Schanker and Hochberg P.C. is a premier Estate Planning law firm. We offer legal services for sophisticated Estate and Gift Tax planning, Decedent Estate Administration and Probate services, Business Succession Planning, Charitable Giving, Special Needs Planning for persons with disabilities, simple Will planning, and all aspects of Elder Law planning including Medicaid planning and applications.
Our website, www.schankerandsch.wpengine.com, provides detailed information about our practice and the services we offer. It also is an excellent resource for articles of interest about Estate Planning and Estate and Gift Tax Laws. A copy of each newsletter will always be available on our website.
Estate Planning is so much more than just tax planning. There is a considerable decision-making process. Schanker and Hochberg P.C. has over 30 years of experience in counseling clients for their Estate Planning needs.
As always, we encourage feedback from our readers. If there are any topics you wish for us to specifically address or elaborate on, please email me at: firstname.lastname@example.org.
Estate Tax Planning Update
THE AMERICAN TAXPAYER RELIEF ACT was enacted into law as of January 1, 2013. It provides for permanent Federal Estate Tax, Gift Tax, and Generation Skipping Tax Exemptions of $5 million (indexed for inflation). The top Estate, Gift and Generation Skipping Tax rate was increased from 35% to 40% and the ‘Portability’ aspect of the first deceased spouse’s unused Federal Estate and Gift Tax Exemptions was made permanent. The current Estate, Gift, and Generation skipping tax exemptions are $5,250,000.
PORTABILITY BEWARE. Portability is a Federal rule and does not apply to the State Estate Tax. New York State still has a $1 million Estate Tax Exemption, Connecticut has an exemption of $2 million, and New Jersey has an exemption of $675,000.
Without proactive Estate Tax planning, a married couple will lose the State Estate Tax Exemption of the first deceased spouse. Portability (remember, Federally) requires that the Estate of the deceased spouse affirmatively file a timely Federal Estate Tax return in order to elect that the unused exemptions be preserved for the surviving spouse. Portability does not provide asset protection, spendthrift protection and does not freeze appreciation on the value of that unused exemption, all of which are provided for when using a Trust to mitigate the Estate Tax. It is very important to still consider Estate Tax planning if you live in a State that has an Estate Tax.
2013 Estate Tax Thresholds
|Federal Estate Tax and Generation Skipping Tax (GST) Exemption:||$5,250,000|
|Top Estate (and GST) Tax Rate:||40%|
|Lifetime Gift Tax Exclusion:||$5,250,000|
|Gift Tax Annual Exclusion:||$14,000, per donee|
|Top Gift Tax Rate:||40%|
|Annual Exclusion; Non-U.S. Spouse:||$143,000|
|NYS Estate Tax Exemption:||$1,000,000|
|NYS Estate Tax Rate:||approx. 10%|
|CT Estate Tax Exemption:||$2,000,000|
|CT Estate Tax Rate:||2%|
|NJ Estate Tax Exemption:||$675,000|
|NJ Estate Tax Rate:||approx 10%|
Note: New York and New Jersey do not impose a Gift Tax. Connecticut, however does, applying a $2 million gift tax exemption.
GIFTING IS STILL AVAILABLE. With the lifetime Gift Tax Exemption indexed for inflation, opportunity continues to be available to make lifetime gifts. Gifting continues to be a very effective method of minimizing the Estate Tax. There are several methods of gifting to choose from.
Keeping Your Estate Plan Up to Date
ESTATE PLANNING is not a static process. It changes as family circumstances change, as the tax law changes and as other changes in the law and society occur. The following is a list of some of the more important estate planning issues that you should be thinking about in keeping your estate plan up to date.
1. Be certain that those you have named as executors, trustees and guardians under your estate planning documents are still suitable choices and that you still want them to serve. As children and parents get older, you should continually review your choices for these all important roles. It can be a real burden and a responsibility to be called upon to act.
2. The tax law has just changed significantly, with Congress enacting much more generous federal estate and gift tax exemptions than had existed in the past, so a review of your tax planning provisions is certainly in order. The federal estate tax exemption is now $5,250,000
and it is indexed for inflation but the New York State estate tax exemption remains at $1,000,000 and the New Jersey estate tax exemption remains at $675,000.
3. Double check your beneficiary designations with respect to your IRAs, 401ks, 403bs, pensions and profit sharing plans to ascertain that the people who you had designated to receive these substantial assets are still the people you want to receive them. Qualified plan monies will go to whoever you designate, regardless of what your will states or even if you have no will at all. Make sure you change the beneficiary designations when appropriate. For example, upon divorce or remarriage or any other life circumstance arising which would make the existing beneficiary no longer appropriate.
