Estate and Elder Law Planning

Estate and Elder Law Planning

By Deborah J. Weber, Esq.

Estate Planning and Elder Law Planning… What You Need to Know

Estate and Gift Tax Planning

Estate and Gift Tax

  1. Estates and gifts are taxed using a unified rate schedule.
  2. Each person has a credit, known as the applicable credit amount that is currently the equivalent of $3,500,000. Under current law, the estate tax is repealed for the year 2010. In the year 2011 and thereafter, unless additional legislation is passed, the applicable credit amount is $1,000,000.
  3. Annual Exclusion
    1. An individual can make annual gifts to any number of persons without incurring gift tax. The amount of the annual exclusion is currently $12,000 per donor to an individual donee.
    2. Married persons can combine their annual exclusions to give away a maximum of $24,000 to each donee, regardless of whether the assets being given are in the name of the husband, wife or both. However, when a gift is made from one party but “split” with another, a gift tax return must be filed to elect the split gift treatment.
    3. These annual exclusion gifts are not counted against the $2,000,000 the applicable credit amount detailed above.
  4. Gifts must be a present — not future interest.
  5. New York State Estate Tax
    1. On February 1, 2000, the NY estate tax became a “sop” or “pick-up” tax. This meant that the NY estate tax was equal to the amount of the allowable federal credit for state death taxes pursuant to the Federal estate tax return. This was true until 2004.
    2. In 2004, when the Federal applicable credit amount increased to $1,500,000, New York estate tax again became an issue since the NY legislation was drafted for increases with the applicable credit amount only up to the $1,000,000 exemption amount. As such, in New York, estates in excess of $1,000,000 pay estate tax to New York State. This means that an estate may have no federal estate tax due if under the $3,500,000 but will have New York estate tax due if $1,000,000 or over.

A Few Basic Rules of Estate Planning

  1. Unlimited Marital Deduction
    1. An individual can leave any amount to his or her spouse and there will be no federal estate tax when the first spouse dies. However, this does not necessarily mean that spouses should leave everything to each other where there could be a taxable estate at the death of the surviving spouse.
  2. The Credit Shelter
    1. As a result of the applicable exclusion amount, in 2006 an individual can leave $2,000,000 to a non-spouse and there is no tax (this is often referred to as the “credit shelter amount”).
  3. The Credit Shelter Trust
    1. Basic estate tax planning can exempt $4,000,000 (in 2006) from federal estate tax. This is accomplished by leaving $2,000,000 in a “credit shelter trust” (also known as a “by-pass trust”) for the benefit of the surviving spouse.
    2. The surviving spouse receives income, and principal invasions if necessary for support, education, welfare and maintenance (Additionally, if provided for in the trust document, invasions are allowed to the extent of the greater of $5,000 or 5% of the principal per year) from the trust. At the death of the surviving spouse, the trust principal is distributed to the children (or any other designated beneficiaries). At the death of the surviving spouse, the trust amounts from the first estate are not considered owned by the now deceased surviving spouse. Thus, the trust principal is not included in the surviving spouse’s gross estate.
    3. To achieve this maximum exemption from our tax, splitting assets between husband and wife makes sense. Spouses should each have at least $2,000,000 in their individual names so each fully utilizes the applicable exclusion amount.
  4. Irrevocable Life Insurance Trust (ILIT)
    1. Life insurance proceeds (the death benefits) are taxable in an insured’s estate.
    2. To avoid inclusion, planners often recommend the creation of an ILIT and have the trustees of the ILIT own the life insurance on the life of the insured.
    3. The insured makes a gift to the trustees each year in an amount at least sufficient to pay the premium.
    4. The ILIT would provide income, and principal invasions when necessary, for the benefit of the spouse (same basic strategy as in a credit shelter trust). At the death of the spouse, the children receive the assets of the ILIT.
    5. Thus, on the insured’s death, there is no tax because the insured did not own the life insurance asset, and the same is true at the death of the spouse.
    6. The life insurance trust is designed to accept life insurance death benefit proceeds on the death of the insured.
    7. The trustee of such a trust, usually named as beneficiary on the life insurance policy, uses the proceeds for the specific purposes and objectives of the insured, which is very often to provide liquidity, pay administrative expenses and estate taxes upon death of the insured.
      1. This can be accomplished in many ways. Very often, the Trust will purchase assets from or loan money to the estate of the insured.
    8. The Internal Revenue Code provides that proceeds from a life insurance policy moved to a trust (or otherwise transferred) within 3 years of the date of death will be brought back into the estate. Therefore, any new policies purchased after the creation of the irrevocable life insurance trust should be purchased by the trustee of the trust rather than the insured to avoid possible inclusion in the insured’s estate. (When an insured transfers an existing policy, the grantor must outlive the transfer by 3 years in order for the proceeds to escape estate taxation.)
    9. The irrevocable transfer of an insurance policy constitutes a gift. Generally, the gift is measured by the replacement cost of the policy. The $12,000 annual gift tax exclusion is available, provided the Crummey withdrawal provisions are included in the Trust and followed.

