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Estate Planning

Tuesday, January 6, 2015

Increases in the Federal Estate Tax and Portability for 2015

The American Taxpayer Relief Act of 2012 brought significant changes to the federal estate tax system, including the concept of portability. In 2015, there will be a $5,430,000 federal estate tax exemption, increased from $5,340,000, and a top federal estate tax rate of 40%.

What is portability?

Portability is a concept that allows a deceased spouse’s unused estate and gift tax exemption to be used by the surviving spouse. In effect, this mechanism is intended to prevent families from having to pay costly gift and estate taxes that could have otherwise been avoided.

How does portability work?

Portability is best illustrated by understanding how the federal estate tax system would work without portability. For example, assume a hypothetical marriage between Spouse X and Spouse Y. Spouse X owns $6 million of assets and Spouse Y has $4 million. Spouse X passes away, leaving the entire $6 million to Spouse Y. Because passing the property to Spouse Y would qualify for the unlimited federal estate tax marital deduction, the deceased spouse, Spouse X, has effectively wasted his unused federal estate tax exemption. When Spouse Y passes with an estate worth $10 million, Spouse Y would only be allowed to exempt $5,340,000, assuming they pass away in 2014.  Thus, the remaining $4,660,000 would be subject to a 40% taxation, a significant portion of the estate.

If portability applied upon Spouse X’s death, the $5.34 million of unused estate tax exemption could have been passed to Spouse Y to use. Now, Spouse Y would be able to use her own $5.34 million of federal estate tax exemption, as well as the $5.34 million of federal estate tax exemption that passed from Spouse X, for a total federal estate tax exemption of $10.68 million. Since the estate is worth $10 million, Spouse Y can apply the entire $10.68 million federal estate tax exemption to insulate the entire estate from federal estate taxes. Thus, portability saves the heirs nearly $2 million in federal estate taxes.

For more information about estate planning techniques or how the federal estate and gift taxation laws are applicable to you and your loved ones, contact an experienced Trust and Estate attorney.  To set up a consultation with the attorneys at Maroney Associates, PLLC, please call us at 866-994-2025. 


Tuesday, December 16, 2014

Passing Wealth to Your Grandchildren without Tax Penalties

Many grandparents want to pass their wealth to their children or grandchildren while they, the grandparents, are still living. Gifts to your loved ones can be a good way to reduce a taxable estate. Currently, the law (2014) allows you to give a child or grandchild $14,000 a year without paying a tax on the gift. Note that this exemption applies only to gifts made during the lifetime of the individual who is doing the gifting.  However, one major consideration is whether or not the child is mature enough to handle the acquisition of a large amount of money.

A "Crummey" trust provides a way to take advantage of the gift tax exclusion while keeping the money in a trust until the child is old enough to handle it.

The benefit of putting money for a child into a trust is that you retain control over the time and amount the child will receive. Simply putting money into a regular trust will generally not prevent the gift from being taxed. In order to avoid the gift tax, the child must have a "present interest" in the money. This means that child must be able to access the money the instant the trust is created. As such, a promise to give a child money at a certain point in their life, i.e. when the child “matures,” does not count as a present interest. Thus, most gifts to trusts are not excluded from the gift tax.

The Crummey trust is designed to allow you to put money into a trust and receive a gift tax exclusion. Essentially, the Crummey trust includes a provision that gives the beneficiary (the child or grandchild in our scenario) a certain amount of time to withdraw money before it is transferred into a trust. After the designated amount of time has passed, the beneficiary can no longer access the funds and it becomes subject to your trust designations. When establishing a Crummey trust, it is very important that the creator of the trust notifies the beneficiary of the gift as well as his or her right to withdraw the gift.

If this notice is not given, it is very likely that the IRS will tax the gift. Given the existence of the temporary present interest, there is the risk that the beneficiary will withdraw the money right away. However, once the temporary time period has expired, the gift will be a part of the trust, you control how much the beneficiary can receive and when.

For more information about end-of-life asset management, or further information regarding Crummey trusts, please contact the experienced elder law and estate planning attorneys at Maroney Associates, PLLC.  Call us today at 866-994-2025.  


Tuesday, November 4, 2014

To Gift or Not To Gift?

During the course of estate planning, many families consider passing their homes onto their children as gifts. While this seems like a reasonable consideration, there may be potential tax ramifications for such a transaction.

