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, www.schankerhochberg.com, 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 will be able to contribute their own career perspective to the newsletter’s audience.
We encourage feedback from our readers and if you have any ideas for topics that you wish us to elaborate on, please email me at:
Tax Relief, Unemployment Insurance Authorization and Job Creation Act of 2010
On December 17, 2010, President Obama signed into effect H.R. 4853, “The Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010” (the Act). The Act significantly impacts Estate Planning. The rules under the Act last until the end of 2012. On January 1, 2013 (without intervening legislation by Congress) the Federal Estate Tax and Gift Tax laws will revert to the law in effect back in 2001. That said, between the current $5 million Federal Estate Tax Exemption ($10 million for a married couple who are both U.S. citizens) and the $5 million lifetime gift tax exclusion, there is an unprecedented opportunity to seriously reduce the taxable estate or at the very least, freeze the value of highly appreciating assets. This article will outline the key points of the Act in connection with the Federal Estate Tax and Gift Tax rules:
- $5 million Federal Estate Tax Exemption and Portability
- $5 million Lifetime Gift Tax exemption – Opportunity Knocks
- $5 million Generation Skipping Transfer Tax Exemption
- Return of the ‘Step-up’ in Basis of a capital asset to the Date of Death value
Portability of the Federal Estate Tax $5 million exemption
‘Portability’ is a provision under the Act that allows the surviving spouse to transfer any unused portion of the Federal Estate Tax Exemption to themselves thus adding to the surviving spouse’s available exemption. For example, John dies in 2011 and Jane survives. John never used any of his lifetime gift tax exemption and left no inheritance for the benefit of anyone except his surviving spouse Jane, upon his death. Jane makes an election 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. Jane’s Estate applies her $5 million Federal Estate Tax Exemption and John’s $5 million Federal Estate Tax Exemption. There is a total of a $10 million Federal Estate Tax Exemption which means there is no Federal Estate Tax due.
HOWEVER, John and Jane live in New York State and there is NO portability of the New York State Estate Tax Exemption of $1 million. Therefore, Jane’s Estate will owe a State Estate Tax on the $9 million which is approximately $1,067,600.00.
Traditionally, Estate Planners used a “Credit Shelter Trust” to preserve the deceased spouse’s unused Exemption. For example, John and Jane would have Wills or Revocable Living Trusts directing that up to whatever amount can pass free of the Federal Estate Tax will be transferred into a “Credit Shelter Trust” upon the first death. So upon John’s death, $5 million of assets goes into the Trust and Jane lives off the income of the Trust for the rest of her life. She will manage the Trust with a Co-Trustee and have access to the principal for life’s necessities (‘health, education, maintenance, and support’). Upon Jane’s death, the balance of that Trust (no matter what amount it is) will pass completely free of Federal and State Estate Tax to their three children in the manner they direct. Jane still has $5 million in her taxable estate. Jane’s estate is not subject to the Federal Estate Tax but will be vulnerable to a New York State Estate Tax of approximately $391,600.
Before relying on Portability as a method of Estate Tax planning, you should have a discussion with your Estate Planning Attorney. Planning with a Credit Shelter Trust is, by far, the optimal method of basic Estate Tax planning. At the very least, the State Estate Tax Exemption can be preserved at the time of the first death. Moreover, the Credit Shelter Trust can provide creditor protection as well as shielding assets from possibly becoming intermingled in a future marriage during the remainder of Jane’s lifetime. What if Jane remarries, has more children, and then predeceases her new
Tax Relief, Unemployment Insurance Authorization and Job Creation Act of 2010 (…cont’d)
spouse? With this planning in place, the balance of the Credit Shelter Trust goes to John and Jane’s children rather than being inherited by Jane’s new spouse. This is something portability absolutely cannot offer.
$5 million Lifetime Gift Tax exemption – Opportunity Knocks
There is an unprecedented opportunity available. As of January 1, 2011 and through the end of 2012, there is a lifetime gift tax exemption of $5 million, increased from what was previously a $1 million exemption. There was little to no public discussion of the possible increase before it happened and was thoroughly unexpected by Estate Tax professionals. All bets are off when it comes to what will happen as of January 1, 2013. We are done predicting the actions of Congress; it is impossible. However, they can’t take it away once you have used it. Therefore, ‘use it or lose it.’ Reduce the taxable estate, transfer assets during your lifetime and make a management plan in order to avoid unnecessary taxation at time of death. Never before has the notion of the Estate Tax being a voluntary tax become more true.