Crummey withdrawal provisions are beyond the scope of this lecture. But generally provide to make a gift of an otherwise future interest into a gift of a present interest which then qualifies for the $12,000 annual exclusion.

Update on the Estate Tax Issues

The Senate is considering options to reduce or eliminate the estate tax. The estate tax, which currently taxes fortunes over $2,000,000 at 46% is estimated to affect the estates of approximately 12,600 taxpayers this year. There are currently discussions on whether the repeal of the estate tax should be made permanent or altered to apply to fewer estates. This is no small issue since it is estimated that in 2007 estate taxes will generate approximately $20 billion for the United States Government. Additional estimates indicate that the Estate and Gift Tax laws encourage charitable giving of approximately $10 billion annually.

One such proposal was introduced by House Ways and Means Chair William Thomas in June of 2006. His proposal is called the Permanent Estate Tax Relief Act of 2006 and would provide for the following:

Permanently raise the estate tax exemption level to $5 million and tie the estate tax rate to the capital gains rate (the current 15% capital gains rate is scheduled to increase to 20% in 2011 unless the lower rate is extended by Congress.

Estates of $25 million or more would be taxed at twice the capital gains rate.

The gift tax applicable exclusion amount would be increased from the current $1 million to the proposed $5 million for estate and generation skipping taxes.

Allow for married couples to take full advantage of the $5 million exemption by carrying over any unused exemption of the first dying spouse to the surviving spouse. This would significantly simplify estate planning and do away with the need to equalize estates prior to death. Keep in mind that this is just a proposal and there are other proposals that are being reviewed by Congress at this time. Until legislation is actually passed, the only planning that can occur must be based on current law.


Medicaid is a means tested federal and state program which will pay for custodial care at home or in a nursing home. A recipient of Medicaid can only maintain minimal assets and income.

Allowable Resources and Income

For traditional, non-long term Medicaid situations (homecare), an applicant must satisfy both an income and resource standard to be eligible for benefits. For an individual, the 2006 allowable monthly income is $692 a month and the resource limit is $4,150. For a couple in which one or both are over age 65, the 2006 figure for allowable monthly income is $900. For a couple of any age, they must not have resources in excess of $5,400. As part of the calculation, there are some exempt resources detailed below.

  1. Eligibility for long term care coverage (i.e., nursing home care), is also based on income and resource limits. However, the Medicaid recipient (Institutionalized Spouse) has different limits than the non-Medicaid recipient (Community Spouse).
    1. The Community Spouse is entitled to the benefit of “spousal impoverishment budgeting”. Spousal impoverishment budgeting protects the financial security of the community spouse after an ill spouse is admitted into a nursing home. For 2006, the community spouse may retain $2,489 from the couple’s combined monthly income. The community spouse is also entitled to possess the Community Spouse Resource Allowance (CSRA), currently $74,820 or the amount of the Spousal Share up to $99,540. The Spousal Share is the amount equal to one-half of the total value of countable resources of the couple as of the beginning of the most recent continuous period of institutionalization of the Institutionalized Spouse. So, in order for the spousal share to be more than $74,820, the total countable resources of the couple would have to be more than $149,640.
      1. Continuous period of institutionalization means at least 30 consecutive days of institutional care in a medical institution and/or nursing facility or receipt of home and community based waiver services, or, a combination of institutionalization and home and community based waiver services.
    2. The institutionalized spouse can retain $50 a month of income and can maintain $4,150 in resources. There are also some resources that are exempt during the life of the Medicaid recipient.

