September 2011 Newsletter

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Schanker and Hochberg P.C. is an 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.

This edition includes articles on fiduciary selection, the impact of the State Estate Tax on the value of a decedent's estate, considerations for our aging population, advanced considerations for the affluent estate, and the Estate Planning impact of New York's recent legislation recognizing same-sex marriages.

The Impact of State Estate Taxes

In mid-December of the prior year, Congress passed, and President Obama signed, a tax act increasing the federal estate tax exemption to $5,000,000 per person. On January 1, 2013, that exemption was scheduled to revert to $1,000,000, though few experts expected that to actually occur.

Often lost in discussions about the federal exemption is that twenty-two states have their own estate taxes, with exemptions far lower than the federal amount. New Jersey has a $675,000 estate tax exemption, and New York's is set at $1,000,000 per person (as with the federal estate tax, a spouse can inherit an unlimited amount free of estate taxes). Unlike the federal exemption, there was no serious discussion in Albany or Trenton about raising the state exemptions.

Thus, a New York resident's assets are subject to estate taxation at death if they exceed $1,000,000, and a New Jersey resident's if they exceed $675,000, unless bequeathed to a surviving spouse. The only assets not subject to New York or New Jersey estate taxation are real estate located outside the state.

The tax is based on a rate schedule, roughly 10% of the value of assets in excess of $1,000,000 (ironically, the percentage is actually higher on smaller estates than larger ones due to how the tax is calculated). On an estate of $1,500,000, the tax would be $64,400; on $2,000,000, it would be $99,600.

New York and New Jersey don't tax the real estate of a non-resident located outside the state, but they do tax non-residents who own real estate within New York or New Jersey, calculating the tax based on a percentage of the estate's total assets, even if the in-state real estate itself is worth less than $1,000,000. For example, a non-resident leaving a $600,000 home in New York with an overall estate of $2,000,000 would owe a New York estate tax of $29,880 (30% of the estate is attributable to New York, so 30% of the $99,600 total tax).

Because New York and New Jersey do not tax gifts, and the federal gift tax exemption had also been raised to $5,000,000 per person, one strategy to minimize state estate taxation is to make lifetime gifts. Another is to limit the amount passing at death to anyone other than a surviving spouse to the amount of the state estate tax exemption.

We Are an Aging Population — Covering the Cost

Life expectancy has increased dramatically. According to the U.S. Census Bureau's 2011 Statistical Abstract, the average American at age 70 can expect roughly 15 more years of life; at 80, about 8.8 more years; at 90, about 4.6 more years; and at 100, about 2.3 more years. With increasing life expectancy comes increasing financial liability, since we must now provide for a prolonged life, often with decreased physical and medical quality of life.

Medical conditions, injuries, and diseases once fatal have become long-term disabilities. Roughly a quarter to a half of all individuals over 85 have some form of dementia, and the U.S. Department of Health and Human Services estimates one in five Americans reaching 65 will need extended health care for five or more years. The Alzheimer's Association reports that 21% of women and 14% of men reaching 65 will suffer from Alzheimer's Disease, with survival from diagnosis ranging from four to as long as twenty years.

We earn and save throughout our lives and maintain health, homeowner's, automobile, umbrella, and business insurance, not because we're certain of these fates, but to protect our financial assets against the possibility. Long-Term Health Care Insurance deserves the same seriousness. The costs of in-home care, assisted living, rehabilitation centers, and nursing home facilities are astronomical, and the presumption that Medicaid is available to everyone is unrealistic.

Medicaid is a welfare program with strict rules subject to change, requiring careful navigation of transfer rules, an associated look-back period, and an in-depth application and recertification process. Reliance on family or friends carries its own financial and emotional strain, since loved ones, however caring, are often not capable of providing necessary care, and the emotional burden can interfere with the relationship itself. We strongly recommend Long-Term Care Insurance be considered as early as possible, worked into your retirement financial plan much like retirement savings itself.

Necessary Planning

Aside from a Will, the next most important aspect of anyone's Estate Plan is the lifetime advanced directives: Health Care Directives and the Power of Attorney, generally used during incapacity. Many Americans become subject to tedious and expensive Guardianship proceedings for not having these documents in place, or for having documents that are inadequate for their needs. Guardianship proceedings are lengthy, involve intensive court involvement including an independent Court Evaluator, and require a surety bond, annual accountings, and a termination proceeding.

At Schanker and Hochberg P.C., our Health Care Directives bind together a Living Will, Health Care Proxy, Organ and Tissue Donation directive, and HIPAA Waiver as one master document, along with a laminated wallet emergency information card with contact information for your health care agents and physician. Our Power of Attorney forms include an array of authorized powers carefully drafted for each client to avoid the necessity of a Guardianship Proceeding, and we have clients sign at least three originals so agents and alternates each have one on hand.

