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, 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.
This edition of our newsletter includes articles on fiduciary selection, the impact of the State Estate Tax on the value of a decedent estate, a discussion about important 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.
As always, we encourage feedback from our readers. If there are any topics you wish for us to specifically address or elaborate on, please email: firstname.lastname@example.org.
The Impact of State Estate Taxes
In mid December of last year, Congress passed, and President Obama signed, a tax act which increased the federal estate tax exemption to $5,000,000 per person. On January 1, 2013, the federal estate tax exemption is scheduled to revert to $1,000,000. Few experts expect that to actually occur, and most expect the exemption to remain at an amount in excess of $1,000,000 per person, but what the amount of the federal estate tax exemption in the future will be remains uncertain, at best.
Often lost in the discussions regarding the federal estate tax exemption is the fact that twenty two states have estate taxes of their own with exemptions far lower than the $5,000,000 federal estate tax exemption.
For example, New Jersey has a $675,000 estate tax exemption. New York’s estate tax exemption is set at $1,000,000 per person. (As is the case with the federal estate tax, a spouse can inherit an unlimited amount of assets free of estate taxes.) In contrast with the federal estate tax, there has been no serious discussion in Albany or Trenton about raising the state estate tax exemptions.
Thus, the assets of a New York resident will be subject to estate taxation at death if those assets exceed $1,000,000 in value and the assets of a New Jersey resident will be subject to estate taxation at death if those assets exceed $675,000 unless they are bequeathed to a surviving spouse. The only assets that would not be subject to New York or New Jersey estate taxation would be real estate located outside the state, since there is no jurisdiction of the New York or New Jersey taxing authorities over out of state real estate.
How impacting are the New York and New Jersey estate taxes? Although the taxes are based on a rate schedule and not a clear-cut percentage, the tax is approximately 10% of the value of assets in excess of $1,000,000. (Ironically, because of the way that the tax is calculated, the percentage is actually higher on smaller estates than on larger ones.) On an estate of $1,500,000 the tax would be $64,400 and on an estate of $2,000,000 the tax would be $99,600.
What if you are a resident of another state, such as Florida, which does not have an estate tax of its own? Just as New York and New Jersey do not impose an estate tax on real estate of a non-resident that is located outside the state, they do impose an estate tax on non-residents owning real estate in New York or New Jersey.
What if the New York or New Jersey real estate is worth less than $1,000,000? If you think that it would not be subject to New York or New Jersey state estate taxes, you would be mistaken. New York and New Jersey both calculate their estate tax based on a percentage of all of the assets of the estate, backing out everything except the New York or New Jersey real estate.
Thus, if a non resident leaves a home in New York or New Jersey worth $600,000 and an overall estate of $2,000,000, the New York State or New Jersey estate tax would be $29,880 (30% of $2,000,000 = $600,000 and 30% of $99,600 = $29,880)
Your entire estate plan should be reviewed in light of these recent developments. Because New York and New Jersey do not tax gifts, and the federal gift tax exemption has been raised to $5,000,000 per person as well, one strategy that can be utilized to minimize state estate taxation is to make lifetime gifts. Another strategy is to limit the amounts that will pass at death to anyone other than the surviving spouse to the amount of the state estate tax exemption.
We Are An Aging Population
I. Covering the Cost
Life expectancy has increased dramatically. According to the U.S. Census Bureau’s Statistical Abstract of the United States in 2011, the average American can expect their life expectancy to be approximately 15 years once attaining the age of 70. Upon attaining age 80, you should expect a remaining life expectancy of 8.8 years. Upon attaining age 90, you can expect to live another 4.6 years and if you reach 100, the Census predicts your life expectancy to be 2.3 years. With increasing life expectancy comes increasing financial liability not only because we must now provide for a prolonged basic life including a decreased physical and medical quality of life.
(Aging Population continued)
Medical conditions, injuries, and diseases that had been fatal in years past have now become long-term disabilities. Approximately one-quarter to one-half of all individuals over age 85 have some sort of dementia. The U.S. Department of Health and Human Services says that 20% (or one in five people) of all Americans reaching age 65 will need extended health care for five or more years . The Alzheimer’s Disease Organization reports that 21% of all women and 14% of all men who reach age 65 will suffer from Alzheimer’s Disease. There is approximately a four to eight year survival from date of diagnosis and many patients can and do live as long as 20 years from diagnosis.
