleaning should also include your Estate Plan. What better time to consider dusting off your documents to make sure that your planning is still in line with your life circumstances and objectives?
First, and foremost, if you have not done so already this year, please schedule your complimentary Annual Review. This is something all Schanker and Hochberg P.C. clients are entitled to. If you are yet to be a client, please schedule your complimentary initial consultation to review any current planning you may have that has not been reviewed in some time or to consider implementing an Estate Plan, should you not already have one.
Second, you should review your planning decisions to confirm they are still in line with your current life circumstances. Has your net worth and asset inventory significantly changed since you last visited your Estate Plan? Can you locate your original documents? Can your Alternate Agents named in each document locate their pertinent documents (this is especially critical for the Power of Attorney and Healthcare Directive as well as Guardianship designations)? Have circumstances of your beneficiaries changed? Consider if any of your beneficiaries have certain behavioral or social issues that may affect their management of assets should they be gifted to the beneficiary or inherited by a beneficiary upon your death. Have any of your beneficiaries passed away? Are any of your beneficiaries now disabled? Are any of your beneficiaries currently participating in needs-based government programs?
Third, is your Power of Attorney up to date? In New York, the statute governing the Power of Attorney document drastically changed in 2010 and, finally, is about to change again in June 2021 for the better. If you have an older version, it is strongly recommended that this document be updated for a myriad of different reasons aside from the statute changing.
Fourth, you should confirm beneficiary designations on retirement assets and life insurance. Be sure that you can locate documented confirmation of who those beneficiaries are and if they are still appropriate.
We welcome you to contact us to review all of this together. Your Estate Plan is only as good as you make it. Just like a bountiful garden, it needs to be continuously maintained.
New York State Is Enacting a New Power of Attorney
The current power of attorney form, put into effect in 2010, has proven to be extremely difficult for individuals to use without the assistance of counsel. In response, Governor Cuomo signed a new bill into law that will take effect in June 2021 and addresses many of the criticisms levied at the current form.
Stringent and rigid statutory requirements will be reformed under the new law. The new power of attorney form will only need to “substantially conform” with the statute rather than requiring the form to incorporate the exact wording.
The new power of attorney form will also allow a person to sign on behalf of and at the direction of a principal who is unable to sign. This person signing must not be an eligible recipient of gifts under the power of attorney document.
The new law prevents banks and other financial institutions from refusing to accept a properly executed power of attorney form by imposing damages and legal fees if an institution rejects the new form with no reasonable basis. The new law also provides safe-harbor provisions for those institutions who, in good faith, accept an acknowledged power of attorney without actual knowledge that the signature is not genuine.
The existing power of attorney form should continue to be used until June 13, 2021 and will continue to be valid so long as they were properly executed in accordance with the law in effect as of the date of execution. That notwithstanding, it would be advisable to seek counsel to determine if your current power of attorney form should be updated. Please consider scheduling your complimentary annual review to discuss your Power of Attorney in greater detail.
Welcome Nicholas Mondello, Esq.
We are proud to welcome Nicholas Mondello, Esq. to our firm as an Associate Attorney.
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.