Estate Planning Overview New York State Bar Association CLE, December 2015 INTRODUCTION TO ESTATE PLANNING

Hon. Stacy L. Pettit Albany County Surrogate’s Court Reasons for Estate Planning

 Plan for Lifetime:

 To manage assets, health care decisions and personal needs during disability or advanced age.

 To protect assets for a spouse or other beneficiaries in event of a client’s future need for benefits (Medicaid).  Plan for after Death:

 To manage and distribute estate assets after death -- efficiently and while accomplishing the client's goals.

 To provide for guardians and trusts for minor or disabled beneficiaries.

 To minimize adverse tax consequences. Importance of an Estate Plan  No Will: Laws of intestacy govern the disposition of assets that are not owned by a trust or covered by beneficiary designations or joint ownership.  Example: H & W have 3 minor children. H has $700,000 in his name alone. W has $1,000 in her name. House is owned jointly by H & W. H dies.  Who gets what?

 W keeps the house as surviving joint tenant.

 W receives only $375,000 of H’s funds ($50,000 plus ½ of $650,000).

 3 minor children split the remaining $325,000. Court- appointed Guardian must get Court approval to make payouts, and children get the balance of funds at age 18. What You Need to Know

 THE FAMILY TREE, and who is an interested party in the estate under the law (“distributees”).  THE ASSETS, how they are owned (i.e. solely, jointly, p/o/d, etc.), and the estate, income and gains tax consequences of different planning options.  CONCERNS OF THE CLIENT, i.e. family members with disabilities or other issues, future disability concerns of the client or spouse.  THE WISHES OF THE CLIENT, even if contrary to some planning recommendations.  WHAT DOCUMENTS, TRANSFERS AND PLANNING should be used for that client. The Family Tree A PERSON WHO DIES WITHOUT A PLAN HAS A PLAN BY STATUTE: DISTRIBUTEES - (EPTL 4-1.1)

. If survived by a spouse and children, spouse receives the 1st $50,000, and ½ of the balance, and children equally share the other ½ of the balance.

. If survived by only a spouse and no children, the spouse receives everything. (Prior law included parents)

. If survived by only children, the children equally share everything. If there is a predeceased child, his or her children share their parent’s inheritance “by representation.” Any direct issue of the decedent take before going to the next step.

. If survived by only parents (no spouse, children, grandchildren or younger generations), the surviving parent or parents receive everything. (Siblings do not take if there is a living parent.) The Family Tree. . . continued

 If survived by only siblings and/or children of deceased siblings, the siblings and issue of deceased siblings take “by representation.” Any issue of siblings take before going to the next step.

 If survived by only aunts and uncles and/or children of deceased aunts and uncles (1st cousins), the aunts and uncles, and children of deceased aunts and uncles take “by representation” but distribution does not extend any further than 1st cousins (children of deceased 1st cousins get nothing if there is at least one 1st cousin living.)

 If survived by only great-grandchildren of grandparents (1st cousins once removed), the great-grandchildren of grandparents will equally share the estate.

 If survived by no one closer than the above (i.e. only 2nd cousins or 1st cousins twice removed), the estate escheats to the State of New York. Note: Half-blood relatives are the same as whole (a half sister is treated the same as a full sister). “TO ISSUE, BY REPRESENTATION" OR “TO ISSUE, PER STIRPES"

 "ISSUE" means: the descendants in any degree from a common ancestor, i.e. the person's children, grandchildren, great- grandchildren, great-great-grandchildren, and on down in a straight line of kinship.

 Intestacy provisions use “BY REPRESENTATION”, not “PER STIRPES” as default of distribution (see EPTL 4-1.1).

 An estate with a will executed prior to 09/01/1992 which made a disposition to "issue" will be distributed "per stirpes," and an estate with a will executed after 09/01/92 will be distributed “by representation” if a method of distribution is not specified in the will (see EPTL 2-1.2). DISTRIBUTION “BY REPRESENTATION” VERSUS “PER STIRPES” Client had 3 children, A, B & C. At Client’s death, A is living, and B & C predeceased. All three children had children: A has 1 child, B has 1 child, and C has 4.  Distribution “by representation” (EPTL 1-2.16) would be: 1/3 to A and 2/3 in 5 equal shares to B & C’s children.

 Distribution “per stirpes” would be: 1/3 to A,1/3 to B’s child, and 1/3 to C’s 4 children. Who Cannot Take Under Intestacy?  Divorced or legally-separated spouse (EPTL 5-1.2 [a] [1-4]).  Spouse who abandoned or failed to support decedent (unjustified, without consent and continue through death) (EPTL 5-1.2 [a] [5,6]).  Parent who failed to support decedent child EPTL 4-1.4.  Murderer of decedent (Matter of Covert, 97 NY2d 68 [2001], Riggs v Palmer, 115 NY 506 [1889].  Adopted-out children of birth parent (DRL 117).  Step-children (not adopted by decedent). Asset Information

 Must know how assets are owned and if they have a designated beneficiary: Clients do not always know that when a person dies, assets which are in joint names or payable on death to a designated beneficiary, or owned in a trust, do NOT pass under the terms of a Will.

