Reiner, Reiner & Reiner,
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Estate Planning Checklist
©1997 Reiner, Reiner & Reiner, LLP All Rights Reserved
[Please note that we intend the following material only to inform you of our methods. Some of the material is not in layperson terms. We do not offer the following as legal advice. To protect your interests, you should obtain legal counsel to interpret or apply any law or legal procedure.]
File : _____
ESTATE PLANNING CHECK LIST
Engagement letter received, including explanation of possible inherent conflict of interest in counseling
members having adverse interests?
Completed Estate Planning Questionnaire received, including review copies of existing last wills, trusts, retirement plans, powers of attorney, family tree including dates of birth of all persons, etc.?
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Necessary to prevent guardian being appointed in Supreme Court to exercise right of election to have assets expended before surviving spouse qualifies for Medicaid. Matter of Mattei, Sup. Ct. Nassau, NYLJ 8/28/96, p. 26 col. 5); EPTL 5-1.1 Joint property dissolved? Non-probate assets all payable to estate? Otherwise plan may be invalidated. Requirements for spousal waivers of rights to retirement plans subject to ERISA are especially technical.
Spousal share is $ 50,000 or one third outrightof net estate including addbacks for joint property, Totten trusts, trusts where dec'd had P/A or retained income & pension plans etc.. If right of election is exercised, then spouse forfeits other bequests under last will, e.g. rights to income of trust.
[Eff. 1/1/97, it is a misdemeanor to counsel anyone to dispose of assets, in trust or otherwise, to become eligible for Medicaid if disposal results in the imposition of a period of ineligibility for such assistance.] NYLJ 3/4/97 gave excellent review to ELDER LAW AND GUARDIANSHIP IN NY by Edward Kassoff & Charles Robert. (Lawyers Coop. $180).. It has forms for irrevocable income-only trust and discussion of long term care ins. Also supplemental needs trusts to protect the asset and protect the quality of life of disabled persons. Also third party supplemental needs trusts available under State law and the under-65 self settled trusts authorized by federal law. Also hornbook on guardianships.
Problem: Loss of control vs. aiding next generation
Medicaid Qualifying Trust? Eff 1/1/97 disposal of assets to trust or otherwise in order (EPWD-NYS BA 5-90 Vol 2, P. 584, 624) (i\medicaid.tr)
See Strauss, NYLJ in our file 1404 re EPTL 7-3.1 which provides that all inter-vivos grantor trusts are "available resources," even if trustee has no power to invade, eff. with trusts executed after 4/2/92.
Meanwhile, provide expressly that EPTL 7-1.6 is not to apply to the trust.
a) Gift down to adestitution level before applying, but caveat: gifts will be added back (with exceptions. No. of months in waiting period = Value of gift /monthly cost of private care (approx $3,000/mo.). $ 108,000 gift --> 36 month (i.e. cap) waiting period. Time gift so that non-gifted funds will suffice for waiting period.
b) Transfer of homestead after paying off any mortgage and any other debt (plus costs of repair, furniture and car) to spouse, disabled minor child, sibling with equity interest residing 1 year or child who gave care 2 years is an exempt transfer and will not affect eligibility.(but will constitute intervivos taxable gift unless life estate retained -- with attendant danger that reasonable rent will be claimed by State) Dangers: Child may die, divorce, become incapacitated, lose all assets in business or accident, or may dissipate assets. Solution: transfer to cross trusts f/b/o children, with children as trustees f/b/o each other (with discretion to make distributions to parents?). Community spouse can retain $ 60,000 plus $ 18,000 p.a. income before Medicaid can claim for reimbursement. In practice, it won't do so until community spouse dies. Alternative: Private Nursing Home Insurance to cover all 4 levels of care, to expressly cover Alzheimers and other non-organic diseases, $200+/day coverage, 3 yrs. minimum (lifetime is excessive: will qualify for Medicaid), with 100 day waiting period to reduce premium, and premium waiver while disabled.
c) Get Robt. Wood Johnson type insurance to protect assets.