We earn and save money throughout our entire lives to maintain our lifestyles. We have health insurance, home owner’s insurance, automobile insurance, umbrella policies, and business insurance. We do this not because we are certain that we will suffer these fates but instead to protect our financial assets from the possibility of the occurrence. Is it so difficult to consider Long Term Health Care Insurance with as much focus and seriousness as other forms of insurance?
In our practice, clients often seek our advice concerning the cost of in-home care (should they require it), the cost of assisted living, rehabilitation centers, and hopefully last of all, a nursing home facility. The costs are astronomical! And the presumption that Medicaid is available to everyone is unrealistic. Medicaid and a reliance on family members are the top non-insurance based solutions that people look to for their long-term health needs.
Although there are strategies that can structure assets so that a client may become eligible for Medicaid coverage, our first response to this is that Medicaid is a welfare program with strict rules subject to change at any time. There are transfer rules that apply to structuring assets and there are associated legal costs. There is a look-back period (today five years) that must be satisfied before the transfers are deemed complete, not to mention once the assets are transferred they may not be ‘dipped back into’ here and there. Next, most of the time monthly income exceeds the Medicaid threshold and that money must be transferred to either a Pooled Trust or will be used to contribute toward Medicaid coverage. There is also an in depth application process which usually involves legal costs. And if any part of the application is challenged by the County’s Department of Social Services, an appeal process may have to be commenced. Lastly, every year the Medicaid status must be recertified and this is a new opportunity by the Department of Social Services to challenge a recipient’s continuing financial eligibility.
Schanker and Hochberg P.C. provides complimentary initial consultations.
The reliance on family members or friends is another resource many people rely on. The financial and emotional strain is very high and most of the time our loved ones (no matter how much they care and mean well) are not capable of providing the necessary care. Even when they are, there is often such a strong emotional burden that accompanies their obligations that it can interfere with their relationship with the person who needs not only long term health care services, but emotional and social support from these people.
We strongly recommend that Long Term Care Insurance should be a consideration as soon as possible. It should be an automatic consideration similar to retirement planning. In fact, it should be worked into the financial plan for retirement. We recommend an evaluation with a knowledgeable advisor who can present models of what the cost of this coverage can be. There are traditional, premium based policies and then there are life-insurance or ‘linked-benefit’ based policies where an initial, upfront investment is made but at death, if there is remaining unused premium, a death benefit is awarded. As Nike likes to say, “just do it.” Educate yourself on what options are available to you.
II. Necessary Planning
Aside from a Will, the next most important aspect of anyone’s Estate Plan (affluent or not) are the lifetime advanced directives. There are two main types, (1) The Health Care Directives and (2) The Power of Attorney.
Each is generally used during incapacity. Many Americans become the subject of tedious and expensive Guardianship proceedings in the Supreme Courts for not having these documents in place. Worse is when although someone has them, their documents are not adequate for the purposes they need them for and a Guardianship proceeding is required. Guardianship proceedings are lengthy and involve intensive Court involvement, including an independent Attorney called a Court Evaluator who is assigned to the matter as an interested party on behalf of the County. A surety bond, annual accountings and a termination proceeding is also required.
At Schanker and Hochberg P.C., our Health Care Directives include a Living Will, a Health Care Proxy, an Organ and Tissue Donation directive, and the HIPAA Waiver all bound together as one master document. We also issue a laminated, wallet emergency information card which fits into the average wallet (preferably stored behind your identification card). The wallet card includes telephone contact information for your primary and alternate Health Care agents and primary care physician. Our Power of Attorney forms
include an array of authorized powers which can avoid the necessity of a Guardianship Proceeding. Our Power of Attorney documents are always carefully drafted for each client to include all possible necessary powers the agent may need in order to be able to act on behalf of the principal (on your behalf). We also have you sign enough originals (at least three) of each document so that you, your primary agents and your alternates have an original on hand in case they need to be empowered to act.
