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ACKERMAN, LEVINE, CULLEN, BRICKMAN & LIMMER, LLP

March 15, 2010

General Overview Memorandum

Re:  2010 Estate Planning for Married New York Residents

Estate planning in 2010 may be a dizzying subject for some married residents of New York State.  As described in the attached summary memorandum, the federal estate tax is repealed for decedents dying in 2010, only to come back in 2011.  The federal estate tax exemption scheduled for 2011 is $1,000,000, although Congress is expected to act to increase the exemption to a higher level – perhaps $3,500,000, which was the 2009 exemption.¹  The rates of federal estate tax are high – a 45% rate was generally applicable in 2009, and the scheduled maximum rate for 2011 is 55% with an additional 5% surcharge imposed on estates exceeding $10,000,000.  New York imposes its own estate tax independent of the federal estate tax.²  New York currently provides an exemption of $1,000,000, with tax generally imposed starting at 5.6% and increasing to 16%.³  

To explain the basic issues, the best starting point is a simple estate plan, under which each spouse bequeaths all of his or her property outright to the survivor.  No estate tax is imposed at the death of the first to die because transfers to a surviving spouse are exempt from estate tax.  At the death of the survivor, however, federal estate tax (assuming death after 2010) and New York State estate tax will be imposed on all property held by the surviving spouse in excess of the applicable exemption amount.  A simple estate plan like this is typical for smaller estates below the New York exemption level.

For larger estates, the conventional wisdom for a 2010 decedent is to leave all of his or her property in a “Marital Trust” for the benefit of the survivor.  This means that none of his or her property will be subject to federal estate tax at the survivor’s death (assuming, of course, that Congress does not reenact the federal estate tax for 2010).  Only the survivor’s own property would then be subject to federal estate tax in 2011 and tax years thereafter.  New York estate tax may also be deferred to the survivor’s death because the trust is structured as a so-called “marital deduction” trust, requiring all income to be paid to the survivor.  The trust terms may be structured with maximum flexibility, where appropriate,⁴ for distributions of trust principal to, and control by, the survivor, who may be granted a trustee replacement power during lifetime and a broad testamentary “power of appointment” exercisable at death (by a designation in the survivor’s Will of his or her selection of beneficiary).   

An estate plan like this for 2010 – leaving all property in a marital deduction trust for the survivor – may also be structured to work effectively for 2011 and thereafter.  To avoid federal estate tax for someone who dies in 201, a post-mortem election may be made to defer federal estate tax on the portion of the trust property in excess of the federal estate tax exemption – whether $1,000,000, as scheduled under current law, or at some higher level (say, $3,500,000, as in 2009) enacted by Congress.  Only that portion for which the marital deduction election is made is then subject to estate tax at the survivor’s death.  Assuming a higher federal exemption is enacted, some New York estate tax may then have to be incurred to maximize the benefit of the federal exemption.  The marital deduction may be elected for a larger portion of the trust so as also to minimize New York estate tax; however, such an election would have the effect of exposing that larger portion of trust property to federal estate tax at the death of the survivor.  This important decision may be made post-mortem, taking into account family, financial and personal circumstances, as well as the survivor’s preferences.

An additional refinement may be added to the Martial Trust structure to allow the survivor to direct, within 9 months after the death of the first to die, that the trust portion for which no marital deduction is elected to pass to a so-called “Family Trust” rather than held in the Marital Trust.  The Family Trust is structured to allow distribution of trust income and principal to the survivor and also to children and grandchildren. Similar to the Marital Trust, the survivor may have control to make trustee replacement, but a disadvantage of this Family Trust structure is that the survivor may not be granted a testamentary power of appointment (to designate the

ultimate beneficiary by Will).  This means that the survivor may not alter how the trust remainder is to pass (often for children on an equal basis) upon the survivor’s death.⁵ 

This Marital and Family Trust structure offers maximum flexibility, but because it requires all estate property to be left in trust for the survivor, it may not be attractive to some couples.  A simpler alternative is to create only a Marital Trust tied to the $1,000,000 New York exemption, with the balance of the estate to pass outright to the survivor.  The decision is then left to the survivor whether to direct that a portion or all of the property otherwise passing outright to the survivor is instead added to the Marital Trust, thereby allowing flexibility for 2010, as well as 2011 and beyond, similar to the Marital Trust planning discussed above.  This simpler alternative does not include two advantages of the Marital and Family Trust structure:  (i) the survivor may not hold a testamentary power of appointment over any additional property directed by the survivor to be added to the Marital Trust; and (ii) this simple approach does not contain a Family Trust under which children and grandchildren might also be trust beneficiaries during the survivor’s lifetime. 

The rules for income tax basis have also changed for someone who dies in 2010.  For tax years prior to and after 2010, the general rule is that the basis of all inherited estate property is “stepped-up” to its fair market value at date of death.  In 2010, however, “carry-over” basis will apply – meaning that the basis of inherited property remains the same as it was in the hands of the decedent, except to the extent the basis exceeds the fair market value at date of death, in which case basis is lowered to the date of death value.  The new rule for 2010 contains two special basis step-up provisions:  (i) a general provision allowing a $1,300,000 step-up in basis for estates of all 2010 decedents and (ii) an additional $3,000,000 step-up in basis for property passing outright to a surviving spouse or a Marital Trust.  In general, the basis rules for 2010, as well as the different rules for 2011 and thereafter, may be handled satisfactorily under an estate plan utilizing a Marital Trust structure described above.

