Rogers & Tartaro Business Litigation Blog : New York and Connecticut Business Litigation Lawyer & Attorney : Rogers & Tartaro Law Firm : Commercial Litigation : Westchester County NY, Fairfield County CT

As we have mentioned before, under current law, the federal estate tax is scheduled to temporarily disappear next year before returning in 2011 at an even higher 55 percent rate. During the year without an estate tax, all estates would be subject to capital gains taxes that they now avoid.

The House approached a vote Thursday on permanently extending a 45 percent inheritance tax on estates larger than $3.5 million, canceling a one-year repeal of the tax set to begin next month.

According to an article in the Hartford Business Journal, under the House bill, estates smaller than $3.5 million would continue to be exempt from the tax, and married couples, with a little estate planning, could exempt a total of $7 million.

Under current law, the estate tax would return in 2011 with a $1 million exemption and top rate of 55 percent, unless Congress acts.

We will continue to keep you updated. 

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Connecticut pets can rest easy now.

The Ridgefield Press reports that Governor Jodi Rell signed a law ensuring that animals will be properly cared for if their owners die.

The new pet law, An Act Concerning the Creation of a Trust for the Care of an Animal, requires that the owner designate a “trust protector;” someone whose sole duty is to act on behalf of the animal, ensuring that the pet receives the proper care. In other words, when you’re making arrangements for your children, make them for Fido and Fluffy, too.

Prior to the new law, which went into effect October 1, pet owners could set up trusts for their animals but those arrangements were considered honorary since animal beneficiaries could not enforce them.

The new law complements a standing Connecticut law which states that pets are personal property. This particular legislation actually created a bit of an issue for a divorcing Connecticut couple, according to A Connecticut Law Blog. The couple encountered substantial veterinary bills after seeking treatments for their ill pets. The court ordered that the husband and the wife equally divide the costs of medical treatment for dogs. After all, they were just part of the marital debt.

As pet owners ourselves, Bev and I support the new legislation. Providing for a pet is a matter of personal preference and values and there should be some comfort in knowing such provisions are enforceable and not academic exercises or empty words in a will. But, the more important issue is whether one has gotten around to having an estate plan at all to provide for the objects of one’s affection and bounty, human or not.

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I used to enjoy watching Charles Kuralt on Sunday mornings. But a recent post in the Pennsylvania Fiduciary Litigation Blog shows his soothing voice and well written dialogues masked the real story in his personal life.

PFLB reports that when Mr. Kuralt died at age 62, his estate passed to his wife and his two daughters. However, after his death, it was discovered that Kuralt had a second, “secret” family for over 30 years. Kuralt’s will stated that his wife was the beneficiary of his estate, but before he passed away, Kuralt wrote a letter to his companion stating his desire to have her inherit the 90 acres of land he owned in Montana. A court found that the letter was considered a codicil, and was acceptable under Montana law.

 In New York, where Mr. Kuralt’s original will was probated (declared to be genuine by a court), a codicil must be executed with the same formalities as the original will- - you can’t just write a letter to amend your will. However, if Mr. Kuralt executed the codicil with the requisite formalities but the format just happened to be that of a letter, then it is truly a codicil in almost any state.

Interestingly, change the facts a little and the situation is not so unusual: a prior marriage and divorce . The estate plan would have to provide for the children from a prior marriage, a spouse and children from the second marriage. Conflicts abound.

There were also tax issues associated with the Montana land. Wills are often written with the provision that taxes are paid from the residuary estate. The taxes paid on the Montana property that went to his “secret family” came out of funds that were left to Mr. Kuralt’s known family. A complicated life requires a complicated plan, or inequities like this may ensue.

According to the PFLB report, Mr. Kuralt had other plans in mind but was suddenly stricken ill. This sad and unfortunate aspect of the story offers a valuable life lesson - - don’t put off your planning. Who knows what events may intervene?

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Connecticut has eliminated the “cliff” from its estate tax. The Danbury News-Times, along with other media and legal blogs, reports that this change to Connecticut’s estate tax law, along with other significant changes, will go into effect for decedents who die on January 1, 2010 or later.

The aforementioned “cliff” refers to the fact that under prior tax law, an estate of $2,000,000 was exempt from taxation. However, add one more dollar to that, and the entire $2,000,001 was taxed, resulting in a tax liability of $101,700. With the new law, estates of $3,500,000 or less will not be taxed. This is similar to the federal estate tax threshold (or at least this year it is).

Under current law, the federal estate tax will be abolished next year, only to come back in 2011 with a threshold of only $1,000,000. The expectation is that the federal estate tax will be modified. On the other hand, that expectation has existed for some 8-10 years.  A clear explanation of the status of the federal estate tax is provided by this recent Wall Street Journal article.

In New York, the state estate tax threshold is a mere $1,000,000. But, in either Connecticut or New York, the federal tax takes a far bigger bite, with a marginal rate up to 45%. That’s right, 45%.

Here’s some good more news for Connecticut: estate tax rates are now being reduced by 25 percent, with a new maximum rate of 12%. But the estate tax and a return will be due six months after date of death instead of the current nine months.