Under current federal law, when you give anyone property worth more than $14,000 in any one year, you are required to file a gift tax form.  Additionally, the law stipulates you can gift or “give away” a total of $5.34 million over your lifetime without incurring a gift tax. This means that, if your residence is worth less than $5.34 million, you likely won't have to pay any gift taxes. However, you still must file a gift tax form, assuming it's worth over $14,000.

Here is the issue: While you may not have to pay gift taxes on the gift (a house), if your children sell the house right away, they may incur a steep tax penalty. When you give away your property, the tax basis (or the original cost) of the property for the giver becomes the tax basis for the recipient. Any profit from the sale can then be taxed. Therefore, they may lose a significant amount after the sale of the property.

For example, suppose you bought the house many years ago for $200,000 and it is now worth $450,000. If you give your house to your children, the tax basis will be $200,000. This means that if your children decide to sell the house, they will have to pay capital gains taxes on the difference between $200,000 and the selling price. The one exception to this capital gains tax liability is that, if your children live in the house for at least two out of the five years before selling it, they can exclude up to $250,000 ($500,000 for a married couple) of their capital gains from their taxes.

However, property that is inherited is not subject to the same taxes as property that is gifted. If your children were to inherit the property, the property’s tax basis would be "stepped up." This essentially means that the tax basis would be the present value of the property as of the date of death of the decedent, leaving the house through his or her estate. Therefore, by keeping your house as part of your estate rather than gifting it or selling it, your children will inherit the property at its current market value as of the date of your death, without incurring a capital gains tax liability which can reach up to 28% of the fair market value of the property.  Assuming that your estate is valued below the allotted $5.34 million federal estate exemption mark, such a method could prove to be a valuable planning strategy to consider. 

Trust and estate attorneys can guide families through the difficult process of creating a will.  For more information about estate planning strategies, contact our experienced New York estate attorneys at Maroney Associates, PLLC.



Thursday, October 30, 2014

Artwork Valuation and the Estate Tax

Many wealthy families with art collections are faced with costly decisions when determining how to address their art collections for estate tax purposes. Questions such as these often prompt families to consult a trust and estate attorney who can advise and fight on behalf of their clients.

The conundrum that art collectors face is when to sell their collections. If a collector sells the artworks while they are alive, they are subject to a 28% (currently) capital gains tax on any appreciation in the value of the art. However, if the art owner retains the art until death, up to 40% of the entire market value of the artwork could potentially be taxed under the estate tax (which currently provides a $5.34 million exemption).

Thus, for families who are nearing the estate tax exemption mark or are currently over it, the choice of whether to sell, gift, or donate the artwork can have huge financial implications, as assets above the exemption mark are taxed at a top rate of 40%.

Recently, the Fifth Circuit issued a decision which weighed in on how some families may be able to lower the rate at which artwork can be taxed.  The court granted a prominent family a $14.4 million estate tax refund and affirmed the use of fractional interest discounts for works of art.  This allows some families to creatively reduce estate taxes. The case involved 64 pieces of art whose worth, based on their full fair market value, totaled $24.6 million.

Anticipating future estate and gift tax issues, the family executed various planning techniques to divide ownership interest in the artwork. These techniques included a Grantor Retained Income Trust, a co-tenancy agreement, a lease, and a disclaimer. Essentially, by the time the grantor passed away, he held a 50% interest in three of the works and a 73% interest in the other 61 works. His three children held the remaining interests.

However, the IRS maintained that a tax discount for such fractional interests was unallowable. Thus, for tax purposes, the art would be valued based on the fair market value with no regard to the fact that the works were, in effect, owned by more than one individual.  

While the Tax Court disagreed with the IRS’ position that such fractional ownership discounts for artwork were unallowable, the court wrongly applied its own arbitrary 10% discount. In overruling the Tax Court’s decision, the Fifth Circuit held that the family’s personal valuation of the discount was applicable. 

As the Fifth Circuit held, “…in the absence of any evidentiary basis whatsoever, there is no viable factual or legal support for the court’s own nominal 10% discount,” and: “The Estate, as taxpayer, presented all of the evidence and a surfeit at that, further eschewing the propriety of a nominal discount.”

This simply means that, because the estate provided support for its valuation based on the fractional interest in the works of art, it was up to the IRS to rebut the estate’s evidence. Furthermore, the Tax Court erred in deciding that the discount should amount to 10% without any evidence.