4. Check the titling of bank and securities accounts to be sure that they are correct. If you intend to hold these accounts jointly with rights of survivorship with someone else, the titling of the accounts should indicate this. So to, if you mean for an account to be in trust for
someone or payable on death to someone, be sure it is indicated in the title. Otherwise, the account may not go where you intended.
5. Finally, update your living will, health care proxy and power of attorney. Also, be sure that the people named as agents under these documents are the ones that you still want to serve. With the population aging and incapacity becoming a greater issue, these documents become even more important to have updated.
How to be Charitable with Benefits; The Charitable Remainder Trust
IF YOU ARE CHARITABLY INCLINED, then there are some Estate Planning options that you should consider. Besides being a ‘dogooder’, there are income tax and estate tax benefits that can be enjoyed by structuring a charitable plan. A ‘Charitable Remainder Trust’ can be created during your lifetime or upon your death. This type of trust must be carefully designed so that it qualifies to take advantage of the exclusion from the taxable estate and also the available income tax deduction.
A Testamentary Charitable Remainder Trust (funded upon death) results in a charitable estate tax deduction for the present value of the remainder interest earmarked for the charities (a great benefit for your heirs). A lifetime Charitable Remainder Trust (created and funded during your life) results in an income tax deduction and a flow of income during your lifetime as well as a charitable deduction on the Estate Tax.
A lifetime Charitable Remainder Trust (CRT) offers several distinct advantages to you during your lifetime, as well as benefiting the charity or charities that you designate at the time of your death. The primary requirement is that the assets of the CRT must eventually wind up in the hands of a public charity or charities. Prior to that time, you retain the right to receive a reasonable rate of income from the assets of the CRT.
You receive a charitable income tax deduction for establishing the lifetime CRT. The deduction depends upon the amount of assets contributed, the type of assets (50% of Adjusted Gross Income for cash or 30% of Adjusted Gross Income for appreciated property), your age, and a rate of interest (the Applicable Federal Rate or ‘AFR’) that the Internal Revenue Service dictates. The older you are and the larger the contribution to the CRT, the larger the deduction will be. At the time of your death, the entire remaining balance will be excluded from the value your Estate for Estate Tax purposes.
“A charitable income tax deduction can be used to
offset remaining income tax liability.”
The CRT works particularly well with the contribution of appreciated assets. Being a tax exempt Trust, the CRT can sell the appreciated assets without the imposition of capital gains taxes and then invest the proceeds of sale without the proceeds being eroded by taxation. This has become an even more important benefit as a result of the increased capital gains tax rates under the recent tax act.
For example (and based on the current AFR), assume that you purchased a stock in 1990 for $100,000 and that it is worth $300,000 today. Assume also that you are 70 years old and are subject to the 20% capital gains tax rate. You transfer the stock to a CRT and designate that it gives you a 6% return.
Had you merely sold that stock on your own, you would have had $240,000 after taxes to invest to provide whatever rate of return the market will generate. With the CRT, however, you have the full $300,000 to invest. You also have a 6% return, or $18,000 per year, for the remainder of your lifetime. In addition, you receive a charitable income tax deduction of $80,000.
To the extent that you cannot use the deduction fully in one year, there is a five year carry forward. This charitable income tax deduction can then be used to offset your remaining income tax liability. And, at your death, the assets of the lifetime CRT are not part of your taxable Estate. This is truly a ‘win-win’ situation for those who are charitably inclined. Planning with a CRT is smart from a tax perspective, fulfilling from a charitable perspective, and strategic from an Estate Planning perspective.
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President Obama: 2014 Budget Proposal and Estate Planning
President Barack Obama released his 2014 budget proposal on April 10, 2013. It notably proposes a $3.4 million cap on retirement accounts as well as requiring those who inherit IRAs to take their taxable distributions within five years (instead of having the ability to ‘stretch’ the distribution over their lifespan). The proposed budget plan also calls to lower the Federal Estate Tax exemption back to 2009 levels ($3.5 million Federal Estate Tax Exemption).
Legislation is rarely permanent and indefinite. Good planning incorporates the risk of changes in the Tax Laws. As a client of Schanker and Hochberg P.C., rest assured that we are closely monitoring this proposal and will immediately publish the results of this proposal on our website as well as distributing a relevant mailing.
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Planning Considerations with Retirement Benefits
IT IS NOT AT ALL UNCOMMON for retirement benefits (IRAs, 401ks, 403bs, Qualified Retirement Plans) to comprise a major portion of one’s assets. Planning with retirement benefits include (1) the accumulation phase, (2) the lifetime distribution phase, and (3) the post death distribution phase.
