Estate Planning

SPLIT ANNUITY FOR ESTATE PLANNING

Published on: April 21, 2016 | by Ettinger Law Firm

HYBRID PLANNING TOOL – COMPOUND INTEREST AND IMMEDIATE PAYOUT

There are some retirement strategies that people engage in that have many benefits one the one hand with a similar amount of disadvantages on the other. Life is like that, it involves trade offs and often you get what you pay for. There are exceptions, however, especially in financial planning products. The only limits are the laws and the creativity of investment managers. With respect to the laws, the main concern that investors should consider is the tax liability, which can vary depending on what form of investment is generating income with the invested money.

Annuities are investment products that generally either guarantee a specific rate of return and start to pay immediately for a specified period of time, or, the funds are placed in an account where they accumulate tax deferred as an investment and then converted into an annuity and withdrawn in accordance with the annuity plan. The former type of annuity is called an immediate annuity, while the later is called the deferred annuity. An immediate annuity is generally taxed up prior to deposit of the funds, while the payout of the annuity is not considered a taxable event. With respect to the deferred annuity, the payout, minus the principal, is a taxable event. If the money is withdrawn from the annuity prior to the age 59 1/2, the amount is generally subject to a 10% tax penalty. A split annuity, however, is a financial product that couples these two types of annuities together.

JOINT SPOUSAL TRUST

Published on: April 15, 2016 | by Ettinger Law Firm

NOT AS USEFUL BUT STILL GOOD TO HAVE

This blog has explored the issues revolving around an ABC trust in the past and how its previously primary reason for existence is now no longer a consideration for many people. The primary reason for their existence was to ultimately lowering the overall tax liability of the parties by sheltering one spouse’s assets and estate tax liability from the others. With the higher estate tax exemption and exemption portability allowed between spouses, its utility is diminished. For those in New York, however, there is some need to maintain it for New York estate tax purposes. There are other benefits to having such a trust. ABC trusts are known by many names, including a credit shelter trust or a joint spousal trust.

There is little if any difference between the names. Another benefit to such trusts is the step up basis that is accomplished upon the passing of the owner. Whenever title to that asset eventually does pass, the new owner will have a higher basis, so that when they in turn pass title, they will have a lower capital gains tax bill. Indeed under federal estate tax law, the stepped up basis will likely be not be an issue for estate tax liability, given the large federal estate tax exemption and availability of the portable exemption between spouses. New York’s estate tax, however, makes it more likely that a joint spousal trust should be employed, so that the deceased spouse’s original basis can be noted and the surviving spouse can account for any increase in basis for their estate when they pass away, since the surviving spouse gets full stepped up basis of the asset. This can help to possibly reduce the overall tax bill.

ESTATE PLANNING FOR NEW YORK’S ESTATE TAX

Published on: April 13, 2016 | by Ettinger Law Firm

GOOD NEWS AND BAD NEWS

Most people are aware that April 15 is tax day. That simply means that you have to have your taxes filed and paid by that date and that the year that those taxes are due for are from January 1st to December 31st of the previous year. New York, however, takes a slightly different approach to estate tax liability. Estate tax liability rates are set from April 1st to March 31st. So, if you are administering an estate, wherein the deceased passed away on March 30, the estate tax liability will be different and lower than if they passed away on April 2 of the same year. As this blog discussed in the past, New York state amended its estate tax in 2014 so that it will be on par with the federal estate tax rate in 2019. Prior to 2014, New York had an estate tax exclusion of one million dollars. As of April 1, 2016 the estate tax exclusion is $4,187,500. As such the good news is that with the passage of the changes to the estate tax laws, more estates will not have to pay any estate tax at all. The bad news is that the majority of the estates that exceed that value will likely have to pay a higher tax rate than before and maybe even more than the federal tax rate.

Starting in 2019, New York’s estate tax rate exclusion will mirror the federal amounts. Since both are pegged to inflation, they will grow year to year. That is where the differences will end. Under the federal estate tax, only the amount above the federal tax exclusion is taxed. So, just to make the example easy, if the federal tax exclusion is $5,000,000 (it is not), an estate worth $6,000,000 would only be taxed by the federal government on $1,000,000. New York’s estate tax requires that if the estate is greater than 105% of the exclusion, the entire estate is taxed. So, with the same example immediately above, the entire estate (6,000,000) would be taxed. If the estate was say $5,249,999 (one dollar less than 105%) instead of 6,000,000, the entire amount would not be taxed, since the estate has to exceed 105%. If the estate was $5,250,001 (one dollar more than 105%), the entire estate would be taxed.