In all three jurisdictions, (federal, Connecticut and New York), your “estate” for tax purposes includes almost everything you own: property, IRA’s, 401(k)’s, pension plans, the proceeds of life insurance and “In Trust For” accounts.

And one more point of potential confusion, specifically with respect to life insurance: the fact that beneficiaries do not pay income tax on the proceeds does not mean that the estate won’t pay estate tax.  A substantial life insurance policy can be enough to "tip: an estate into a taxable bracket.

A final piece of advice: take care of yourself and your loved ones.

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The ubiquitous media coverage of Michael Jackson’s death last week mentioned the plight of his children and the state of his financial assets and woes. This unfortunate situation should serve as a reminder that careful estate planning is not just for the wealthy or Hollywood Elite. Taking care of your affairs now ensures that your loved ones are cared for in the manner you wish once you pass.

Many people believe their estate automatically passes onto the spouse, when in fact the spouse may actually receive less than intended.  In Connecticut and New York, the laws of "intestacy" (estates without a will) provide for fractional shares for the spouse if there are children.  By contrast, many married couples who write wills give all to the other and only at the death of both do assets pass to the children.  Without legal planning, how an estate will be distributed or who the administrator will be is determined by impersonal laws without considering individual circumstances..

Although there are no laws that require the assistance of an attorney in estate planning, we highly recommended  it. A "do-it-yourself" will or generic trust may actually be more expensive than consulting a lawyer. Generic forms often do not address the legal requirements of New York or Connecticut. They also will not take into account individual wishes. And then, of course, there may be tax issues that will need to be resolved.

The death of a loved one is always difficult, but with no estate plan, the loss can be compounded by family squabbles and feelings of betrayal -- not to mention an overwhelming amount of paperwork.

Visit some of our archived blog entries for more information.

Image:  Last will & testament of Alfred Nobels, dated November 27th, 1895.  Courtesy Wikimedia
 

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A recent blog post suggesting that decreasing asset values present opportunities did not get my full appreciation until I put it together with an unrelated experience in an estate litigation case to draw a broader lesson.

The post was in the Utah Business, Real Estate and Estate Planning Blog, by Matt Fankhauser and entitled “A Silver Lining in Decreasing Asset Values.” The point was that decreasing asset values present opportunities for high net worth individuals. With gift and estate taxes not likely to go away, individuals can make gifts at a discount (that is, at depressed values) to take maximum advantage of lifetime gift tax exemptions and annual exclusions. 

While seemingly unrelated, the idea brought to mind my experiences with the parties in a will contest that was resolved only after years of litigation.

Valuable investment property had been in the family 35 years with the decedent refusing to allow it to be sold in her lifetime. One party in the will contest fought to gain control of that property intending to keep the property from being sold and as a family asset even longer. The estate also happened to include overseas properties that may have been owned by the decedent for 50-60 years.

In holding properties 35, 50, 60 years, the decedent (and other family members) exhibited a distinct long-term mindset. Since they intended to hold on to the assets for the long term, this family might very well consider a period of depressed values to be an opportune time to make tax-saving gifts.

More generally, a longer-term mindset, even in an uncertain economic environment, may identify opportunities that would otherwise be overlooked. That is as true of personal financial issues, such as estate and gift tax planning as it is of core business issues.

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HartfordBusiness.com reports that the world now has ten million millionaires (“World now has 10 million millionaires, report says”). The story, by Associated Press Writer Candice Choi, is based on a report issued by Merrill Lynch & Co. and consulting firm Capgemini Group. It also reports that one third of the millionaires are located in the United States.

I will suspend my skepticism at anyone’s ability to overcome differences around the world related to, among other factors, differences in currency, property valuations and customs of confidentiality to derive an accurate number. The exact number, after all, is not that important.  We like milestones so let's consider the number to be 10 million. 

Whatever the exact number, a lot of people are millionaires and multi-millionaires without realizing it. We can credit the growth of IRA’s, 401(k)’s, 403(b)’s, and even life insurance (and allowing for the current dip) home values.

But, the HartfordBusiness.com story also reports that a million dollars isn’t what it used to be. Today, millionaires can be people of fairly modest means.   

This story drew our attention because we interpret our "business litigation" mandate broadly.  We include in our commentary issues related to estate planning, in particular, avoiding litigation among beneficiaries and the unpleasant surprises associated with unexpected estate tax liabilities and disputes with tax authorities. 

We counsel clients to think about and make plans for their entire estate. Pension assets (which include IRA’s, 401(k)’s, 403(b)’s), the proceeds of life insurance and any jointly owned assets (such as homes, bank accounts, securities) do not necessarily pass by will but by separate beneficiary designations or operation of law. In legal terminology, these are “nonprobate assets.” Writing a will without also carefully coordinating the separate beneficiary designations, for example, may lead to unpredictable distributions of assets and the potential for disputes and litigation among the beneficiaries.

On the other hand, nonprobate assets are included in considering whether an estate becomes taxable and could put a modest estate over the top to a taxable level. We counsel clients to be aware of the way asset values may have grown over time and to do the appropriate planning.