A present gift of the remainder interest to the next generation, with attendant gift-tax problems (especially NYS, unless the gift is made outside the State), with no annual exclusion available (because it is a present gift of a future interest), unless there is language giving each beneficiary the unrestricted right to withdraw an amount not to exceed the annual gift tax exclusion per donee ($10,000) within 15 days following each of the donor's contributions to the trust. Cristofani Estate v. Com'r (97 T.C. 5, 7/29/91). Notice of gift required to beneficiaries promptly after each gift to trust.
Intervivos Revocable Trust
Has no tax effect. Potentially saves some probate costs, but may has current administrative costs.
Annual gift tax exclusion is $ 10,000 [$ 20,000 with spousal consent] + tuition paid directly to school + medical paid directly to provider. $ 20,000 joint gift requires return but no tax. File 709 promptly to start S/L.
Transfer by donor to himself as custodian under the UTTMA does not reduce estate. [Sec. 2038. retained power to alter, amend or revoke.]
1) appreciation to D/O/D escapes estate tax.
2) G/T on gifts exceeding 600K will escape estate tax if donor survives 3 yrs.
3) G/T attributable to gain will increase donee's basis, but not above FMV.
Disadvantages:
1) no stepped-up basis upon death;
2) loss of income on G/T paid, and
3) no $ 10,000 annual exemption on gifts to trusts (future interests)..
may not work if there is no economic substance except tax savings. Where an 82 yr. old parent deeded house to only heir and received back a 5-yr. lease plus a mortgage, where required mortgage payments equaled rent under lease, where grantor/mortgagee forgave 20K of mortgage annually, where insurance was never transferred to grantee, and where executor of grantor/mortgagee included date-of-death mortgage balance but not value of residence, held that value of residence must be included in gross estate under 2033 &/or 2036. L.G. Maxwell, 98 TC 39 (1992).
is discussed in NYSBJ Sept/Oct 1996. In defining principal of bypass trust, many wills leave maximum amount that can pass free (provided use of State Tax Credit does not require an increase in the State Estate Tax.). the bracketed language reduces the amount going to the trust by $42,424, unless that amount is properly disclaimed. In defining bypass trust, make sure that it includes personal residence, to the extent it is deductible from NY estate tax. Otherwise, the residence will pass into the residuary estate, and the NY taxable estate will not be reduced by $ 250,000 from $ 600,000. This provision is moot as of year 2000 under the new New York State estate and gift tax law.
No gift when joint bank account or US bond is created (It's revocable). Gift occurs upon withdrawal by noncontributing owner. But gift of 50% occurs upon joint registration of broker's account or realty, because noncontributor can't convert to cash without accounting to creator, i.e., broker will probably require both signatures to withdraw cash.
Consider for cash-rich estates, consider . Second-generation transferee receives lump-sum in cash, in exchange for contractual obligation to pay a set sum to donor-annuitant for life. Gift tax is payable on the difference between the cash transferred and the present value of the annuity, subject to 10K or 20K annual exclusion for gifts of present interests. If the annuitant dies before receiving the said present value, then the transferee has an underwriting profit reportable on Form 1040 for the year of death and the annuitant has a corresponding deductible loss on his final return. Until then, annuitant pays income tax on the taxable portion of the annual annuity. Most beneficial to a younger annuitant, although if he outlives his life expectancy, the tax effects might be negative, unless, before he dies, he takes out another private annuity. See CPA Journal (May 1992) P. 75. Also consider GRATs & GRUTs: Term, Life, Shorter of Term or Life, increasing annuities.
Grantor (say 60 yr old) transfers residence to trust for a term of (say 15) years, reserving the use for the term and providing that if he does not survive term, property reverts to estate. If he survives, title passes to remaindermen (children). Value of gift of remainder interest is sharply discounted (75%) from FMV. Grantor is still entitled to attendant tax deductions. Danger: if Grantor does not outlive term, value stays in his estate. But nothing is lost. Any gift tax paid on the transfer is credited on Form 706 and the gift is not reportable there (only assets and prior gifts A. . . not otherwise reportable. Trust should provide that if he survives, he may stay, provided he pays appraised market rent to remaindermen. [Cf. RLM file 1878] Problem: Income tax (capital gain) implication. No stepped up basis if donor survives term. Caveat: No split gifts in year of transfer.