Exempt Resources

  1. Resources that are exempt for purposes of eligibility for Medicaid include (a) an irrevocable and prepaid burial and funeral account (dollar value unlimited), (b) a car, (c) certain personal and household items, (d) $1,500 in cash, liquid assets, or the cash surrender value of a life insurance policy which is specifically designated for burial purposes, and (e) and the personal residence (if it is the home of the Community Spouse or if the Institutionalized Spouse has an intent to return). Also, the Deficit Reduction Act of 2005 ( hereinafter the DRA) added a $500,000 cap on equity value of a home, meaning that applicants seeking to exempt their home and still be eligible for Medicaid for nursing home care must have less than $500,000 of equity in their home.
  2. Purchasing exempt resources as a method of spending down may only delay the DSS recovery of correctly paid Medicaid. The DSS may recover from the estate of a deceased recipient all of the individual’s real or personal property and other assets that pass by a valid Will or intestacy. This is to say that to the extent that exempt resources are not consumed (for example – the burial plot will be consumed but a home will not) they can be used to repay DSS to the extent that they pass by Will or Intestacy.

Applicable Medicaid “Look Back” Requirements

  1. When an application is made for institutional Medicaid benefits, the state Medicaid agency (i.e., the Department of Social Services, or simply “DSS”) examines the financial history of the applicant. This examination determines whether the applicant has made any asset transfers that may trigger a penalty period. Prior to February 8, 2006, the examination would focus on outright asset transfers within the past 36 calendar months or transfers to inter vivos trusts within the preceding 60 calendar months. However, the look back period for all transfers made on or after February 8, 2006 is increased from 36 to 60 months for individuals applying for Medicaid coverage of nursing facility services pursuant to the DRA.
  2. These periods are commonly referred to as the “look back” periods. They run from the time that a person files an application for institutional Medicaid benefits, regardless of whether the person is already in a care facility or about to enter one. An asset transfer during the “look back” period will trigger the “transfer penalty period”.
  3. The “transfer penalty period” is the period of Medicaid ineligibility that results from a penalized transfer of assets. The actual penalty period can be any length of time because it is based solely on a calculation of the value of the assets transferred and the average monthly cost of nursing home care in the county where the Medicaid application is filed. The average monthly cost of home care is referred to as the “applicable regional rate”. The APRs for the regions of New York are as follows:
    • Central $6,232
    • Long Island $9,842
    • New York City $9,132
    • Northeastern $6,872
    • Northern Metropolitan $8,724
    • Rochester $7,375
    • Western $6,540

Penalty Period of Ineligibility

In the case of a transfer of assets made on or after February 8, 2006, the begin date of the period of ineligibility is the first day of the month after which assets have been transferred for less than fair market value, or the date on which the otherwise eligible individual is receiving nursing facility services for which Medicaid coverage would be available but for the imposition of a transfer period, whichever is later, and which does not occur during the other penalty period.

Prior to the passage of the DRA, the period of ineligibility began to run on the first day of the month following the transfer. This provided for planning opportunities since the practitioner could estimate the amount of the gift and the duration of the penalty, and if the transferor kept sufficient assets to private pay during the period of ineligibility, often by the time the individual was seeking Medicaid assistance for the payment of long-term benefits, the period of ineligibility had expired. This was generally referred to as “the rule of halves”. This type of planning is no longer be useful and it is a big change from the prior practice of just waiting until after the transfer penalty has run to apply for Medicaid.

It is important to remember that both the changes in the look back period as well as the transfer penalties do not apply to individuals seeking Medicaid assistance for home care as New York has not yet exercised its option to impose a transfer penalty for community based Medicaid.

Exempt Transfers

The following transfers are exempt from the transfer penalty rules:

  • Assets that were transferred to an applicant’s spouse, or to another for sole benefit of the applicant’s spouse.
  • Assets that were transferred outright to the applicant’s child of any age who is blind or permanently disabled or to a trust established solely for the benefit of such child.
  • Assets that were transferred for fair market value or for other valuable consideration.
  • Assets that were transferred exclusively for a purpose other than to qualify for medical assistance (Medicaid).
  • Assets that were transferred for less than fair market value that were subsequently returned to the applicant or spouse.

The asset transferred was the homestead and it was transferred to:

  • The Spouse
  • Minor child under age 21 or child of any age who is certified blind or permanently disabled.
  • Brother or sister who has an equity interest in the home and who lived in the home for at least one year immediately before institutionalization.

Assets that were transferred for less than fair market value that were subsequently returned to the applicant or spouse.

Annuities & Retirement Assets

  1. Another significant change contained in the DRA relates to annuities. Annuities were becoming a common tool for Medicaid planning since the purchase of annuity, if it met certain criteria, could be used to convert a resource into an income stream which was useful in some cases.