Strategic planning can help families prepare for unexpected estate tax burdens. If you have any questions about how art and other collectibles may be valued for the purposes of taxation, contact the experienced estate attorneys at Maroney Associates, PLLC. 


Tuesday, September 30, 2014

Digital Asset Accessibility

Delaware recently became the first state to pass legislation that affords families access to the digital assets of a deceased or incapacitated loved. Signed into law on August 12th, the new law allows fiduciaries to access to digital assets, such as email, social media, health care, and other accounts, just as they would take possession of physical ones. 

Previously, fiduciaries were bound by the inflexible terms-of-use policies of the individual service providers, many of which were insufficient or simply nonexistent.

For example, Facebook allows individuals to request that a decedent's account be turned into a memorial or removed. However, due to privacy reasons, the social network cannot provide anyone with login information. Another social media mega-site, Twitter, currently allows family members to request that a deceased or incapacitated loved one's account be deactivated.  However, Twitter does not simply hand over the password to the account.

Delaware is the first state to pass a law of this kind. Fiduciary access to digital assets, which has long been championed by the Uniform Law Commission, a nonprofit organization that provides states with non-partisan legislation. According to the ULC, Delaware’s adoption of this new legislation may have the domino effect of inspiring other states to adopt legislation that makes dealing with digital remains a much more seamless process.

Until the widespread adoption of legislation that would make such digital assets more accessible by fiduciaries, strategic estate planning can help alleviate such potential barriers. For more information on asset management, contact our skilled trust & estate attorneys at Maroney Associates, PLLC.  


Tuesday, August 19, 2014

Changes in the New York Estate Tax Exemption Amount and New Gift Tax Legislation

The New York estate tax exemption refers to the amount an individual may gift to others free of New York estate tax. Previously, this amount, in New York, was capped at $1,000,000 per individual. However, legislation passed earlier this year has increased the amount to $2,062,500 for individuals dying on or after April 1, 2014. Furthermore, this amount is scheduled to increase annually over the next five years at which point it will be equal to the federal estate tax, which is currently $5,340,000 per individual and indexed for inflation, for estates of individuals dying on or after January 1, 2019.

Essentially, the New York estate tax exemption is “phased out” for taxable estates valued above the exemption amount, and no exemption is available for taxable estates valued above 105 percent of the exemption amount. This means that the new increased exemption amount will effectively decrease estate tax burden for individuals whose taxable estate falls below the 105 percent mark. Individuals who will have a taxable estate valued above that threshold will not receive the benefit of the new exemption amount.  However, some speculate that because of the way the estate tax is calculated these individuals are likely to pay the same amount of New York estate tax as under the prior law.

In addition to the aforementioned changes, the new legislation also provides that gifts (other than to a spouse or a charity) in excess of the annual exclusion amount ($14,000 per donor per recipient per year), are now subject to a New York State estate tax, if the gifts were made within the three years prior to death. However, this rule applies to only to gifts made between April 1, 2014, and January 1, 2019, by an individual who was a resident of New York at the time of the gift. In addition, annual exclusion gifts and qualified gifts, such as those for medical or educational purposes, would not be affected by this new rule.

Careful planning and the implementation of a sound strategy can often times help alleviate unexpected estate tax burdens. If you have questions about estate planning, tax exemptions, or how the recent changes in the law will affect you or a loved one, contact the experienced estate attorneys at Maroney & Associates, PLLC. 


Tuesday, July 15, 2014

What is a Revocable Living Trust?

An Alternative to a Will
The revocable living trust is often considered to be a sound alternative to a traditional will. The advantage of a revocable living trust, as opposed to a traditional will, is that the lengthy probate process can be avoided. Additionally, the cost of administration can be substantially lowered while the distribution of your estate can be completed much sooner. Simply put, the distribution of your items will happen much quicker.

Understanding the Probate Process
The difference between a revocable living trust and a will is the manner in which your estate will be administered at the time of your death. A will normally must be entered for probate in the county of your residence at the time of your death. Probate is a court-supervised procedure that can take anywhere from nine months to a year to complete. Additionally, a notice to creditors must be published in the newspaper, a petition for probate must be filed with the court, and the court must authorize distribution of your estate following administration.