Consider these facts carefully and reach out to a knowledgeable advisor so you have the right plan in place to protect your interests. Schanker and Hochberg P.C. provides complimentary initial consultations and you will find that most financial advisors do as well.
Review, review, review.
Schedule a complimentary appointment to review existing Estate Planning documents in our Long Island Office,
Manhattan Office, or our New Jersey office. Contact us at our main telephone
number at (631) 424-5400.
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Current Gifting Opportunities
The 2010 Tax Act, signed into law by President Obama in December of last year, increased the federal gift tax exemption to $5,000,000 per person. This created a number of opportunities to make major gifts to family members without actually incurring gift taxes. For a married couple, the gift tax exemption has been increased to $10,000,000 if they elect to “split the gift” regardless of which of them actually owns the gifted property.
Prior to 2011, the federal gift tax exemption was only $1,000,00 per person, and the gift tax exemption is scheduled to revert to that $1,000,000 figure on January 1, 2013 if nothing further is done by Congress. Accordingly, it is advisable to act before that date to guarantee that the increased gift tax exemption will be available
One commonly used gifting technique is that of the Grantor Retained Annuity Trust (GRAT.) This is an irrevocable trust that is established for a period of years of your choice. During that time, you retain the right to cash flow from the asset or assets in the trust. The longer the term of the trust and the greater the rate of return you choose, the less is the gift. This is because the IRS recognizes the time value of money. Your beneficiaries must wait until the trust ends to receive the assets.
One advantage of the GRAT is the fact that it is entirely statutory. The IRS has spelled out what provisions the GRAT must contain and the discounts that can be obtained are determined actuarially depending upon your age, the length of the trust and the federally mandated interest rate (AFR) which is now at historically low
levels. Another advantage is that the appreciation in the value of the assets that are placed inside the trust inure to the benefit of your children or other beneficiaries who would receive the assets at the end of the trust term.
A second planning technique that can allow for both continuing control of assets and discounts for gift tax purposes is the Family Limited Partnership (FLP.) This involves the creation of a partnership in which you (or a corporation you control) is the general partner and your children and other family members are the limited partners.
Under the terms of the partnership agreement, you retain all control over the assets of the partnership while the remaining family members, as limited partners, have no control. Because they can neither market nor control their partnership interests, and they have no guarantee of income, the value of the gifts them is reduced for gift tax purposes. For these reasons, the FLP also provides excellent creditor protection since a creditor who attacks a limited partnership interest cannot attach the assets of the partnership itself.
As general partner, you can continue to receive a management fee from the partnership and there is no particular period of time that the partnership needs to be in existence
in order to obtain substantial discounts. The FLP does, however, require an expert opinion to be rendered as to the appropriate discounts.
A third planning technique involves a sale of assets to an Intentionally Defective Grantor Trust (IDGT). The trust is irrevocable and names beneficiaries of the principal and income.
Schanker and Hochberg, P.C. attorneys regularly
deliver seminars to clients and professional client
advisors on current Estate and Gift Tax hot topics.
Assets are exchanged with the trust (“sold”) in return for a promissory note. The note is only required to include interest at the federally mandated AFR rate which, as previously mentioned, is at historic low levels. Principal payment can be made, but are not required.
The assets in the IDGT are allowed to appreciate in value, but the face amount of the note will never increase. At your death, the principal balance of the note is included in your estate, but not any of the appreciation in the value of the assets in the trust. The IRS does require that a gift of “seed money” (ranging from 5% to 10% of the value of the assets) be made at the inception of the IDGT. But, here again, the temporary increase in the gift tax exemption will allow all but the very largest amount of assets to be transferred without incurring an actual gift tax.
In summation, there are significant opportunities to shift wealth to children and grandchildren while retaining both control of assets and income, if you so desire. You now have a limited amount of time to utilize a dramatically increased federal gift tax exemption. We urge you to strongly consider the utilization of one or more of these planning techniques now.