Current Gifting Opportunities

The 2010 Tax Act increased the federal gift tax exemption to $5,000,000 per person ($10,000,000 for a married couple who elects to "split the gift"), creating opportunities to make major gifts to family members without incurring gift taxes. Prior to 2011, the exemption was only $1,000,000, and was scheduled to revert to that figure on January 1, 2013 absent further Congressional action, making it advisable to act before that date.

One commonly used technique is the Grantor Retained Annuity Trust (GRAT), an irrevocable trust established for a chosen term of years during which you retain the right to cash flow from the trust's assets; the longer the term and the greater the retained rate of return, the smaller the taxable gift. A GRAT's discounts are determined actuarially based on your age, the trust's length, and the federally mandated interest rate (AFR), which was at historically low levels — and appreciation in the trust's assets inures to the benefit of your beneficiaries at the end of the term.

A second technique, the Family Limited Partnership (FLP), involves creating a partnership in which you (or a corporation you control) serve as general partner while children and other family members serve as limited partners with no control. Because limited partners can neither market nor control their interests and have no guaranteed income, the value of gifts to them is reduced for gift tax purposes, and the FLP also provides strong creditor protection.

A third technique involves a sale of assets to an Intentionally Defective Grantor Trust (IDGT), an irrevocable trust in exchange for a promissory note requiring only interest at the AFR rate. Assets in the IDGT appreciate in value, but the note's face amount never increases; at death, only the note's principal balance is included in your estate, not the trust's appreciation. The IRS requires a gift of "seed money" (5%–10% of asset value) at the IDGT's inception.

These techniques offer significant opportunities to shift wealth to children and grandchildren while retaining control of and income from the assets, within a limited window to use the dramatically increased federal gift tax exemption.

Same-Sex Marriages: Estate and Gift Tax Considerations

Governor Cuomo recently signed New York State's Marriage Equality Act, granting same-sex couples the ability to marry under New York law and enjoy the same benefits previously available only to opposite-sex married couples. Same-sex couples marrying under this law now face a series of issues arising from the conflict between the Marriage Equality Act and the Federal Defense of Marriage Act (DOMA), which did not recognize same-sex marriages under any circumstances.

Issues to consider include:

1. Widow's Right of Election. New York statute provides that you cannot disinherit a surviving spouse absent a Prenuptial Agreement waiving the right; a surviving spouse must be left the greater of $50,000 or one-third of the net estate.
2. Statutory Distributees are entitled to contest a Will submitted to probate, and always include a surviving spouse. Prior to legalization, a life partner had no such right; that has now changed, and a surviving spouse must be notified when a Will is offered for probate.
3. Intestate Share defines who inherits when someone dies without a Will. Previously, a life partner had no right to participate; now, a surviving spouse is always entitled to participate in intestate distribution.
4. The Unlimited Marital Deduction allows unlimited assets to pass to a surviving spouse tax-free federally, provided the couple is legally married under DOMA and the recipient is a U.S. citizen. New York also recognizes the Unlimited Marital Deduction for its own Estate Tax, creating a conflict where the deduction is unlimited for New York purposes but not Federal purposes — this must be carefully planned for in any Wills or Trusts for same-sex couples.
5. Gifting requires caution: New York has no Gift Tax, so lifetime gratuitous transfers aren't taxed or reportable there, but since the Federal government did not recognize same-sex marriages, a transfer between married same-sex individuals could trigger a Federal Gift Tax Return requirement, and possibly a Federal Gift Tax, depending on the size of the gift.

These estate tax issues must be addressed with the help of an Estate Planning attorney knowledgeable in both Federal and New York State Estate Tax Law. The attorneys at Schanker and Hochberg, P.C. have a long history of planning for same-sex couples and are fully familiar with the complexities involved.

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: R. Mark Hochberg

R. Mark Hochberg received a Bachelor's degree in Economics from Rutgers University, a law degree from Brooklyn Law School, and a graduate law degree with a concentration in estate planning and taxation from the University of Miami Law School. Mr. Hochberg is a member of the New York, New Jersey, and Florida Bars and is admitted to practice before the United States Tax Court and the Supreme Court of the United States.

Mr. Hochberg has lectured and written extensively on estate planning topics, was an adjunct instructor at Adelphi University for ten years, and is a former columnist for Financial World Magazine. Mr. Hochberg resides in Plainview, New York, with his wife, a financial consultant, and his two daughters.

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.