While annuities are still allowed, for all annuities purchased on or after February 8, 2006, unless the beneficiary is the spouse or a minor or disabled child, the State must be the primary beneficiary at least for the amount of the Medicaid paid, so that any benefits Medicaid paid over the client’s life would have to be paid back to Medicaid upon the client’s death. AND, even where there is a spouse or minor or disabled child, the State must be named as the secondary beneficiary.

If a Medicaid Applicant or Spouse refuses to name the State as the primary or secondary beneficiary, the purchase will be considered a transfer of assets for less than fair market value.

Additionally, as has always been the case, for an annuity to be treated as income rather than a resource, the annuity had to be in pay-out status (such as an immediate annuity), the scheduled annuity payments cannot exceed the Medicaid applicant’s life expectancy (in other words, are actuarially “sound”) and it has to be irrevocable.

The prior rules still apply to the treatment of retirement accounts (such as IRAs, 401Ks or 403Bs). This means that as long as the applicant (or spouse) is taking the minimum required distributions after age 70 ½, the annual distribution will be treated as income (pro-rated over the 12-month calendar year) and the cash value of the retirement account will not be treated as an available resource. If the applicant or spouse is under age 70 ½ however, the entire value of the account will be applied to the Resource Allowance.

Estate Planning

“I don’t fear death, I just don’t want to be there when it happens.” – Woody Allen

What happens if a person dies without a will?

If a person dies without a Will, New York State intestacy laws dictate who receives the estate of the decedent. EPTL §4-1.1 provides that where a decedent has passed without a Will, the estate of the decedent will be distributed as follows:

If a decedent is survived by:

  • A spouse and issue, fifty thousand dollars and one-half of the residue to the spouse, and the balance thereof to the issue by representation.
  • A spouse and no issue, the whole to the spouse.
  • Issue and no spouse, the whole to the issue, by representation.
  • One or both parents, and no spouse and no issue, the whole to the surviving parent or parents.
  • Issue of parents, and no spouse, issue or parent, the whole to the issue of the parents, by representation.
  • One or more grandparents, or the issue of grandparents (as hereinafter defined), and no spouse, issue, parent or issue of parents, one-half to the surviving paternal grandparent or grandparents, or if neither of them survives the decedent, to their issue, by representation, and the other one-half to the surviving maternal grandparent or grandparents, or if neither of them survives the decedent, to their issue, by representation; provided that if the decedent was not survived by a grandparent or grandparents on one side or by the issue of such grandparents, the whole to the surviving grandparent or grandparents on the other side, or if neither of them survives the decedent, to their issue, by representation, in the same manner as the one-half. For the purposes of this subparagraph, issue of grandparents shall not include issue more remote than grandchildren of such grandparents.
  • Great-grandchildren of grandparents, and no spouse, issue, parent, issue of parents, grandparent, children of grandparents or grandchildren of grandparents, one-half to the great-grandchildren of the paternal grandparents, per capita, and the other one-half to the great-grandchildren of the maternal grandparents, per capita; provided that if the decedent was not survived by great-grandchildren of grandparents on one side, the whole to the great-grandchildren of grandparents on the other side, in the same manner as the one-half.

Why have a will?

The Last Will and Testament is a good document for the distribution of both personal and real property.

Aside from retaining the right to distribute property according to the decedent’s wishes (as opposed to New York State law), the Will provides an individual the opportunity to make additional directions in relation to an estate.

The Last Will and Testament is a good document for designating the individual or individuals responsible for carrying out the wishes of the Testator. An individual can designate an executor who is the person to administer an estate and make distributions to beneficiaries.

An individual can control the timing of an inheritance. For example, if a beneficiary is a minor, the Will can provide for various directives regarding when the minor should receive money.

The Last Will and Testament is used for the distribution of property that does not pass by any other means. This means property of the probate estate.

Money can be held until a beneficiary attains the age of 21, or longer if trust provisions are included in the Last Will and Testament. If a Testamentary Trust is included in the Last Will and Testament, the Testator can also designate the trustee to administer the Trust.

Planning Considerations with Gifting

Many considerations are relevant to the decision of whether a donor should make a gift. The considerations include tax, business, and financial or personal family factors. A variety of motives may be present. Because the considerations are subjective and difficult to evaluate, the donor and his or her advisors should take a comprehensive analysis of the pros and cons of making lifetime gifts.