Same Sex Marriages; Estate and Gift Tax Considerations
Governor Cuomo recently signed the New York State “Marriage Equality Act”, which, for the first time ever, grants to same sex couples the ability to obtain a Marriage License and get married under New York Law and, as a result, enjoy all of the benefits that opposite sex married couples had enjoyed previously. This article will deal briefly with the estate planning issues and complexities created as a result of this Law.
Same sex couples who legally marry must now face a whole series of issues and decisions (and complications) created by the conflict between New York State’s “Marriage Equality Act” and the Federal Government’s “Defense of Marriage Act” (DOMA).
The Federal Government absolutely does not recognize, under any circumstances, same sex marriages. New York State does, for all State Law purposes, recognize same sex marriages. Therein lies the basis for the conflict of laws that must be addressed.
Those items, which must be considered by same sex couples who are contemplating marriage or who have married, are as follows:
1. Widow’s Right of Election. This provides, by statute in New York State, that you cannot disinherit a surviving spouse unless there is a Prenuptial Agreement waiving the right. Under New York’s Elective Share Statute, a surviving spouse must be left the greater of $50,000 or one-third of the net value of the estate. This
must be dealt with in terms of a Prenuptial Agreement, if the parties so desire, but at the very least, should be taken into account when contemplating marriage.
2. Statutory Distributees are those people who are entitled to contest the validity of a Will when a Will is being submitted to probate. A statutory distributee will always, at the least, include a surviving spouse. Until New York legalized same sex marriages, a life partner was not a surviving spouse and, therefore, had no rights to contest the Will of a deceased life partner. That has now changed. In addition, that surviving spouse must be put on notice when a Will is offered into probate in New York and be given an opportunity to contest, if he or she should choose to do so.
3. The Intestate Share defines what individuals
are entitled to inherit from an individual who dies with no Will in place, which we call “Intestacy.” Prior to this new bill, a life partner was not entitled to participate at all in an intestacy situation, but under current Law, a surviving spouse will always be entitled to participate in the distribution of assets where the spouse died with no documents in place.
4. The Unlimited Marital Deduction. The Federal Government provides that unlimited amounts of assets can be left behind to a surviving spouse and no taxes paid, provided they are legally married (DOMA) and the recipient spouse is a U.S. citizen. New York State also recognizes the Unlimited Marital Deduction, but since New York recognizes same sex marriages, we have the inherent conflict
where the Marital Deduction is unlimited for New York State Estate Tax purposes but not Federal Estate Tax purposes. This must be planned for very carefully in any Wills or Trusts that are drawn for the benefit of same sex couples.
5. Gifting is another area where caution must be exercised. New York State has no Gift Tax so any gratuitous transfers while alive, would not be taxed nor even required to be reported. The Federal Government, however, has an unlimited Marital Deduction for lifetime gifts to a spouse, but since the Federal Government does not recognize same sex marriages, a transfer as between married same sex individuals may well trigger the requirement of filing a Federal Gift Tax Return and perhaps even paying a Federal Gift Tax, depending upon the magnitude of the gift.
Obviously, all of these estate tax issues must be addressed and dealt with together with the help of an Estate Planning attorney knowledgeable in both Federal Estate Tax Law and New York State Estate Tax Law in light of the recent “Marriage Equality Act” of New York.
The attorneys at Schanker and Hochberg, P.C. have a long history of planning for same sex couples when there was no “Marriage Equality Act” and are fully familiar with all of the complexities in planning decisions that must be made where a same sex couple is now married or is contemplating marriage under New York’s Marriage Equality Act.
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
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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.
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:
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. He was an adjunct instructor at Adelphi University for a ten year period of time and he is a former columnist for Financial World Magazine, where he wrote a monthly column on a wide range of issues dealing with personal and estate planning. Mr. Hochberg has been interviewed in the New York Times and other prominent publications and has written articles for The Tax Advisor and The CPA Journal.
His patient and understanding manner is well-suited for the field he has chosen: “I enjoy working with and helping people. This area of the law is not detached and impersonal as some other specialties are. Estate planning is a cooperative process; it is not confrontational in nature.”
Mr. Hochberg resides in Plainview, New York with his wife, a financial consultant, and his two daughters.