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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 must be mindful of the need for thorough planning. The recent past has seen a revolution in the manner in which estates are taxed.

On the federal side, the year of 2010 was supposed to be the year of no taxes, at least no federal estate taxes. However, the law then in effect required 2011 estate tax exemption amounts to revert back to levels seen in 2001. Legislation was needed to correct the chaos of those years. Finally, the American Taxpayer Relief Act of 2012 was passed by the United States Congress on January 1, 2013, and was signed into law by President Obama the next day. It introduced some major changes to the law.

Both the federal estate and gift tax rates are now based on a flat rate of 40% at the highest marginal rate. However, the amount which passes free of federal estate and gift taxation was increased. For example, the amount of taxable assets subject to exemption from federal estate taxation in 2014 is $5,340,000.00 with each year following scheduled to rise by an amount  linked to the rate of inflation. Equally important, the American Taxpayer Relief Act of 2012 introduced the novel concept of “portability” into the estate planner’s tool box. Estates of decedents survived by a spouse may now  elect to pass any of the decedent’s unused exemption to the surviving spouse. Under the former law, the unused exemption in the estate of first spouse to die would have been lost without careful planning. This election by the surviving spouse  is made on a timely filed estate tax return for the decedent with a surviving spouse. This return must be filed even if there is no federal estate tax due on the estate of the first to die.  As a result, it is possible to imagine a scenario, say  in 2014, where a total of $10,680.000 may pass to the next generation upon the death of the second spouse to die. This will serve to exempt a larger number of estates from federal taxation than ever before, but that does not necessarily mean that estate planning becomes a thing of the past. Greater attention must be paid to basis planning on the income side. Likewise, the area of elder planning is very important with a wide range of choices available to minimize the ruinous cost of nursing home care and similar considerations. 

New York has also experienced its own revolution in estate and gift taxation. Until March 31, 2014, New York estate taxation began at $1,000,000.00 with a highest marginal rate of 16%. Under old New York law, any estate valued at an amount above $1,000,000.00 was subject to taxation, even if was exempt from federal taxation. Under the new law, beginning on April 1, 2014, and over the next five years, the New York estate tax exclusion amount (formerly $1,000,000.00)  is increased incrementally until the New York exclusion matches the federal estate tax exemption, as follows: 

For decedents on or after...

And before...

The exclusion amount will be...

April 1, 2014

April 1, 2015

$2,062,500

April 1, 2015

April 1, 2016

$3,125,000

April 1, 2016

April 1, 2017

$4,187,500

April 1, 2017

Jan. 1, 2019

$5,250,000

Jan. 1, 2019

equal the federal estate tax exemption

There are many issues with the new law in New York, issues that require estate planning so as to avoid certain traps built into the new law that may wipe out the increase in the exclusion amount.

The increase in gift and estate tax exemptions 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:

Cullen and Dykman can answer these questions and other estate planning questions for you.

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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