Factors Encouraging Gifts

  1. Donors want to make plans for an orderly transfer of control in a family business.
  2. Providing donees with resources to use and from which to learn or simply to enjoy. Donors must consider the risk of loss of control or dependency with their children. Also, children donees may be spoiled and develop an unrealistic impression of the value of money.
  3. Make annual transfers within the annual exclusion amount. A transfer within the IRC 2503(b) exclusion is free of gift tax and estate tax.
  4. Removal of post gift appreciation and periodic income from the donor. Shifting post transfer income and appreciation may be compelling reasons for making lifetime gifts. Donors who possess property with significant growth potential can achieve substantial transfer tax savings by lifetime transfers.
  5. Achieve income tax savings. Property than generates recurrent income – dividends, rents, interest, etc. is a prime candidate to transfer to a lower-bracket donee.
  6. Minimize state death taxes. Many states impose an estate or inheritance tax but not all states, including New York, have an inter vivos gift tax.
  7. Provide for support and maintenance to minor children.

Factors Discouraging Gifts

  1. Loss of control over property. A prospective donor must be reminded of the finality of an irrevocable gift. In many intra-family gift situations, particularly involving gifts to children, the donors overlook the fact that legal ownership of the property has been transferred. If the donor is able to control the property and actually treats it as his or her own, the IRS may deem the transfer to be incomplete.
  2. Reduction in net worth and periodic income. This is closely related to the loss of control. A reduction in net worth may impair the donor’s investment opportunities and restrict the amount of available credit. If the transferred property was income producing, the transfer reduces the donor’s disposable income as well. Although, the reduction in net worth or disposable income may be acceptable to the donor, particularly if the donor is still working, the potential consequences to the surviving spouse should be considered. The death of a wage earner can leave a financial drain on the non-working surviving spouse.
  3. Loss of step up in basis. A lifetime gift provides to the donee an income tax basis equal to the donor’s basis in the property. For purposes of determining gain on the sale of gift property, the donee’s basis is the donor’s basis at the date of the gift. For purposes of determining loss, the donee’s basis is the lesser of the donor’s basis or the fair market value at the time of the transfer.
  4. Potential repeal of estate tax. No one knows for certain what will happen with the estate tax.
  5. Potential application of the “kiddie tax”. If the donee is a person less than the age of 14 years, the possible application of the “kiddie tax” must be considered. The “kiddie tax” provides that net unearned income of a child less than 14 years generally is taxed at the marginal tax rate of the parent, if greater than the child’s rate.

Other Factors to Consider

  1. Will the donor have a taxable estate?
  2. What is the age of the donor?
  3. What gifts should I give to donees? Equal or fair?
  4. Selection of assets for gifts- what are the goals of the gift?
  5. Indirect gifts.

What is the Probate Estate?

  1. The probate estate is comprised of property that does not pass to an individual by any other means. Property that normally passes outside of the probate estate is as follows:
    1. joint assets (example: joint bank account).
    2. life insurance
    3. retirement assets
    4. annuities
    5. trust assets
  2. What is the Difference Between a Probate Estate and the Gross Taxable Estate?
    1. The gross taxable estate is everything that an individual owns or has an ownership interest in at the time of death. This includes the full death benefit of life insurance, life estates in real property, certain trusts interest (for example living trusts), joint assets, retirement assets and, of course, individual assets.
    2. The probate estate consists of only those assets that do not pass by any other means. As such, while the gross taxable estate of an individual may be quite large, the probate estate could be considerably smaller.
    3. It is very important to understand the distinction between the gross taxable estate and the probate estate. It is also very important to understand what assets will pass under the Last Will and Testament and what assets will pass by other means.
    4. Many individuals (and sometimes professionals) are under the misconception that the Last Will and Testament speaks to all assets. This is not true. The Last Will and Testament only speaks to the assets contained in the probate estate.

When Should an Individual Choose a Living Trust as Opposed to a Last Will and Testament?

Many people are under the mistaken impression that a Living Trust saves estate taxes. Generally, a Living Trust is revocable. Where a Grantor retains the right to change or revoke a trust, he or she retains sufficient control over the assets contained therein, such that the assets are taxable in his or her gross taxable estate. As such, a Living Trust has no effect in terms of estate taxes.

So if a Living Trust does not save estate taxes, why would an individual set up a Living Trust?

