New York Estate Planning & Elder Law Blog

In the New York Surrogate’s court ruling of the Evelyn Seiden (Hogan) estate, the 2014 taxation of marital trust rule was overturned to allow for refund on $530,000 in assets, Matter of Seiden (Hogan), 2018 NY Slip Op 32541 (U),. The estate argued that federal Internal Revenue Service (“IRS”) rule IRC § 2044 was inapplicable on grounds that the order of taxation on $530,000 held in her husband’s estate at tie of death in 2010, was invalid after transfer to his spouse. Since the Surrogate’s court decision in 2014, state law has considered the issue of family heirs’ rights to tax refunds and future savings on large estates.

QTIP Trust Tax Deferral

The Seiden estate case illustrates the flexibility of “Qualified Terminable Interest Property.” trusts for remaining spouses. New York estate law allows for spouses to take advantage of marital deduction in tax reporting. Under the current tax law, spouses control the distribution of estate assets at the death of a surviving spouse until their own death or incapacity. QTIP trusts allow for tax deferral, but not tax avoidance according to IRS and state rules.

The formation of a Qualified Terminable Interest Property (“QTIP”) trust is a tax-exempt estate planning option that allows for an owner to elect distribution of estate assets to named beneficiaries, including children of a preceding marriage. In most cases, estate property assets transfer automatically to a surviving spouse under federal and New York estate law. The creator of a QTIP trust does not transfer any assets during their life. Most estate holders include a trust as part of their will, not as a separate entity. A safe estate planning option for parents interested in protecting the rights of children to their estate, the QTIP is one of the best estate planning tools for transferring property after death.

                           The Interests of Surviving Children

The circumstance of a second or third marriage as part of the consideration of an estate or trust formation is most usually relevant where there are surviving children of those unions.

QTIP Trust Planning for Same-Sex Couples

When the United States Supreme Court struck down the Defense of Marriage Act (“DOMA”) in a 2013 ruling, estate planning opportunities for same-sex couples were broadly enhanced to include tax-exempt and tax-deferred asset protections. The landmark decision overturning the DOMA redefined the entire framework of estate related provisions formally reserved for the benefit of a marital union between a man and a woman. The modification of the Act has since had important impact on the financial, retirement, and estate planning of those families as result of a universal model of marital rights.

How DOMA Reversal Changed Estate Planning

Viatical settlement has become a popular strategy for investors seeking immediate liquidity for end-of-life expenses. Distinct from other derivative products, viatical settlement also offers life insurance policy holders immediate cash for reinvestment without the extenuating contract obligations of other financial assets. Settlement transfers the title of a life insurance policy to a new buyer in exchange for a lump sum cash payment. Eligible insured can also avoid the hassle of collateral borrowing against the limit on a life insurance policy with viatical settlement, which affords an investor immediate cash in exchange for the full value of the policy.    

Eligibility Requirements for Settlement

Life insurance policy holders in New York are eligible for life settlement depending on the terms and conditions of an agreement. An eligible policy can provide an investor with additional cash to offset finance medical or other important expenses. The seller and buyer must agree to any modification of a policy’s terms and conditions, such as obligation to premium payments assumed at time of origination. The full value of a life insurance policy must be determined prior to settlement. Distribution to named beneficiaries of a policy, or other condition to the sale of the policy value should be articulated before transfer.      Unlike other key investments such as real estate, a life insurance policy settlement is a fast and efficient process for enhancing retirement liquidity.

New York insurance laws allow for insurance providers to offer insured seniors life-care policy coverage. A specialized form of insurance coverage, a life-care policy indemnifies the holder for end-of-life care and treatment as part of an extended life services agreement. Distinct from a limited life insurance agreement, life-care coverage can be purchased as a separate policy. An option for estate planning clients, life-care can be written into an agreement as part of a comprehensive insurance policy. Combining life insurance with the added health and life expense benefits that may be required by an estate holder while still alive, life-care coverage protects valuable estate and trust assets in the interim. Insurance policies offering value-added, life-care coverage agreements:

1)    Extended Life-care Policies

A comprehensive life-care policy will cover life insurance beneficiaries on death, as well as any life expenses a holder may have such as residential services, housing, treatment, and end-of-life costs. Some extended life-care policies also offer healthcare services agreements with unlimited access to medical providers at little to no difference in fee assignment. Extended life-care policies tend have a higher sign-on fees.

Estate planners working with clients who have hit the jackpot in Atlantic City or Las Vegas, or have won the lottery, can assist in the formation of an irrevocable life insurance trust (ILIT) to enhance liquidity and pay assigned federal and state estate taxes before the event of their death. The federal Internal Revenue Service (“IRS”) restricts the transfer of lottery future payments, and some state laws also prohibit assignment of cash transfers of winnings without proper estate or gift planning in place. Creation of an ILIT allows for a decedent to protect family members from unexpected gift and estate taxation of winnings, and plan for distribution of any future payment streams resulting from one of these special assets.

Tax implications of a “win”

Federal estate tax rules for gaming and lottery assets are relatively straightforward. The IRS applies a 25% tax rate to all gaming, gambling, lottery or sweepstakes winnings above $5,000. Winnings less than that amount are exempt from federal taxation. An estate that holds a lottery or other gaming win as an asset is valued on basis of fair market value, but also the winner’s original interest in the asset at time of death.

Advanced directives to end the pain of terminal illness within a “living will” became a near future possibility for terminally ill individuals at the end of May this year. Euthanasia has been offered to resident of California, Montana, Oregon, Vermont and Washington) for some time, yet physician assisted suicide continues to be an issue set aside by many state governments unwilling to take on the moral controversy of organized religious groups opposed to such legislation. Thirty-seven (37) U.S states still stand firmly against medically assisted suicide, defining euthanasia under criminal statute; or at minimum codified as an illegal, life-terminating act. At present, New York law classifies the act of intentionally causing or aiding the commission of a suicide of another person as second-degree manslaughter (N.Y. criminal statute 125.15).

A History of “Living Will”

Mid-twentieth century integration of the concept of a “Living Will” within U.S. law was originated by the public policy agenda of the Euthanasia Society of America. Intended to influence public opinion in the interest of legalizing physician-assisted suicide, the Society promoted euthanasia as a treatment solution in the event of medical impairment. Today, the term advanced directive associated with living will formation, also refers to a Durable Power of Attorney for Health Care (DPAHC). Advanced directives now provide instructions for medical treatment, including authorization of euthanasia or physician-assisted suicide in states where it is permitted.

Trustees make difficult decisions about estate or trust investments, distributions and requests for disclosure of financial information. If an estate holder’s investment portfolio is comprised of assets held by onshore and offshore institutions, trustee decisions are especially at risk of an inquiry giving rise to significant claims. Where ambiguities exist, the prudential authority of an estate or trust entity must follow the laws of all jurisdictions involved. An estate attorney can provide a trustee with legal representation in a petition for court instructions in an estate or trust litigation matter.  

Trustee Powers and Duties in U.S. Law

In the United States, the common law of estates provides trustees with prudential authority unless there Is reasonable doubt that the discretionary powers or duties are unreasonable (Restatement (Second) of Trusts § 259 (1959)). The Uniform Trust Code (UTC) allows for “judicial proceeding[s]] involving a trust may relate to any matter involving the trust’s administration, including a request for instructions[.]” (UTC § 201(c) (2010)). U.S. courts generally do not interfere prior to the exercise of a trustee’s discretionary authority, and trustees are entitled to request court instructions absent of a legal dispute.