For more on this subject, we invite you to view an earlier post, with link to our video program, My Financial Journal.

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The Utah Business, Real Estate and Estate Planning Blog, in its article, “ILTSs as an Estate Planning Tool” by Matt Frankhauser, provides a clear and succinct summary of how an Irrevocable Life Insurance Trust (ILIT) may be used to keep the proceeds of life insurance policies out of the gross estate of the insured. We don’t want to try to improve on the summary and offer the entire article here. But, we offer a few comments to supplement it.

First, as a point of clarification for our readers who are not lawyers, it is widely known that the proceeds of life insurance policies, the death benefits, are not taxed as income to the recipient. It is less widely known that the death benefits are counted as part of the gross estate of the insured and subject to estate tax if the estate is large enough to be taxable. The life insurance proceeds, by increasing the size of the gross estate, can push the estate across the threshold from a nontaxable to taxable estate.

The focus of our blog is generally on litigation and, whenever possible, avoiding litigation. One type of litigation our business clients will definitely want to avoid, although it will affect their beneficiaries, not themselves (who are gone at that point), is litigation with the IRS over whether millions of dollars in life insurance death benefits ought to be taxed at a marginal rate of 45% or so. Thus, Mr. Fankhauser’s article notes that “if properly constructed and managed,” ILITs can be effective estate planning tools (emphasis added). His article does a nice job of communication elements of proper construction and management.

One aspect that is especially difficult to communicate, however, concerns the process of paying the premiums. Although covered in the Utah blog article, some elaboration may help to further understanding. The issue arises because premiums paid by the insured for policies owned by this artificial entity (the ILIT) are gifts.

Now, in addition to keeping the future proceeds of the life insurance out of the gross estate, a further goal is added, not to pay gift tax on the current gifts of the premiums to the trust. As mentioned, in the Utah blog article, this is often done by taking advantage of the annual gift tax exclusion (currently $12,000). Unfortunately, the tax code and the IRS have established two governing principles: (1) the annual gift tax exclusion may not be used for a gift of a future interest and (2) money given to the trust to pay premiums that may not result in death benefits for many years are future interests.

But, if someone can exercise the option to receive the gifts now, then the gifts are considered present (and not future) interests. The result is the procedure of the “Crummey Letters,” named after a court case that established the procedure. The beneficiaries of the trust are given the option, limited for a short period of time, to immediately demand the money intended to be used by the ILIT to pay premiums. The existence of this option establishes that the gifts to the trust (for premiums) are “present interests” and the annual gift tax exclusion does apply.

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If you have a compulsion to be involved in truly contentious litigation and are tired of matrimonial cases, try a will contest. For this reason, we include the identification of “best practices” in the area of Estate Planning as falling within the overall mission of our blog. Acquisition, preservation and, ultimately, disposition of assets are activities t, in our way of thinking, that are appropriately categorized as business activities that can be managed so as to avoid unnecessary and costly litigation.   

Because we consider Estate Planning such an integral part of our mission and practice, our firm’s two partners were excited to be invited and to actually appear last year to talk about Estate Planning on the public access television program My Financial Journal hosted by Andrew Rose. In all modesty, our audience was probably small. More important, we believe our audience, whatever its size, was treated to a fast paced, interesting and informative program.

With special thanks to Andrew Rose the program can be seen by clicking here.

If you don’t have time for the half hour program or the technical resources to download it, I offer a few bullet point highlights.

• The discussion of death is definitely uncomfortable for many people but others find a source of satisfaction and accomplishment in knowing they have taken care of their families and addressed some difficult issues.
• In particular, the care of minor children and financially dependent adult family members is a concern.
• The complexity of an estate plan can depend on the variety and nature of your assets but two other factors include the extent to which income tax qualified assets are included in your estate and whether, because of size, the estate is exposed to federal and state taxation.
• The status of estate tax laws is in flux because federal law, while temporarily increasing the size of exempt estates, is scheduled to be repealed absent another act of Congress and states have enacted their own estate tax laws “decoupling” or becoming independent from federal estate tax law.
• Revocable Trusts can be effective planning tools if real estate is owned in multiple states or to provide an added layer of disincentive to contest the plan.
• But, often revocable trusts are set up without actually transferring assets to them, nullifying some of the advantages.
• Planning for non-traditional families and families with children from prior marriages requires an added level of sensitivity and a concern for fairness.
• Similarly, gay and lesbian couples need to explicitly address their particular needs through effective planning because some useful provisions of law are inapplicable to them.
• Women, traditionally tending to be caregivers, may have difficulty putting their own needs first, but upon establishing a relationship can proceed expeditiously in facilitating the family’s estate plan.
• Single women and single men, in our experience do not tend to differ in the fundamental nature of their estate planning needs; one aspect is that often their concern is for more remote family members or even friends.

We hope you have the time to view the entire program. Whether you do or not, we hope you make the time for your own estate planning. You may not be around to experience it yourself, but for your beneficiaries the disputes, among themselves or with tax authorities, can be costly and debilitating.

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