Why Use a Revocable Living Trust?
The primary purpose of a trust is to avoid probate. Typically, you would transfer your assets out of your name as an individual and into your name as trustee of your trust. During your lifetime, you would have the power to amend or revoke the trust and add or withdraw property from the trust. All income would be payable to you, during your lifetime, exactly as it is without a trust. Additionally, you could withdraw principal in such amounts as you deem necessary or appropriate. The trust would provide, however, that upon your death, the person you designate as the successor trustee would be required to follow your directions with respect to distribution.

Tax Implications
During your lifetime, there would be no income tax consequences to a trust. Income would continue to be reported using your Social Security Number. As long as you serve as the trustee, you would not have to obtain a separate tax identification number for the trust. The appointed successor trustee has the power to obtain a separate tax ID for the trust, without the necessity of probate or authority of a court.

Maroney Associates, PLLC understands that everyone has a different set of circumstances when it comes to estate planning. Our New York trusts and estate attorneys will use our experience, knowledge, and understanding of the state and federal laws to create a comprehensive end of life strategy that fits you and your loved ones’ needs. Contact Maroney Associates, PLLC for advice regarding your specific situation.


 


Wednesday, June 29, 2011

Five Reasons to have a Revocable Trust

In past blogs, we have discussed the reasons of including trusts as part of your estate planning program.  We also outlined the differences between revocable and irrevocable trusts.  Here is a quick summary of the advantages of establishing a revocable trust:

  1. Avoids probate.
  2. Maintains control of your assets until your death or incapacity.
  3. Establishes your beneficiaries to inherit your estate after death.
  4. Establishes who will act as the fiduciary to settle your estate after death.
  5. Establishes Credit Shelter and/or Special Needs Trust provisions to:
     
  • Mitigate or avoid estate taxes.
  •  Care for a special needs individual without jeopardizing his or her government benefits.
  •  Avoid a minor having access to an inheritance at 18 years of age.


Tuesday, June 28, 2011

Five Reasons to have a Last Will and Testament

In previous blogs, we have discussed a number of aspects of a last Will and Testament.  Below is a quick summary of those discussions and why, if you haven’t established a Last Will and Testament, you should do so without delay: 

  1. Establishes your beneficiaries to inherit your estate after death.
  2. Establishes who will act as the fiduciary to settle your estate after death.
  3. Establishes the guardian for your minor children in the event of an untimely death.
  4. Create Trusts in your Will so as to avoid estate taxes, care for a special needs individual without jeopardizing his or her government benefits, and to avoid a minor from having access to an inheritance at 18 years of age.

And the most important reason:

       5.  Avoid the government making decisions “1 through 4” above for you.

 

Saturday, May 28, 2011

Debts of the Decedent

 
Unfortunately, when a family member dies, his or her survivors must not only deal with grief, but often, with debt collectors seeking to collect from the estate of the decedent. This often leads to panic on the part of the surviving family members, especially a spouse, who may be concerned about having enough assets to survive.
 
In general, family members are not responsible for a decedent's debts, but this does not necessarily stop the collection agencies from trying to collect.
 
An estate should have a personal representative, known as an executor if there is a will and an administrator if there is no will. One of the main duties of the estate's personal representative is to marshal all of the assets of the estate, and pay any just debts of the decedent. However, if the estate does not have sufficient funds to pay creditors, the debt will go unpaid and without recourse against the survivors.
 
The exception to this rule relates to debts that were jointly held. For example, if a credit card was shared between the decedent and his or her spouse, or another family member, then even if the estate of the decedent does not have sufficient funds to pay the debt, the surviving spouse or family member who was “on the card” may be personally responsible.
 
To be clear, we used the example of a credit card, but the rule applies to any just debts that were jointly held between the decedent and the surviving family member; the surviving spouse or family member may be personally responsible for a jointly held debt.
 
It is critical that the personal representative make sure that just debts are paid, while other interests are protected.   Scammers are out there and will actively seek out surviving relatives of a recently deceased person, and then create debts where there are none, in an effort to get an unjust payment.  The executor/administrator must be sure to not provide personal information to debt collectors unless they are certain that the debt collector is legitimate.
 
If one of your loved ones has died, Maroney Associates invites you to contact us, so as to answer any and all questions you may have about winding up the estate, and taking care of any just debts owed by the decedent.
 