The manner of the division of property between spouses remains important for estate planning in 2010 and future years.  In more recent years, it has, in general, been desirable for title of assets between spouses to be structured so that each spouse owns assets sufficient to utilize his or her federal estate tax exemption.  For couples with assets below the estate tax exemption threshold, this sometimes would mean equal division of assets.  The variation for 2010 estate planning is that equal division generally also becomes more advantageous for larger estates – with the added twist that, where the death of one of the spouses (on account of advanced age or illness) is more likely in 2010, it may be advantageous for more assets to be titled in that spouse’s name.

On account of their income tax treatment, qualified retirement benefits (e.g., taxable IRA and 401(k) accounts) present special considerations for Marital and Family Trust planning.  In general, it is preferable for income tax purposes to designate qualified retirement benefits to pass outright to the survivor, who transfers the account property into a “roll-over” IRA.  This allows the account property to remain in an income tax-free vehicle (the roll-over IRA) for a longer period than that permitted under a beneficiary designation to a Marital or Family Trust.  For some married couples, this income tax advantage may be more important than estate tax planning.  In order to preserve flexibility until after the death of the first spouse to die, it often may be preferable for the beneficiary designation to be outright to the survivor and include an attachment to the beneficiary designation form that permits the survivor to direct all or a portion of the account to pass instead to a Marital (or Family) Trust.

Flexibility in planning under the Marital (and Family Trust) structure is achieved in part by renunciation by the survivor, which must be done within 9 months after the death of the first spouse to die.  As long as the survivor is mentally competent, this presents no practical problem.  There is always the possibility, however, that the survivor may become mentally impaired and not possess the requisite mental capacity, after the death of the first to die, to make a valid renunciation.  To protect against that risk, spouses should have in place durable powers of attorney designating an agent (e.g., a child or other family member) to carry out the renunciation on behalf of the survivor.  For many spouses, it is important that each of them consider executing new durable powers of attorney under the revised New York statute enacted in 2009.

Planning for disposition of assets after the death of the survivor is also affected in 2010.  Prior to 2010, conventional wisdom was for assets to pass to children pursuant to trust planning in order to maximize the so-called “GST exemption” – $3,500,000 in 2009 for federal generation skipping tax purposes.  For larger estates, this might mean a structure so that a total of $7,000,000 of the net inheritance is directed to be held in trust for lives of children, with the excess passing outright to children.  The trust property would then be protected from any transfer tax (estate or GST tax) at a child’s death.  Like the federal estate tax, the GST tax is also repealed for 2010 only, and then reinstated in 2011 and thereafter.  From a pure tax planning perspective for larger estates, this makes disposition of all property in trust for children desirable for a 2010 decedent.  The trust provisions may be structured with maximum flexibility for distribution of trust income and principal for children and grandchildren, including partial (or total) termination to the extent not needed to afford any meaningful tax benefit or for any other reason.

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With proper planning, Wills containing Marital and Family Trust provisions can be prepared and implemented for flexibility in estate planning for 2010, and also to work effectively in 2011 and thereafter.  Our firm has developed forms for document preparation for these structures designed to be customized to specific client wishes.  For further information or to schedule an appointment for one of our trusts and estate attorneys to review your existing estate planning documents, please call us at (516) 829-6900.

Ackerman, Levine, Cullen, Brickman & Limmer, LLP
1010 Northern Boulevard, Suite 400
Great Neck, New York  11021
Telephone:  (516) 829-6900
Facsimile:   (516) 829-6966
www.ackermanlevine.com

ACKERMAN, LEVINE, CULLEN, BRICKMAN & LIMMER, LLP

January 1, 2010

Re: Federal Estate and Gift Tax Alert 

As has been widely reported, Congress adjourned without extending the Federal estate tax for 2010, creating an anomalous situation – with unique risks and opportunities – for personal estate planning.

There is no Federal estate tax in 2010, but for 2011 and later, the Federal estate tax goes up to a 60% top rate (with a $1,000,000 exemption).  The Federal gift tax, however, remains in effect in 2010, at a flat rate of 35%, increasing to the Federal estate tax rates in 2011.⁶  It is widely expected that Congress may "reenact" the estate tax for 2010 – perhaps retroactive to January 1, 2010, although retroactive legislation may not be constitutional. 

As a result, existing estate plans that did not contemplate Congress' failure to act may create adverse consequences for those dying in 2010 without updating their Wills – especially married persons.  The situation also creates tax planning opportunities for gifting in 2010.

Decedents dying in 2010.  All Wills should be reviewed to assess the impact of Congressional inaction on specific provisions that were commonly employed in reliance on existing and contemplated provisions of Federal estate tax law⁷.  For residents of New York, which continues to impose its own estate tax with rates up to 16%, Wills should be reviewed for particular tax consequences and the effect of the New York estate tax exemption.⁸  Finally, Wills containing GST exemption formula clauses and those impacted by new “carry-over basis” rules⁹ also require review.

Gifts in 2010.  The present confusion creates planning opportunities using gifts, including gifts to a trust that can be voided if Congress enacts legislation that nullifies the potential benefit.

The bottom line is that the present anomalous tax law creates special estate planning concerns and opportunities.  Everyone should have their existing estate plans reviewed as early as possible in 2010 to consider the impact and planning opportunities created by these circumstances.