Also self-cancelling installment notes, charitable lead trusts, gift annuities (immed/deferred ), 1-5 life term insurance.
parents are GPs, while alive, retain control, donate assets to partnership and own 100% of LP shares at inception, then gift LP interests [valuing them using a 35% minority discount] to the next generation. Moore, CA-10, 1991, TC Memo 1991-546, CCH Tax Court Digests Para. 12,873(M). Non-tax purpose is to shield assets from creditors of parents and children. Disadvantages: no stepped-up basis upon death of parents. Gift to trust generates income taxed at trust maximum rates. Caveat: contribution of asset subject to liabilities in excess of basis will result in income recognition to transferor. See NYLJ 2/20/97 P.1 [Article is in R. Mayer File 1878]
Scenario I: Present division of assets; present testamentary plan; wife survives.
Scenario II: Present division of assets; present testamentary plan; husband survives.
Scenario III: Equalization of assets; present testamentary plan; wife survives.
Scenario IV: Equalization of assets; present testamentary plan; husband survives.
Scenario V: Equalization of assets; $ 642,424 bypass/qtip/credit-shelter/family trust, income to surviving spouse, then children, then grandchildren; $357,576 qtip for children, then grandhildren, which uses the balance of the $1mill GST exemption; bal M/D trust or O/R to spouse (EPWD Vol. 1, P.289); wife survives. Exec. elects qtip for M/D of $357,576 but reverses election for GST. Sec. 2652(a)(3). The $357,576 is therefore not taxed in H's estate but is taxed in W's estate.
Scenario VI: Equalization of assets; bypass/qtip/credit-shelter/family trust; husband survives.
Other Scenarios: assign life insurance to trust (not to children, who may die or divorce, thereby possibly allowing value to leave bloodlines): see post; change beneficiaries of non-probate assets (retirement plans, etc.) to next generation or to trust.
$642,424 = $208,497 Fedtx -$192,800 Unified Credit - $15,697STCr = $ 0 federal tax; $ 28,045 NYS tax.
IRAs and 401(k)s:
Roll 401(k)s into IRAs, if possible. The IRA rules are less restrictive.
IRAs: Concerns: Income tax, estate tax, and excise tax minimization. [Federal estate taxes paid on an IRA are deductible on income tax return of IRA beneficiary, regardless of who paid the estate tax].
(a) While creator/owner is alive [and by required distribution date (4/1 following 70 ) "RDD" ]
1) Choose beneficiaries (they can always be changed during owner's lifetime, but payout method becomes fixed on RDD ):
a) Stretchout IRAs can bypass spouse and pass to next generation, if joint beneficiary chosen before RDD. [Advantage: lower required annual payouts to owner while he's alive and payouts stretched after his death over lifetime of young beneficiary. No income tax at death of owner and income accumulates tax free until withdrawal.
b) If spouse is named beneficiary before owner's RDD, she will always have the right, after owner dies, to roll the IRA over into her own IRA, name new heirs, and impose her own distribution methods, even if they decrease the annual payouts and stretch them out by joint beneficiary choice.
c) multiple beneficiaries of a single IRA; or IRA can be split into parts and joint beneficiaries named for each part, thereby stretching payouts.
d) Contingent beneficiaries should be named, in case primary beneficiary dies. This also allows primary beneficiary to disclaim in favor of secondary beneficiary.
e) Never name "my estate" as beneficiary. IRA explodes at death and cannot be stretched. There are larger payouts during owner's life (since no co-beneficiary is named) and income tax must be paid at owner's death.
f) Inter-vivos trust Must be in existence on RDD, irrevocable on RDD, have only individuals as beneficiaries, and have a copy filed with bank/broker/adm'r. Then IRA can be bequeathed to the trust and will continue within it after owner's death. Typical plan where bulk of assets is in IRA: Split IRA into parts: a $ 600,000 part to by-pass trust beneficiary to continue the IRA, income to spouse, remainder to children; other part outright to spouse, who, upon owner's death, can roll it over and name new joint beneficiaries.
g) naming charity as beneficiary of a separate IRA will save income and estate taxes; however, the payout will be determined by the single lifespan of the owner.