While the Living Trust does not save estate taxes, it still has a beneficial use in some circumstances. A Living Trust might make sense in the following situations:

  1. An individual is quite elderly and there is some concern that capacity may be diminishing. In this case, the establishment of a Living Trust may make handling that individual’s affairs easier since generally the trustee’s powers will be broader than those powers provided to a Power of Attorney.
  2. If there is real concern that probate will be lengthy and costly, possible involving a Will contest. If property is properly transferred and titled to the trust, then said property will pass pursuant to the Living Trust and not the Last Will and Testament, which will be under the jurisdiction of the Surrogate Court.
  3. However, that where a Living Trust is established, a Last Will and Testament is also necessary just in case property comes into being after the establishment of the Living Trust and prior to the property being transferred into the Living Trust. For example, if the decedent dies in a car crash where there is a claim of action against the other driver, any proceeds from a lawsuit would be an asset in the decedent’s estate and, as such, a Last Will and Testament would still be necessary to transfer said proceeds. Those proceeds would not automatically pass under the terms of the Living Trust.
  4. It is also important to pay particular attention to the titling of assets once a Living Trust is established. Many individuals establish Living Trusts but never transfer assets into them. A Living Trust which does not have assets transferred to it is ineffective.
  5. The administrative hassle of transferring the assets into the Living Trust and paying attention to future titling of all assets, as well as the cost of setting up the Living Trust, must be weighed against the potential savings of future probate fees and other issues associated with probate.

What is Probate?

The word probate means “to prove”. As such, the probating of a Will means the process during which a Will is put forth and proven to the court to be the Last Will and Testament of an individual.

Generally, after an individual passes away, family members generally review important papers to locate that individual’s Last Will and Testament. Once the Last Will and Testament is located, the individual designated as executor, assuming he or she is willing to serve, will usually obtain the services of a lawyer to assist him or her in preparing a petition. In addition to the petition, the following documents are usually filed with the court:

  • Original Last Will and Testament
  • Attorney certified copy of the Last Will and Testament
  • Certified Death Certificate
  • Releases from beneficiaries (if all beneficiaries agree to the probate of said Last Will and Testament)

If all beneficiaries are not in agreement with the probate of the Last Will and Testament and/or are unwilling to sign a release to either the Will, the appointment of the proposed executor or both, then the papers can be filed with the court and the court will cite any individuals who have not already agreed to the probate. The citation will be served on the beneficiaries who have not agreed to the probate of the Last Will and Testament and said beneficiaries will be given an opportunity to be heard by the court concerning the probate of the proposed Last Will and Testament. If the individuals do not appear on the return date of the citation, either individually or by their own attorney, the court will issue “Letters Testamentary” to the individual who prepared the petition and agreed to serve as executor.

Once an individual is appointed as “Executor”, it is his or her job to “marshal the assets” of the decedent. An individual marshals the assets of the decedent by gathering the assets of the decedent under the direction and control of the executor for the estate. Once the assets are marshaled, the estate must remain open for a period of at least seven months to allow creditors to file claims. Once the seven-month period has expired and assuming all bills of the decedent have been paid (and all claims against the estate have been paid), and also assuming that all estate taxes have been filed and paid, if applicable, the executor can then distribute the assets of the estate pursuant to the directives of the Last Will and Testament.

Once the estate has been distributed and releases from all beneficiaries have been obtained, the estate can either be formally closed or informally closed. Most estates are closed informally. This means that the file in the Surrogate Court is closed, but the executor does not receive a formal discharge. Where there is no concern about creditors later coming forward and where all beneficiaries are family members in agreement with the distributions, estates are normally informally closed. However, if there is some contention among beneficiaries regarding distributions or concerns of future creditors, an executor may wish to be formally discharged.

Lastly, if the assets of an estate are insufficient to pay all claims of creditors and make distributions to beneficiaries, an executor will normally petition the court to obtain a judicial settlement of the estate. The judicial settlement can occur by mutual agreement of all parties (through settlement negotiations) or by order of the court where payments to creditors are made pursuant to their priority as directed by the New York State Estate Powers and Trust Law.

A Few Minor Points Regarding Estate Planning:

Even though a new Last Will and Testament will state that it revokes all prior Last Will and Testaments, it is still a good practice to destroy all prior Wills. Not only should copies be destroyed, but originals should be retrieved from prior attorneys and from filing in the Surrogate Court. Many individuals do not understand that failure to retrieve a prior Will from filing in the Surrogate Court will result in both Wills being put forth for probate. While ultimately the court may find a later Will to be in fact the Last Will and Testament of a Testator, that prior Will must still be dealt with and may cost additional time and attorney’s fees in citing beneficiaries listed in a prior Will and/or obtaining releases.