HOW TO ASSURE AN ESTATE BATTLE

Published on: April 11, 2016 | by Ettinger Law Firm

HUGUETTE CLARK AS EXEMPLAR

The last member of the gilded age passed away just a few years ago. Huguette Clark’s life, in some ways, seems to mirror the classic Orson Welles classic

One of the first things that she did to insure an estate battle was to pass the entirety of her estate via a will. While the larger family itself may have created various trusts for family members to pass on the overwhelming wealth, Ms. Clark herself chose to pass her wealth via a will. While it is alleged that Ms. Clark’s attorney and accountant had something to do with these limited and financially irresponsible decisions, Ms. Clark did not create a trust to ensure the passage of her large and very valuable art collection to charity, which included a painting by Monet, valued at at least $25 million as well as a Picasso worth over $31 million.

UNDUE INFLUENCE IN PROBATE

Published on: April 9, 2016 | by Ettinger Law Firm

KNOW IT WHEN YOU SEE IT

Supreme Court Justice Potter Stewart wrote in an opinion on a first amendment, free speech issue that became famous, but is so commonplace and true about life. Specifically he said that some things are hard to define, but he would know he if he saw it. That same sentiment holds true for so many things in life and the law. Many times certain phrases, concepts or principles can be reduced to a canned or trite definition but still better expressed as the kind of thing that you know it when you see it. The principle of undue influence of a testator creating or amending a will is the type thing that could best be defined as such. For certain courts and legislatures created any number of definitions, but life has a way of finding another set of circumstances that do not fit any such definition but is undue influence just the same. Indeed New York state’s standard jury instructions on the issue of undue influence and duress comes from a case that specifically states that undue influence is difficult to define. Despite the limitations, a good working definition is when the testator was unable to exercise independent action and the person exercising the influence made the person do something against their free will and desire. Charm, ties of affection and past kind acts are not enough. Instead the actor must engage in an act of coercion to make the actor do what they would not otherwise do. Some Courts even broke the definition of undue influence down even further, by stating that it can even be found when a testator believes what the influencer wants them to believe, without even knowing that the influencer asserted their will over them.

There are certain hallmarks that are common with issues of undue influence.

WHAT IS A CRUMMEY TRUST

Published on: April 7, 2016 | by Ettinger Law Firm

STRANGE NAME, GREAT CONCEPT

A person is entitled to gift up to $14,000 per year without incurring any gift tax liability. There are some limitations to those gifts, however. The gift must be for the unlimited, present usage of the interest that is being conveyed. That creates problems for when someone wants to convey up to $14,000 per year to a minor but not have the same money handed over to the minor in its entirety when the minor reaches the age of 21. Gift tax liability is controlled by 26 U.S.C. § 2503. 2503(b) states that in order to qualify for the gift tax exclusion the giftor (person giving the gift) must convey a present interest. Subsection (c) states that if the recipient is a minor, the giftor can put the money into a trust that will convey the money to the minor when they are 21 years old and it will still be considered a present interest for purposes of gift tax liability. So, if you want to give $14,000 to a trust for a minor, with the intention that the minor not withdrawal all of the monies accumulated when they reach 21, so that they may obtain the benefit of compound interest and allow the $14,000 to grow even more, the Crummey trust is the right tool.

While the Crummey trust may have a strange sounding name, it comes from the name of the person who first created such trust, D. Clifford Crummey, and the resulting Tax Court opinion of 1966. It works by gifting a certain sum of money to a trust as a gift, with the right of immediate withdrawal from the trust by the recipient, with the expectation that the recipient will not withdrawal the money or liquidate the asset from the trust. The law recognizes the right to immediate withdrawal, not actual realization of the present interest as satisfying the present interest requirement under 2503. This right of withdrawal for a limited period of time is called the Crummey power. In 1999, the IRS issued a letter ruling on the Crummey trust and outlined the four criteria to qualify as a Crummey trust.

