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Estate Planning

Taxes on the succession of property upon the death of the owner have been around for a very long time. The ancient Egyptians are said to have imposed a ten per cent tax on the transfer of property at death. In colonial times, Stamp Acts were used as a form of estate tax in that one had to purchase from the government a “stamp” that would be affixed to a will and enable it to be given effect. During the Civil War, the Tax Act of 1862 imposed a federal inheritance tax to help pay for the war effort. While Cullen and Dykman did not counsel ancient Egyptians or our colonial fellow patriots, we have been in practice since the Civil War and we have seen every new tax regime the government has implemented to pay its bills. We have responded in the appropriate way each time to minimize the impact on our clients of whatever new tax structure was imposed.

Estate taxes have varied considerably. A chart from the Heritage Foundation illustrates the levels of estate taxation since the 1916 act that inaugurated the modern system of estate taxation:

A significant portion of the work of our Trusts and Estates department involves estate planning in light of federal and state gift, estate, generation-skipping transfer, income and excise taxes.

Thus, we not only have extensive experience with respect to classic will and/or trust plans incorporating the combination credit shelter/marital deduction provisions, but we also utilize some of the important current planning tools like residential trusts, perpetual generation-skipping trusts, family partnerships or limited liability companies and split dollar insurance trusts. (See the discussion of this topic under “Business Transition Planning.”)

For clients who are not citizens or residents of the United States, but who have investments in the country, we can assist in the creation of off-shore trusts and/or personal holding companies to minimize tax exposure within the United States. Moreover, we routinely draft qualified domestic trusts to benefit spouses who are not citizens of the United States.

Now more than ever, the person possessing sufficient assets to have estate tax concerns (and remember New York still adheres to a $1,000,000.00 starting point for the imposition of state estate taxes), must be mindful of the need for thorough planning. The year of 2010 was supposed to be the year of no taxes, at least no federal estate taxes. The federal estate, gift, and generation-skipping transfer taxes were reinstated retroactively as of the beginning of 2010. Both the federal estate and gift tax are based on a flat rate of 35%. For 2010 only, the generation-skipping transfer tax rate was zero.

For 2011 and 2012, the federal estate, gift and GST taxes remain at 35%, with an exemption of $5,000,000.00. For married couples, the unused exemption in the first spouse's estate may be used in the survivor's estate (a concept known as “portability”). The increase in gift tax exemption to $5,000,000.00 ($10,000,000.00 for a married couple) provides an excellent chance to pass wealth and future appreciation to later generations, either by outright gifting or through leveraging strategies such as sales to intentionally defective trusts and grantor retained annuity trusts (“GRATs”), not to mention the utility of incorporating planned giving techniques in your testamentary plan. (See section on “The Role of Charity in Your Estate Plan”).

It is important to recognize that there are important aspects of estate planning which don’t turn on tax planning. It is necessary to decide whether your intended beneficiaries are able to manage assets responsibly or whether they should be protected by trusts. If you have a strong desire to disinherit someone who would inherit from you if you died without a will, knowledgeable advice will help prevent that person from making a great deal of trouble when you pass away. Another important facet of your plan is selecting the appropriate executor or trustee, a person who has the necessary abilities to exercise this responsibility and make the sort of decisions you would approve. Cullen and Dykman has the experience and sophistication to assist you in making these kinds of decisions and minimizing litigation over your choices.

Questions you should be asking:

• Who will get my property if I die without a will?
• What is a trust and what are its benefits?
• What is an in terrorem clause and how does it prevent costly probate litigation?
• Do I want to “avoid probate” and how do I do that?
• Is there a difference between the probate estate and the taxable estate?
• What is a charitable remainder trust and should I consider one?
• If I have a living trust, do I still need a will?
• How can I avoid my children fighting over my will?
• How do I decide on the choice of an executor? A trustee?
• How do I disinherit someone without causing expense and litigation to my loved ones?
• How is a living trust different from a will?
• Where should I keep my will?
• May a person dispose of property in any way he or she wishes?
• What happens to a joint bank account when one of the owner’s dies?

A case in point

Elizabeth, a widow, owned a small business which was operated by her daughter and son-in-law on a valuable piece of real property in Brooklyn Heights, which she owned. The value of these assets was approximately $6,000,000 and the value of Elizabeth’s liquid assets (cash and securities) was approximately $200,000. Elizabeth wanted her daughter and son-in-law to inherit her assets, including the business they had participated in their entire adult lives. Busy managing her business, Elizabeth never took the time to prepare a comprehensive estate plan.

Elizabeth died in 2011. With a taxable estate of approximately $6,200,000, Elizabeth's estate faced a $420,000 federal estate tax bill, with less than $200,000.00 in cash to pay the bill. Consequently,  Elizabeth's daughter and son-in-law were forced to sell a significant portion of the business to pay the tax.

Another case in point

Michael was a widower who had two children, David and Elaine. Michael had estate planning arrangements which incorporated the use of a revocable trust for the equal benefit of his children, but he maintained a couple of substantial cash accounts (approximately $175,000) outside of the trust in his own name. In order to make sure that his cash could be managed in the event of his incapacity, Michael wanted to add one of his children as a co-owner on the accounts. Because David lived nearby and Elaine lived in Oregon, Michael added David to the accounts, making them joint accounts. Michael contributed all the money to the joint accounts.

After Michael's death, the joint accounts passed by right of survivorship to David and did not pass equally to David and Elaine like all of the trust assets. With the usual stress of coping with their father's death and disagreements that arose during the administration process, the joint accounts acted as a significant wedge between David and Elaine and their relationship never recovered. Even if David and Elaine remained close, David could not immediately transfer one-half of the cash accounts to Elaine without incurring gift tax consequences. What could have been done to prevent this unfortunate outcome?

Another case in point

It was the second marriage for both Lisa and William. Lisa was a widow with two adult children from her first marriage, while William was a widower with three adult children from his first marriage. They signed new wills leaving their nearly equivalent estates to each other and providing that upon the death of the surviving spouse, the estate was to be divided equally among the five children. Lisa died and left her estate to William. Several years later, William executed a new will leaving everything to his three children. When William died, Lisa's children received nothing. Litigation ensued on William's contractual obligations, if any. What could have been done to prevent this unfortunate outcome?

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