2) Choose distribution options:
a) Unless beneficiary is a trust with a charitable beneficiary, always choose "joint" distribution rather than over owner's single lifespan, in order to minimize annual required distribution. If, before RDD, owner names young joint beneficiary: lower required annual payouts while owner alive and payouts stretched after his death over lifetime of young beneficiary, provided latter does not ever change registration on IRA and provided beneficiary makes first required payout by 12/31 following death of owner; otherwise, IRA will expire in 5 years.
b) Choose method of calculating payout term for owner and beneficiary: "fixed" [danger: owner or beneficiary may outlive IRA benefits] or "recalc" method [advantage: owner and beneficiary can't ever outlive benefits]. Choose fixed term for male owner and "recalc" for female beneficiary. But then if she dies first, the IRA will explode on his death.
c) If required annual distributions top $ 155K (or $ 775K lump sum) then 15% excise tax on payments applies starting in 2000. Payment upon death of first spouse allows tax free growth of remainder for spouse. Further, the 15% excise tax is deductible on Form 706.
(b) Distributions after creator/owner dies:
a) If spouse is benficiary, she has the right to roll the IRA over into her own IRA, name new heirs, and impose her own distribution methods, even if they decrease the annual payouts and stretch them out..
1) Except for death/disability of beneficiary (or for annuitization) no withdrawals before age 59 .
2) First annual withdrawal must be by 4/1 following year of 70 birthday of beneficiary.
Surviving spouse of owner of IRA may roll it over, designate a young beneficiary, and take minimum distributions based on the joint lives of herself and the young beneficiary.Consider naming spouse as beneficiary, with charitable remainder trust as contingent beneficiary (with children as income beneficiaries of CRT). This may result in lower tax than deferring tax by taking payments only over life expectancy of individual beneficiary). [Gideon Rothschold, ADL Planner, Spring, 1995]
Use unfunded irrevocable life insurance trust (EPWD-NYSBA 5-90, Vol 2, P.525) to shelter proceeds from estate tax in both estates. Assignment of insurance to next generation has same tax savings but with danger that upon death or divorce of child, control of insurance might leave bloodline. Exception: policies gifted within 3 years of death are includible. Insured should never be trustee, unless without powers as to the insurance. Give Crummey power(P.527) to beneficiary to avoid G/T problems as to gifts of premiums. Caveat: Crummey powers, if not used by beneficiary, are a non-exercise of a power of appointment, i.e., a gift back to the trust of a future interest, i.e., taxable to the extent they exceed higher of 5% or $ 5,000 of corpus. Remedy: Crummey power is the least of $ 10,000 or amount of annual gift or greater of 5 by 5. Unused Crummey powers, to the extent unexercised, should carry to next year. Trustee to have power to litigate to collect proceeds. Indemnify him for costs. Pourover from L/W or other I/V trust should be authorized. To give an opportunity for a lookback/amendment of Airrevocable life insurance trust, have the policies owned by taxpayer's profit sharing plan (thereby escaping estate tax since not owned by decedent) with beneficiary the Irrevocable Life Insurance Trust. Premiums are paid by plan with pre-tax dollars. If taxpayer wants to amend the ILIT, he simply sets up another ILIT and has the plan change the beneficiary to it. (Works especially well with survivorship life insurance).
Care is to be used in drafting language for power of appointment in any beneficiary. If power is a general power, the assets will be included in his gross estate; therefore, the power must be limited by an ascertainable standard: support in his accustomed manner of living/ education, including college and professional education/ medical, dental, hospital and nursing expenses and expenses of invalidism/ health, education and support". Usual language is "health, education, support and maintenance." Prohibited: "care/comfort/welfare/happiness." A power held jointly with the donor or a person having an adverse interest in the property is not a general power.
Invasions should first be from M/D trust, if any, to minimize survivor's estate.
Consider including in the by-pass trust a 5 x 5 power of invasion, which will not cause inclusion in beneficiary's estate.
Include direction that no compensating adjustments as between income and principal accounts shall be required or made as a result of the election by the executor to claim expenses of administration as income tax deductions rather than estate tax deductions.
Shareholder agreements (EPWD Vol 2, P. 565.)