GENERATION SKIPPING TRANSFER TAX

Published on: April 5, 2016 | by Ettinger Law Firm

SEEMINGLY COMPLICATED

The Generation skipping transfer tax seems complicated to understand and it absolutely should only be dealt with by a seasoned professional, but there are some hallmarks that are present in each such transaction so that individual taxpayers know when the tax will apply and can follow a general conversation about the topic. To begin with, the name may seem a bit confusing at first. The skipping that the name refers to is the tax that would (should according to some lawmakers and IRS officials no doubt) be incurred when a second generation passes on the inherited asset.

The generation skipping transfer tax was first introduced in 1976 to avoid what Congress saw as an avoidance of the estate tax by wealthy families that could afford to hire attorneys to create complicated, long term trusts that avoided the estate tax. The net result was that less wealthy, middle class families were paying a disproportionate share of the estate taxes; in other words, those who could least afford it were paying more of the tax. The generation skipping transfer tax in its current incarnation creates tax liability anytime a transfer of an asset or money is transferred more than one generation from the grantor or to someone who is at least 37.5 years younger.

TAXATION OF TRUSTS

Published on: March 31, 2016 | by Ettinger Law Firm

SOMETIMES MAY BE BETTER TO DISTRIBUTE THAN HOLD ON

Most trustees know that they have to make an accounting and pay taxes on at least a quarterly basis. While accounting itself may seem like a relatively simple theoretical proposition, the truth is much different. The devil is in the details. Allocation of each line of income to specific taxes, each with its own tax forms, requires that the trustee account for every penny that comes in, how it is earned, how it is treated under both federal and state tax laws and how it is distributed is a full time job to say the least. Once a trust is funded, it generally does not act simply as a bank account simply holding the money for later distribution.

Often the money is invested in a diverse portfolio of stocks, bonds and other financial instruments. It is not uncommon for a trust to include ownership of real estate assets that produce income in the form of rent or mineral royalties or perhaps even intellectual property which can produce a different source of income. Whatever the source, most trusts are now subject to a 3.8% net investment income tax on any undistributed income that is not distributed to beneficiaries or given to charities. While this figure may be low it is a consideration that needs to be taken into account when determining whether to pay out certain monies to beneficiaries, from what source that money comes from, whether it is from principal, capital gains or dividends.

THE CLAT – STRANGE NAME, GREAT PLAN

Published on: March 28, 2016 | by Ettinger Law Firm

CHARITABLE LEAD ANNUITY TRUST

There are many great estate planning strategies that allow a person to avoid or lower estate tax liability and give money to charity at the same time. With the large estate tax exemption and portability of estate tax exemptions only a small number of Americans will face the possibility of paying the federal estate tax. For many New Yorkers, however, the federal estate tax is a secondary consideration in light of the lack of right to transfer any unused estate tax exemption from for the first deceased spouse to the next. Instead of a double benefit, New Yorkers face a potential double hit of not only having a lower estate tax threshold, but being taxed on the entire estate amount, sans estate tax exemption. For couples that face this possibility and for those with larger estates, few match the simplicity of the charitable lead annuity trust, often abbreviated as a CLAT. It is also a good fit for those who seek to defer the payout of their trust payments to relatives quite some distance in the future.

The CLAT works quite simply by funding the trust with a certain amount, usually a large amount (since it is generally used by families or grantors looking to reduce their estate tax liability) that is scheduled to be paid out to a charity over of a certain length of time. Once the payout period for the charity is over, a certain sum, plus any additional monies earned (minus taxes and expenses of course) is paid to the remainderman beneficiary of the trust.

UNDERSTANDING THE SUPERFUND A 529 ACCOUNT

Published on: March 24, 2016 | by Ettinger Law Firm

529 ACCOUNTS

Estate planning is the legal strategy by which one generation transfers wealth to the next, which involves an the use of various trusts and/or a will or even transferring money or items to corporations in an effort to legally and ethically reduce tax liability. One of the easiest ways to insure that your children, grandchildren or loved ones who have not yet graduated from high school have a much easier ride in life is to have them graduate from college.

College graduates almost uniformly enjoy a longer life, better health, live in safer neighborhoods and make more money than those who did not graduate from college. There is a hitch, however, in that college is an extremely expensive undertaking. College graduates can be saddled with debt that can follow them for decades. As such, if you can find a way for them to go to college and graduate with no debt or at least minimal debt, you will ensure that you transferred more wealth to them than even the average wealthy parent can leave via traditional estate planning. Many people are aware of 529 plans, which allows for deposits into an account, wherein the money grows tax free and is non-taxable when withdrawn if used for educational costs.