Choosing an Executor, Trustee, Health Care Proxy and/or Power of Attorney should not be a popularity contest. The individual or individuals chosen for each task should be based on the characteristics of the individuals chosen. Very often, parents will want to name all of their children as their Executors or Powers of Attorney. The old saying of “too many cooks in the kitchen” is often appropriate to remember in relation to estate planning.

Powers of Attorney

  1. The purpose of a power of attorney is to authorize another person to transact business in the event of incapacity.
  2. New York State law allows an individual to designate another as the principal’s attorney-in-fact and this designation will be unaffected by the principal’s subsequent incapacity if the power of attorney specifically states that the powers will continue to exist even after the principal has become disabled or incompetent.
  3. A power of attorney can be in one of two forms.
    1. A power of attorney can take effect immediately upon execution by the principal.
    2. A power of attorney can be a “springing” power of attorney which means that the power of attorney becomes effective upon the disability or incapacity of the principal.
  4. An individual can appoint more than one power of attorney. However, if the individual designates more than one power of attorney, the individual most also designate whether the named attorneys–in-fact are to act separately or together. Generally, it is recommended that an individual designate only one individual to act as attorney-in-fact.

Health Care Proxies and Living Wills

  1. A health care proxy is similar to a power of attorney except that it applies to health care decisions.
  2. In a health care proxy, a person appoints another individual to make decisions regarding medical treatment in the event the principal is unable to do so.
  3. Unlike a power of attorney, an individual can only designate one attorney-in-fact.
  4. It is recommended that the health care proxy also contain “living will” type language or that a Living Will be executed at the same time a health care proxy is executed. This language directs that extraordinary means be withheld in the event of terminal, incurable and irreversible illness. Wishes in relation to artificial nutrition and hydration must be specifically stated.

Retirement Assets and Beneficiary Designation Forms

Summary of Required Minimum Distribution Rules

  1. On January 11, 2001 the Internal Revenue Service issued Proposed Regulations making sweeping changes to the “required minimum distribution rules”. Final and Temporary Regulations clarifying the January 11, 2001 Proposed Regulations were issued April 16, 2002. The required minimum distribution rules generally require an individual to commence distribution from a retirement plan (profit sharing plan, money purchase pension plan, 401(k), deferred compensation plan, and IRA) no later than April 1st of the year following the year the individual attains age 70½ or the date the individual retires. Individuals who own more than 5% of the business sponsoring the plan must commence distributions at age 70½ even if they continue to work. Additionally, the minimum distribution rules require distributions from a traditional IRA to commence no later than April 1st of the year following the year the individual attains age 70½ even if the individual is still working.
  2. Required minimum distributions then must continue each year.
  3. ROTH IRAs are not subject to the minimum distribution rules during the IRA owner’s lifetime. However, the post-death minimum distribution rules apply to ROTH IRAs.

Prior to the Proposed and Final Regulations, determining the required minimum distributions was a very difficult task with several options and with different tax implications for the account owner’s beneficiaries after the owner’s death. Following the Final Regulations, the rules for determining required minimum distributions both before and after the participant’s death have been greatly simplified.

What has changed?

  1. Lifetime required minimum distributions will be determined under a uniform life expectancy table regardless of the named beneficiary on the account. There is no longer a need to determine the best method for calculating the minimum distribution (the old question of whether to recalculate or not to recalculate).
  2. Post-death required minimum distributions are easier to determine and are now not set in stone at age 70½. The required distributions now are based on the life expectancy of the beneficiary who actually receives the benefits.
  3. There is now more flexibility to rearrange the beneficiaries of the retirement account after the death of the account owner to obtain more ability to defer payments.
  4. The date for determining the designated beneficiary has been changed to September 30th of the calendar year following the calendar year of the participant’s death.
  5. The final regulations clarify that a designated beneficiary can disclaim benefits and so long as this occurs according to law and is done prior to September 30th of the calendar year following the calendar year for the participant’s death then that person is not taken into account for purposes of determining the distribution period for required minimum distributions after the participants death.

What has not changed?

  1. It remains just as important for individuals to designate beneficiaries to ensure the maximum income tax benefits after death.