During the accumulation phase, we build and save our earned income into the various retirement plans that are available. Working with a trusted and knowledgeable financial advisor provides the necessary guidance to maximize the accumulation on your investment. Understanding the rules regarding lifetime distribution and then post-death distribution can maximize the income tax benefit and potentially pass a valuable asset on to your beneficiaries.
Qualified Plans and Individual Retirement Accounts (IRAs) are income-tax deferred, while in the accumulation phase. Only upon distributions does ordinary income tax occur. There is an IRS penalty tax of 10% on withdrawals made before reaching age 59 ½. There is also a 50% tax imposed on the amount that should have been withdrawn but wasn’t if you exceed the ‘Required Beginning Date’ (the ‘RBD’) which is 70 ½. Once you turn 70 ½, you must withdraw your ‘Required Minimum Distribution’ (the ‘RMD’) which is determined based upon the value of the benefit, your life expectancy and the life expectancy of a contingent beneficiary assumed to be ten years younger than you, all according to a uniform lifetime table.
Upon your death, your plan assets are distributed to your named beneficiaries. If the named beneficiary is your spouse, he/
she can roll over the benefit into a new IRA which gives the surviving spouse the ability to use his/her own life expectancy (along with a new contingent beneficiary’s life expectancy) for the formula directing the RMD as well as the ability to name his/her own beneficiaries. This ‘roll over’ can also occur into a Trust for the spouse’s benefit as long as the Trust is a qualified beneficiary.
If the beneficiary is not a spouse, he/she can still withdraw the Plan over his/her life expectancy. If the beneficiary is not considered a ‘qualified beneficiary’ according to the IRS rules (for example, your ‘estate’ because an estate can’t possibly have a life expectancy), then the rules say that the Plan assets must be paid-out within five (5) years of your death. This 5-year rule will also apply if the qualified beneficiary fails to make his/her first required distribution by December 31st of the year after you die. If no contingent beneficiary is named, the default contingent beneficiary is the Estate and this 5-year rule will apply.
Make sure your Beneficiary Designations are up-to-date, appropriate and that you have a record of them. Without a qualified beneficiary, that 5-year rule will apply. The beneficiary form is what governs who receives the Plan assets. Your Last Will and Testament does not. So when you are planning how you wish your Estate to be distributed and you are designing distribution provisions in your Wills and Trusts, keep in mind that retirement assets
with ‘designated beneficiaries’ are distributed pursuant to your beneficiary form’s designation. Don’t name minors as a beneficiary. This will require a custodian be appointed to hold the asset until such minor is 18 years old. And age 18 may not be the appropriate age for a person to inherit such a potentially valuable asset.
Estate tax planning should carefully consider retirement benefits. Retirement benefits are included in the value of your taxable estate. Therefore, this must be a consideration in the Estate tax evaluation for an estate plan.
“Make sure your
are up to date.”
Extensive Services at Schanker and Hochberg P.C.
- Complimentary Initial Consultations for Estate Planning, Probate and Estate Administration matters
- Complimentary Annual Review meetings for existing clients
- Complimentary Family meetings for existing clients
- Tax alert services for existing clients
Our main office is housed in an elegantly restored Victorian structure in the heart of Huntington Village. Here, we welcome you and your family into a relaxing, warm setting where we will work together to improve your circumstances and achieve your goals.
To better serve our clients and their families, we also have convenient office locations in Midtown Manhattan and New Jersey; we also offer our services to clientele in Florida.
GENERAL DISCLAIMER: While we hope this newsletter provides useful information, please know that this newsletter does not predict or guarantee the outcome or result in any particular situation and no attorney-client relationship exists or is established as a result of this newsletter or its receipt.
Highlighted S&H Attorney
ANDREA B. SCHANKER
Andrea B. Schanker received her Bachelor of Arts degree in Clinical Psychology from University of Rochester in 1999. She received her Juris Doctorate from New York Law School in 2002. Andrea is a licensed member of the New York and New Jersey Bar Associations. She is a Trustee and Member in the Huntington Lawyers’ Club, a member of the Suffolk County Bar Association, a member of the New York State Bar Association, and a member of the American Bar Association.
Ms. Schanker joined Schanker and Hochberg P.C. in 2004, specializing in Estate Planning, Estate Administration, and Elder Law. She regularly delivers Estate Planning presentations to professionals in the financial industry and their clients. Ms. Schanker also regularly advises accountants, financial advisors and insurance advisors in connection with estate tax issues.
Andrea lives in Huntington with her husband, Michael Abruzzo, and their daughters, Patricia Gertrude Abruzzo and Sylvia Grace Abruzzo.