The number one concern people have when considering making gifts include the ideas that they are prematurely enriching the next generation, that they relinquish all control, and that the recipients of these gifts do not have the skill to responsibly manage their newly acquired equity. It is essential to understand that there are several smart ways of ‘gifting’ to retain security over the assets and confidence that the decision you are making will be advantageous rather than disastrous.
Methods of gifting include:
- Outright gifts
- Irrevocable Gift Receiving Trusts
- Grantor Retained Annuity Trusts [GRATs]
- Family Limited Partnerships
- Intentionally Defective Grantor Trusts [IDGTs]
There are tax considerations and tax reporting requirements for each vehicle. When considering taking advantage of using all or part of your lifetime gift tax exemption, you should always have a conversation with your Estate Planning Attorney and Accountant.
Schanker and Hochberg P.C. will be making a presentation
on Long Island and New York City in June of 2011
on how to take advantage of the gifting opportunity.
For more information, please contact
Andrea B. Schanker, Esq. at (631) 424-5400.
New York Estate Tax on $5 million = $391,600.00
An Inheritance Tax is a tax levied on the beneficiary receiving the inheritance and differs based on the relationship to the decedent. Spouses are exempt. 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 to a decedent’s estate should be evaluated with a licensed Attorney who specializes in Estate Planning within that respective State.
The State Estate Tax Exemptions in New York and Bordering States
|STATE||State Estate Tax Exemption Amount|
|New Jersey||$675,000 AND Inheritance Tax ranging from 11% – 16%|
|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 do we develop an Estate Plan? Hollywood always depicts the doctor advising the patient that, due to the recent terminal prognosis, the patient should get his/her ‘affairs in order.’ Why? It isn’t because that patient is necessarily vulnerable to the Estate Tax. Maybe it is because that patient may be a single parent with children who are minors. It is within our constitutional rights to decide who cares for those children and how our assets are administered. Planning in crisis is never wise. Generally, we all assume that there is an unlimited amount of time to make these types of decisions. In reality, it is like carrying an umbrella – if you have it, rain rarely comes. But if you don’t have it, its cats and dogs all day long.
The following are non-Estate Tax considerations for planning your Estate:
- Equalizing and managing the inheritance to the next generation
- Providing for grandchildren
- Providing for the ‘special needs’ beneficiary
- Planning for the long-term unmarried couple, same sex marriages and same sex partnerships
- Planning for the international couple; non-citizen spouses
- Planning for second marriages and the blended family
If you do not make a plan, someone else will make it for you. That someone will be the State’s statute governing Estate Administration. It dictates an outright distribution according to a statutorily designed lineal family tree.
The Basic Estate Plan
- The Last Will and Testament
- Springing Power of Attorney with HIPAA Waiver
- Health Care Declaration
a. Living Will
b. Health Care Proxy
c. Organ and Tissue Donation Affidavit
d. HIPAA Waiver
- 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 that 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 now become the primary contact for Elder Law matters which include 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 in the home or in a Nursing Home) for senior citizens. It is, without a doubt, very wise to do some research into the cost of prolonged care. Meeting with an Attorney can provide valuable information about possible Medicaid eligibility and if not financially eligible, the Attorney can review a plan to possibly help the client(s) become financially eligible to apply successfully for Medicaid coverage. Planning in advance is essential because the cost of long term health care is astronomical in New York. 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 is absolutely not an option down the road.
Senior citizens should also make sure that their basic Estate Planning documents are in effect and that the decisions reflect their wishes. Basic documents include a Last Will and Testament, Power of Attorney, and Health Care Directives. Something as simple as a Power of Attorney can prevent the necessity for a time consuming and expensive Guardianship proceeding.
In conclusion, information is extremely valuable and knowing what issues and options exist ahead of time will save inevitable time and money later on. Schanker and Hochberg P.C. is very proud to provide Elder Law counseling as part of our practice.