(Vol 1, P.113). Exemptions: Annual $ 10,000 [$ 20k for married couple] + medical + tuition for direct skips to individuals + lifetime $ 1,000,000 per transferor, or $ 2,000,000 for married couple. For inter-vivos transfers to trusts for skip persons, gift tax returns must be filed to elect portion of lifetime exemption to allocate to transaction. Lifetime exemption to be elected on Form 706, Schedule R, for decedents. Applies to most gifts to grandchildren or grandnephews. See article in Estate Plan Questionnaire folder. Also as to reverse election of executors in last will.
a) Tangibles should not be part of residue. Early distribution of specifically bequeathed tangibles (including real estate) or specific pecuniary bequest carries no DNI. No executor's commission on specific bequest, unless executor has duty to divide among a class.
b) Tax apportionment? or payment out of residue as an expense?
c) Minors' clause? No bond? Successor fiduciaries? Fiduciary/draftsman disclosure? Fiduciary must be a US citizen or permanent resident of NY .[Criteria for fiduciary: skill in assembling and safeguarding property, trustworthiness, financial acumen, objectivity, knowledge of beneficiaries needs and circumstances and testator's goals, experience in business and investments; physical proximity; willingness to assume burdensome responsibility. Lack of criteria -> disqualification]
d) Rule against Perpetuity savings clause. Susman Sec. 13.05, P. 13-39.
e) Common disaster clause. Appointment of guardians for minors.
Exempt property will pass outside Last Will to spouse or minors: $ 10,000 of computers, furniture and fixtures, musical instruments; $ 1,000 of books, pictures, tapes & software; $ 15,000 animals & tractor; $ 15,000 auto; $ 15,000 cash.
Credit shelter bypass trust's size is determined by amount needed to use unified credit fully in first estate. TIP trust's size is determined by election of executor of first spouse to die, who elects to treat ordinarily non-qualifying terminable interest as an interest which does qualify for M/D in first estate. If no election, then the trust does not qualify for M/D is taxable in the first estate, but tax may be offset by unified credit.
Take capital losses against gains. They are lost on death. Do not take gains. Flower bonds? Durable general power? Living will (with health care proxy)? Pay off mortgage on personal residence. It reduces the effect of the NYS $250,000 personal residence estate tax deduction.
Sec. 303 nondividend redemption of stock takes cash out of corporation without taxes.
Sec. 6166 estate tax extension 14 yrs.
Special use valuation on up to $ 750,000 of underused business realty.
Owner of closely held corp likely to grow in value can fix estate value as of date of present recapitalization gifting common to kids with preferred recd in exch retained [after repeal of Sec. 2036(c) and replacement with 2701-2704].
Protection against creditors may be provided by transfer to family limited partnership, where creditors of grantor/general partner may reach neither partnership assets nor shares of limited partnership. Use family partnership instead of trust, to avoid high trust income tax rates?
Keogh Plans are exempt from execution by judgment creditor [CPLR 5205(c)(2)] as is residence (co-op etc.).
Does agent have power to gift? If so, he may have a general power of appointment, and principal's entire estate may be included, if agent predeceases. Therefore, limit the power to gift to gifts which do not require the filing of gift tax returns and/or limit the power to gifts only to spouse and lineal descendants.
a) On works created prior to 1978, duration is 28 years, renewable for an additional 47 years to a total of 75 years. If owner dies during first 28 years, then renewal belongs to a class made up of widow and children, regardless of any contract executed by author (conveying the copyrights to others) or his attempted testamentary disposition. )
b) During the lifetime of the author, if he conveys the copyright to another, he still retains the renewal rights, unless he expressly conveys the right to renew. If he does so and if he is alive at renewal time, then the grant is good; if he dies before the renewal date, the widow and children prevail. Consult Edward M. Cramer, Esq. NYC (NYSBA Journal, Sept 1995)
Sell residence in old state; obtain homestead exemption in new state; move tangibles; sever business relationships; move banking/brokerage relationships; rent safe deposit box; get new attorney and sign new will reciting new domicile; file affidavit of domicile with county clerk; register and vote; file tax returns as residents of new state, including intangibles tax return; re-register auto; get new driver's license; surrender old license and plates; change billing address and address of record for Soc Sec and other pensions; terminate club, library and religious affiliations and re-establish them.