Tuesday, May 17, 2011

Duties of a Trustee

We have discussed in prior blogs various types of trusts. We have also discussed the necessity and importance of selecting the right trustee.  The purpose of this blog is to give our readers assistance in making that proper selection by advising them of the duties of a trustee.

For starters, a trust is a legal arrangement where one person, known as creator, grantor, settlor, or trustor, establishes a legal entity known as a trust, and selects a person or entity known as a trustee, who will hold legal title to property for another person, who is called a beneficiary. A trustee, therefore, should be someone in whom the grantor has great confidence, and whose qualities include using good sound judgment.  A trustee’s duties include, but are not limited to the following:
 
Fiduciary Duty
A trustee has a fiduciary duty to the initial beneficiary who is entitled to the income or principal of the trust, as well as the remainder beneficiaries, which are the people who will receive the trust assets upon the death of the initial beneficiary.  A fiduciary is held to a very high standard with respect to the prudence that he or she must show toward the trust assets.
 
Comprehensive Duty
A trustee has a duty to truly know and understand the terms of the trust. The terms of the trust are contained in the words that make up the trust, and act as instructions to the trustee with respect to what she/he can do with the asset, its income, and its remainder.  It may sound simple, but if you are a trustee, you must read and fully understand the trust, and/or hire a professional to help you.
 
Investor Duty
A trustee must be a prudent investor. This means that the trustee cannot be needlessly risky or speculative with respect to the assets for which she or he is responsible as trustee. It is not his or her money to invest but, in fact, is for the beneficiary.  The trustee must be careful to make sure that she or he protects the assets for the current beneficiary as well as the future remainder beneficiaries. Seeking high income may be a natural desire, but the trustee must be careful not to indulge in choices so risky that the assets could be lost.
 
Distribution Duty
Certain trusts allow the trustee discretion with respect to whether or not she or he should make distributions to the beneficiaries of the trust.   This discretion requires the trustee to evaluate the needs of the beneficiary and future beneficiaries, against the assets of the trust.

This may often require the trustee to tell the beneficiary that she or he cannot have any more money, which moves the trustee's role into the personal realm in addition to the legal.  This can be especially tricky when the beneficiary is a relative.
 
This duty should be taken very seriously when considering and/or selecting your trustee, as a professional trustee (such as a bank, trust company, attorney, a financial adviser, accountant, etc.), may have an easier time saying no to a loved one.
 
Monitoring the Trust Duty
The trustee must be organized and have some bookkeeping skills.  She or he need not become an expert in accounting, but must have some understanding of accounting/bookkeeping, so as to track income, distributions, and expenditures.
 
Certain trusts must file a tax return, and as with the above paragraph, the trustee need not become an accountant or professional tax preparer, but if a tax return is required to be filed, it is the trustee’s duty to insure that it gets done.  This may involve delegating the job to a professional, which is discussed immediately below.
 
Delegating Duties
The trustee will be responsible for delegating duties that she or he is not equipped to handle.  A good trustee does not have to be an accountant, skilled and able to prepare a tax return, or an attorney able to handle interpretation of the trust.  A good trustee must, however, be skilled at selecting the proper professionals to help him or her complete their role as trustee.
 
Trustee Fee
Both the creator of the trust and the selected trustee should know that a trustee is entitled to a reasonable fee for his or her services. This may be especially important for family members named as trustees as they often do not wish to accept the fees.  The job of a trustee may require a serious time commitment, so in order to insure the job is done well and without a “grudge,” it may be prudent to establish in writing that you, as the creator, direct the trustee to take his or her reasonable fee.
 
If a trusted professional such as a bank, trust company, or law firm, etc. is selected as trustee,  they are entitled to and will take a reasonable fee, whether it be an hourly fee, a percentage of the fees under which they are charged to oversee as a trustee, or something else.
 
Having the appropriate information on the duties of a trustee should help you better understand how to select a trustee and/or how to serve as a trustee.  As always, should you have further questions regarding the selection of Trustees, or any other legal matter, Maroney Associates invites you to call our offices.



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Based in Melville and Garden City, New York, the attorneys at the Law Offices of Maroney Associates, PLLC assist clients throughout Nassau County, Suffolk County, Queens, and the cities of Mineola, Hempstead, New Hyde Park, Franklin Square, Williston Park, Queens Village, Melville, Huntington, Farmingdale, Patchogue and Uniondale, NY.



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