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 then issues (finally) 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 obtains their detailed knowledge of how the rich and famous left their legacies (how much money was Leona Helmsley’s dog, Trouble, entitled to under her Will?)
While an Estate is being probated, the decedent’s assets are essentially frozen. No real estate can be sold and no accounts can be accessed until the Letters Testamentary (or Letters of Administration if the decedent died without a Will) are issued. And let us be clear, probate is not a swift process. In fact, it can easily become a long and drawn out process which, during a grievous time, may add unnecessary frustration.
What triggers the need for a Probate?
Any asset in which title is in the name of Decedent. For example, John Doe’s name (alone) is on the checking account. The account is frozen upon John’s death and access will not be granted without Letters Testamentary and a certified death certificate.
Are there assets that are never subject to Probate?
Assets with a designated beneficiary are not subject to Probate. For instance, John Doe names his wife, Jane, as the beneficiary of his IRA. Upon John’s death, Jane will submit a certified death certificate, become the primary on the IRA and then name a beneficiary of her own. John also has a life insurance policy. He names Jane as his beneficiary and here too, there will be no Probate required before the death benefit can be paid to Jane. Jane names her children as Transfer on Death (or Payable on Death) beneficiaries on her investment account [most of the time a very bad idea]. Upon her death, this account passes automatically to the designated beneficiary named on that account. This is also what happens on accounts with the designation of Rights of Survivorship.
Many times, people are advised that probate can be easily avoided by creating joint accounts with rights of survivorship or have an individual account that designates
a transfer on death beneficiary. Titling is Estate Planning in its most basic form. For example, John and Jane spend time with their Attorney and make thoughtful decisions as to how their inheritance will be passed on for their young children in their Wills. They then meet with their investment advisor and decide they now want their Estate to avoid probate and they put beneficiary designations on each of their accounts. This titling overrides what the Will says. Always review titling decisions to make sure that it will not conflict with the Estate Plan.
Revocable Living Trusts
A very common Estate Planning tool is called a Revocable Living Trust (commonly referred to as a Will substitute because it essentially does everything a Will does). Just like John and Jane create their own Last Will and Testament, they each will also create their own Revocable Living Trust. They will be the primary Trustee of their own Trust. This means that they have unlimited control of all matters of their Trust. During their lives, they transfer probate-assets into the Trust, including:
- Their primary residence
- Their vacation home in Key West
- Their ski cabin in Stowe, Vermont
- Their investment portfolio
- Their savings account at their local Bank
John and Jane can buy, sell and in any way manage all of their Trust assets the same way they did when title was in their names individually. There is no additional income tax reporting requirement and there is absolutely no tax consequence. Just like a traditional Will, upon John and Jane’s death, the Revocable Living Trust has Trustee (same role as an Executor) who they have named when they created the document. The Trust also, like a Will, directs how their assets are distributed and to who.
Probate can be avoided in more than one way. Beneficiary designations on certain assets can avoid Probate but may actually conflict with the design of how someone wants their assets to be distributed. It is important to review title on different assets with your Estate Planning attorney and to keep an updated inventory of your assets. Regular reviews of these types of decisions will ensure that the proverbial ‘affairs’ are in order.
Extensive Services at Schanker and Hochberg P.C.
- Complimentary Initial Consultations for Estate Planning, Probate and Estate Administration matters
- Complimentary Annual Review meetings for existing clients
- Complimentary Family meetings for existing clients
- 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.
Regardless of where we meet, you will know that with Schanker & Hochberg by your side, you have a trustworthy and expert advocate that will help you plan your legacy in the best interests of you and your loved ones.
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.
Highlighted S&H Attorney:
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 of America.
His knowledge and competence have earned him widespread respect amongst his peers and colleagues. A very relaxed and personable manner has enabled him to build long, gratifying and rewarding relationships with his clients.
Mr. Schanker is an accomplished public speaker and has lectured in front of both lay and professional audiences on an national basis. He has been retained and continues to be 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, the Estate Tax Planning Council of Long Island, a speaker at “Top of the Table,” a former adjunct professor at Adelphi University on Long Island, and a quoted author, including articles in Forbes and Fortune magazines.
Mr. Schanker resides in Huntington, with his wife, Carol, who is an accomplished artist.