Lifetime Minimum Distributions

  1. Lifetime required minimum distributions are determined by dividing the participant’s account balance (valued at the end of the prior year) by the applicable life expectancy factor. That factor will now be determined under the uniform table regardless of who is the designated beneficiary or whether there even is a designated beneficiary with one exception.
    1. The one exception is that if the participant’s spouse is more than 10 year younger than the participant and is the sole beneficiary of the participant’s account, the participant’s required minimum distributions can be determined based on the joint life expectancy of the participant and the spouse, if that would result in a longer distribution period than determined under the uniform table. The determination of which method to use is made on a year by year basis.
  2. A participant’s life expectancy is determined by reference to the uniform table and is recalculated each year.

Post-Death Distributions

  1. Post Death distributions are determined by the life expectancy of the designated beneficiary as of September 30th of the calendar year following the calendar year in which the participant died.
  2. Death Before Required Beginning Date.
    1. If the participant dies before age 70½ (which is the required beginning date) the post-death required distributions will be based on the life expectancies of the beneficiaries who actually inherit the benefits. The designated beneficiary is now to be determined as September 30th of calendar year following the calendar year in which the participant died. This means that a beneficiary designation can be changed even after the participant attains the age of 70½ and that the minimum distributions will be affected by that change. Previously, although a participant could change the designated beneficiary, the change could only shorten the required minimum distributions, it could never lengthen the required minimum distributions.
    2. If the beneficiary is the spouse as the sole beneficiary, the spouse has two options; first (and what is often the best choice), the spouse can roll over the deceased participant’s account to his or her own name, in which case the surviving spouse is treated as the account owner and can then wait until the surviving spouse attains the age of 70½ before taking any distributions. In the alternative, if the spouse decides to remain as beneficiary rather than account owner, distributions must commence under the five-year rule or over the spouse’s life expectancy beginning no later than December 31st of the year the deceased spouse would have reached 70½ or December 31st of the year after the year the participant died, whichever is later.
    3. Multiple Beneficiaries – The beneficiaries must take the required distributions over the life expectancy of the oldest beneficiary, unless separate accounts are established. A major change from the old rules is that separate accounts can now be established for each beneficiary after the participant’s death.
    4. No Designated Beneficiary – If any one of the designated beneficiaries is not a person (for example, the estate, a non-qualifying trust or a charity), the account must be distributed no later than December 31st of the year that contains the fifth anniversary of the date of the participant’s death.
  3. Death After Required Beginning Date
    1. Spouse as Sole Beneficiary – If the spouse is the sole beneficiary, the account can be distributed over the surviving spouse’s life expectancy, recalculated annually. Once the surviving spouse dies, the remaining account balance is paid over the life expectancy of the surviving spouse with that life expectancy computed as of the surviving spouse’s age in the year of death. Keep in mind that the spouse also has the right to roll over the account into his or her own name.
    2. Beneficiary is Not the Surviving Spouse – Distributions are taken over the beneficiary’s life expectancy.
    3. Multiple Beneficiaries – Distributions are paid over the oldest beneficiary’s life expectancy, unless separate accounts are established.
    4. No Designated Beneficiary – Again, if one of the beneficiaries is not an individual, the account must be paid over the remaining years of the participant’s life expectancy.

It is still allowable to designate a trust as a beneficiary and have the trust treated as a person for purposes of minimum distributions as long as four requirements are met. The four requirements are:

  1. The trust is irrevocable or becomes irrevocable at death of the participant (as such, a testamentary trust will suffice).
  2. The trust is valid under State law.
  3. The beneficiaries of the trust are identifiable.
  4. A copy of the trust (or trust certification) is provided to the plan administrator no later than October 31st of the year after the year of the participant’s death.

Understanding All of the Above – It is very important to coordinate the beneficiary designation forms with the Last Will and Testament, Living Trust and overall estate plan. This includes other assets such as life insurance or annuities that pass by beneficiary designation form.

Very often the majority of an individual’s estate will be comprised of assets that pass by beneficiary designation form. As such, if the Last Will and Testament includes a disclaimer provision into a credit shelter trust or disclaimer trust, the beneficiary designation forms for the retirement assets and/or life insurance and/or annuities may need to include the same provisions.

It is important to work with the various institutions who are responsible for maintaining these plans, annuities or insurances to create beneficiary designation forms that are acceptable to the companies and yet still provide for maximum estate planning and flexibility upon death.