Reiner, Reiner & Reiner, LLP
Attorneys at Law
19 Rector Street - Suite 1801
New York, NY 10006-2302
(212) 269-2466
(212) 269-2467 FAX

Trust and Estate Planning

[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.]

The purpose of trust and estate planning is to enable you to transfer the maximum percentage of your wealth to the beneficiaries of your choice. Under current law, spouses who are both United States citizens can leave their entire estates to each other without any estate tax liability until the death of the second spouse. However, amounts in excess of certain thresholds left to other beneficiaries are subject to Federal and State estate and gift taxes which can easily exceed 30% or more. It is thus incumbent on you to take advantage of any available planning opportunities.

Your estate is taxed on your assets (including proceeds of life insurance policies you own) except those passing to a charity or to your spouse. Many techniques advertised in the major media claim to offer "dramatically reduced estate taxes without giving up control of your assets." Unfortunately, a prudent and effective plan always involves a trading of control over, or access to, your assets in exchange for the tax savings realized in removing the assets from your estate.

Federal estate taxes are payable on estate assets in excess of $ 600,000.   However, federal estate taxes are set to decline over the next years; even better, the New York State estate tax is declining and will, essentially, result in no effective tax beginning in the year 2000.  Thus, the financial incentive which many wealthy people had, under the old law, to leave New York in order to avoid the New York estate tax, will now be able to remain here, if they choose, at no cost to their estates; New York estate taxes are payable on estate assets (except for $250,000 of the net value of the decedent's principal residence) in excess of $ 115,000. The impact of federal and New York State estate taxes can be very large, as the attached schedule of the current estate tax law shows. We are happy to report, however, that both the Federal and New York State estate and gift tax rates will decline in the near future.  In fact, as of the year 2000, the legislature has allayed the common concern of older New Yorkers that remaining a New York resident will be costly for their estate.  As of 2000, there will be no cost to remaining a New York resident, as New York state will only assess a death tax in the amount allowed as a credit on the Federal estate tax return.   Thus, under the new law, Florida and other "retirement states" offer no estate tax advantage over New York.  The attached Schedule of New Estate and Gift Tax Exclusions. If your assets, along with those of your spouse, exceed $ 600,000, you should consider establishing an estate plan to maximize the amount your beneficiaries will net after-tax. Among the steps you might take are the following:

Determine if You are Willing to Relinquish Control Over Assets In Order To Maximize Your Legacy

Preliminarily, you should determine what assets you are willing to relinquish control over in order to net your beneficiaries the largest after-tax inheritance. In essence, if you retain control over your assets you subject them to tax. In contrast, if you give them away (within legal restrictions) while you are alive or transfer them irrevocably to other entities (such as trusts), you may reduce the transfer tax imposed on those assets.

Take Advantage of the $ 10,000 Annual Gift Exclusion from Tax

In order to reduce the tax burden, we generally recommend that clients take advantage of the annual $ 10,000 gifts which each person can make each year to each recipient without any estate or gift tax consequences. The maker of the gift is called the donor; the recipient is called the donee. If married donors decide to "split" their gift to a married child and the child's wife, for example, the donors could give $ 40,000 total annually to their child and the child's spouse without incurring any estate or gift tax liability (although gift tax returns would have to be filed because of the "split" gifts.) In many cases, by this simple act, the parents would have saved perhaps           $ 10,000 or more in eventual tax. In addition to these gifts, tuition paid directly to a school and medical care costs paid directly to the provider are also free of gift tax consequences.b  We note that, beginnning in 1998, the $ 10,000 exclsusion amount will be indexed for inflation.

Consider the Status of Your Life Insurance Ownership and Beneficiary Designation

The proceeds of life insurance policies you own at the time of your death are taxed in your estate. Politics, more than logic, accounts for the special tax treatment of life insurance proceeds. In a common arrangement before tax planning considerations are taken into account, the insured names a spouse as beneficiary of life insurance proceeds. This presents no problem for the spouses because they can transfer unlimited property to each other without estate or gift tax consequences. However, they might consider the eventual tax consequence of this arrangement: if the second spouse later dies with assets over $ 600,000, then federal estate taxes will be imposed on the estate of that spouse. In order to reduce these taxes, the insured might consider establishing a Life Insurance Trust naming a trustee as owner of the policies of insurance, and the insured's surviving spouse and children (or others) as beneficiaries of the trust. In this way, the beneficiaries of the trust will receive the proceeds of the insurance free of estate tax, provided the insured survives the transfer by three years. Gift tax consequences will vary, depending upon policy values and premiums.

For Spouses: Consider Leaving Assets in Trust for Beneficiaries Other Than Your Surviving Spouse

Although many spouse's natural inclination is to leave everything to the other (initially free of estate and gift tax), this scenario is eventually very costly for the couple's heirs. If, instead, the spouse bypasses the survivor to the extent of $ 600,000 of his or her estate, leaving the survivor only the income on the $ 600,000 (in addition to other legally-restricted portions of the $ 600,000) with the remainder to the heirs upon the death of the surviving spouse then the couple's heirs may eventually net hundreds of thousands more than if the spouses had left everything to each other. This "Credit Shelter" or "Bypass" Trust is so named because it shelters assets by taking advantage of the credit which reduces to $ 0 the taxes imposed on estates up to $ 600,000.

In order to effect this type of plan, the spouses must arrange their asset ownership so that each has at least         $ 600,000 registered in his or her own name, individually. Unless this is accomplished, the assets of the estate of the first spouse to die may not be sufficient to reach the $ 600,00 and thus the eventual tax advantage to the heirs will be reduced or lost.

Look Warily on "Magic Bullet" Estate Tax or "Probate Cost" Saving Devices

There is no reliable planning method which allows you to retain control over your assets and at the same time minimize the eventual estate and gift tax burden on your (and your spouse's) assets. So-called "living" or "inter-vivos" trusts ("will substitutes") offer absolutely no tax benefit. These trusts may potentially serve, in states other than New York, to reduce the sometimes high cost of probate (the process of giving a will legal effect upon death). In New York, the cost of probate is not high, particularly in contrast to the costs and inconvenience of maintaining such trusts. Some practitioners in this area have, unfortunately, not put their clients' interests first and have recommended these trusts because of, rather than in spite of, the administrative costs involved.

Similarly, practitioners have established quasi-business entities for their clients and registered the assets of their clients in a "family trust" or "family limited partnership." Recent Internal Revenue Service memoranda and rulings confirm the perspective we have always maintained: if there is no bona-fide business purpose for a transaction, then the Service will ignore the entity and impose the tax on the persons or estate involved (and penalties and interest, if appropriate). The shifting of income or assets solely in order to reduce tax liability is not a bona-fide business purpose. A true family trust, in contrast, potentially serves to protect the assets of a genuine family business (a going concern with sales of goods or services and the manifest intent to make a profit). not to shield a person's investments from estate tax.

Retain An Attorney Experienced in This Area to Establish The Estate Plan

We would be pleased to assist you with your estate and trust planning. Toward this end, you may review the pro-forma Engagement Letter in which we describe the services we would perform and our attendant charges. Further, we have attached the Estate Planning Checklist which we use to insure that we address the myriad of complex issues presented in this type of engagement.   We present this material only to familiarize our clients with the types of estate planning techniques and the analysis involved in their implemenation.