Estate Planning is an often overlooked, but important consideration for every client. Coordinated planning with a client's attorney, financial advisors, accounting firms and other professionals is imperative for the creation of an appropriately tailored and effective estate plan. Considerations will include estate and gift tax savings, probate avoidance, business ownership and succession, retirement benefits, Medicaid concerns and planning for young and/or disabled individuals.
Estate & Gift Taxes
New York currently exempts the first $4,187,500.00 for estate tax purposes ('applicable exclusion amount'). The federal applicable exclusion amount (for both estate and gift tax purposes) is $545 million for 2016 and is now indexed for inflation.
Effective planning allows an individual to make full use of both the estate and gift tax applicable exclusion amounts. While there are a myriad of possibilities and methods, the right plan can only be formulated after a thorough discussion with both clients and their advisors concerning the client's objectives and ultimate goals.
Will v. Revocable Living Trust
The revocable living trust (RLT), while by no means new, is an ever more popular estate and financial planning tool for the control and disposition of a client's property. In utilizing the RLT, a client transfers all or substantially all of his/her assets to the trust of which he or she is the trustee. Reasons for the RLT include: 1) avoidance of probate which is public and can be very time consuming; 2) asset management in the event of incapacity (trust document provides a successor trustee in the event of client incapacity); 3) where the possibility of a contested Will exists and/or where distributees (those who would inherit if there were no Will) will be difficult to determine and/or find; 4) desire for immediate asset distribution.
However, the RLT is not for everybody. Its characteristics and requirements must be presented to each client. Often times, its use will turn on the client's level of comfort with retitling assets now as opposed to after he or she has passed. It should be noted that even where the RLT is utilized, a 'pour-over' Will is still appropriate as a catch-all for miscellaneous property not held by the RLT.
In any event, whether a client chooses a Will or RLT or both, experienced and qualified counsel is an absolute necessity.
An important consideration for some individuals is the continuity of a family owned business. When a business is family-owned, there are certain planning opportunities that should be addressed and used for tax savings and efficient distribution. Minority interest ownership, lack of marketability and restricted interests are varied but not mutually exclusive discounting methods that allow an individual effective use of his/her applicable exclusion amount and can facilitate transfers to children intent on remaining in the business. Seamless continuity can be accomplished through shareholder/operating agreements.
Also a significant consideration is the proper valuation and sale/transfer of shares/membership interests. Tax savings and efficiency can be accomplished through the use of various buy-sell arrangements.
Planning for retirement benefits has become increasingly important due to the composition of the average individual's estate. Next to the residence, retirement accounts are often the largest part of an estate. Appropriate beneficiary designations can save significant income and estate taxes. In that regard, the Pension Protection Act of 2006 allows for non-spousal rollovers to inherited IRAs beginning in 2007.
In the case of younger children and minors, naming a trust as beneficiary can prevent them from withdrawing most or all of a retirement plan account balance, in effect squandering any income tax deferral benefits. However, naming a trust is a complex issue as the trust must be a 'see through' trust to be a designated beneficiary under the Internal Revenue Code and corresponding regulations. If this is done incorrectly, distributions from a plan will be accelerated and the income tax consequences are severe.
Trust planning may also be appropriate where the retirement plan is needed for an individual to make full use of the applicable exclusion amount (discussed above).
IRA and Retirement Benefits Planning is a developing area of law. Accepted planning strategies are often the result of IRS Revenue and Private Letter Rulings.
Medicaid Planning: Elderly & Disabled
The Deficit Reduction Act of 2005 brought sweeping (and for the most part unfriendly) changes to Medicaid and its qualification guidelines. In the event an individual needs long-term care, including nursing home (not including certain types of homecare), effective planning is extremely important. The monthly regional rate for nursing home care in the Central New York area in 2016 is $9,252.00/month (private pay is significantly more expensive). What does this mean to someone needing care? An individual or married couple could spend several hundred thousand dollars - likely most or all of their assets on nursing home care without proper planning (as Medicaid would deem the individual ineligible-resource limits for eligibility are discussed below).
Medicaid is a joint federal, state and city program; it is need-based meaning it is available to those individuals with low incomes and limited assets. There is absolutely no age restriction for qualification. In order to qualify, you must submit a detailed application and provide detailed financial records for the previous 60 months - this is known as the "look-back period".
Where an individual is single and in need of nursing home or other qualifying long-term care, that individual is allotted certain resource and income maximums-amounts above those limits would create Medicaid ineligibility (requiring that person to 'spend down') an otherwise eligible applicant/recipient ("A/R"). For 2016, the limits are as follows: a) resources of the A/R: $14,850.00; b) monthly income of the A/R: $50.00. If you are married, the community spouse ("CS") is allotted the following amounts: a) resources of the CS together with the A/R: $74,820.00 (*the CS is permitted to retain resources in an amount equal to the greater of the following: $74,820 or the amount of the spousal share up to $115,920.00. This share is the amount equal to one-half of the total value of the resources of the couple as of the beginning of the most recent continuous period of institutionalization of the A/R); b) monthly income of the CS: $2,898.00 (see NYS DOH - Medicaid Publications).
The above resource and income amounts are applicable to any resources not considered exempt such as the homestead and certain IRAs in regular payout status. The homestead is the primary residence occupied by an A/R and/or family members (spouse, minor children, certified blind or certified disabled children, and other dependent relatives). The exemption is limited to $750,000 of equity. It should be noted that there is no cap while a spouse, child under 21 or disabled child of the A/R is resides in the home.
The above is a brief overview of some of the rules of Medicaid and the impact of DRA 2005. Too often productive people who have worked their entire lives as responsible members of the community are forced to spend a lifetime of savings in order to obtain proper care. We welcome the opportunity to help you preserve your assets and estate for the benefit of those you intend.
Minors: Children & Grandchildren
Planning can be complicated when young children or grandchildren are involved. Parents or grandparents does not want to and should not leave property outright to minors, either during life or under the terms of a Will or trust. Proper trust drafting can effectively help protect a minor's assets from creditors and more importantly, from the minor. Moreover, even though gifting to a trust would typically require the donor to file a gift tax return, an exception has been created for specific trusts for minors (IRC § 2503). Without this statutory trust, a state's Uniform Trust/Gifts to Minor's Act (UTMA/UGMA) will govern and the child/grandchild would receive the property outright at either 18 or 21, much too young in most cases.
Estate Planning Areas include:
Revocable and Irrevocable Living Trusts (including Medicaid Trusts)
Insurance Trusts (including Irrevocable Life Insurance Trusts)
IRA/Retirement Benefits Planning (including IRS compliant “See Through Trusts”)
Powers of Attorney (both Durable and Non-Durable)
Health Care Proxies and Living Wills
Supplemental/Special Needs Trusts (Self-Settled and Third Party)
Estate, Gift and Income Tax Planning