 Tax Consideration: Need a detailed asset inventory to determine whether ownership is proper and whether there are estate tax, income tax or other issues to be addressed. Obtain Complete Information from Client

. Client should be informed in writing that you will be relying on the information provided to make planning recommendations.

. An estate planning attorney needs a detailed description of the client's assets and copies of all legal documents that might affect the client's estate plan, for example:

. Beneficiary Designations

. Summary Plan Descriptions for Retirement Accounts

. Financial Statements of Closely Held Businesses

. Partnership, Shareholder or Operating Agreements

. Separation Agreements and Divorce Decrees

. Pre- and Post-Nuptial Agreements SIMPLE INVENTORY EXAMPLE

Owner: Husband, If a Designated Tax Current Asset Description Wife or Joint Beneficiary or other Basis Value (H/W/J) joint owner, who Residence at:

Other Real Property at:

Stocks, Bonds or Mutual Funds (describe)

Closely held stock (business interests)

Cash Deposits (list location and account type) Furniture, Jewelry, Cars:

Collections and Art

Pension, Profit Sharing/IRA

College Savings Plans /Educ. IRA

Life Insurance

Other Assets:

TOTAL

Liabilities, including mortgages (describe)

NET ASSETS The Outline Contains an Exhaustive Checklist (by Michael M. Mariani, Esq.) that covers: 1. OBJECTIVES OF THE CLIENT 2. DOCUMENTS AFFECTING PLANNING 3. FACT-GATHERING FOR PLANNING Parts of that checklist are on the next several slides as an illustration of the depth of inquiry which can be made in planning. I. OBJECTIVES CHECKLIST To determine client's main objectives for estate plan and the relative importance of each of these objectives. A. Objectives for Client and Client's Spouse 1. Personal care during disability or old age. 2. Managing assets during disability or old age. 3. Securing advice for current management of assets. 4. Minimizing current income taxes. 5. Arranging for guardians for any of the client's minor children. 6. Arranging for disposition or continued management of family business after disability, retirement or death. 7. Changing residence to another jurisdiction—double domicile problems. 8. Making gifts to family members. 9. Establishing asset management for children. 10. Providing financial care for client's parents and adult dependent children. 11. Ensuring that family assets remain in family. 12. Making gifts to charities. 13. Purchasing additional life insurance. 14. Purchasing insurance to supplement income in case of disability. 15. Concern for health care decisions if gravely ill. 16. Concern for funeral arrangements and donation of bodily organs. 17. Minimizing estate taxes and administration expenses at death. B. Objectives under Client's Will 1. Selection of executor, trustee and successor fiduciaries. 2. Disposition of valued personal effects to spouse. 3. Disposition of valued personal effects to children, other family members or friends. 4. Authorizing spouse to make gifts to other family members during spouse's lifetime. 5. Authorizing spouse to make gifts to other family members under spouse's will. 6. Protecting assets left to spouse or child from present or future creditors. 7. Reduction of estate taxes at client's death regardless of estate tax consequences at death of surviving spouse. 8. Arranging for care of child with mental or physical handicap. 9. Arranging for care of parent or other family member. 10. Selection of guardian for minor children. 11. Arranging for retention of the family home for surviving spouse and children. 12. Cash dispositions to family, friends, and employees. 13. Arranging for disposition of any professional practice assets and other business interests. 14. Dispositions to any charity. 15. Disposition of digital assets. 16. No contest clause. C. Objectives under Power of Attorney 1. Enable attorney-in-fact to act for the client should the client become disabled, or for any other reason. 2. Enable attorney-in-fact to make tax-free gifts up to the amount of the annual gift tax exclusion ($14,000 in 2015), per year for each intended donee. 3. Allow attorney-in-fact to make unlimited tax-free gifts for medical and tuition expenses for each intended donee. 4. Empower the attorney-in-fact to act concerning all tax matters for the client. 5. Enable the attorney-in-fact to pay for all health care expenses for the client. 6. Enable the attorney-in-fact to create or modify a revocable trust for the client. 7. Enable the attorney-in-fact to transfer client's assets to client's revocable trust. 8. Enable the attorney-in-fact to deal with retirement plans and IRAs. 9. Enable the attorney-in-fact to act concerning all business matters for the client. II. DOCUMENT CHECKLIST To determine availability of relevant data. A. Information Regarding Client 1. Current will and codicil. 2. Trust agreements—client created or where client may be beneficiary. 3. Powers of attorney. 4. Naturalization papers. 5. Pending litigation papers. 6. Pre- or postnuptial agreements. 7. Divorce decree or separation agreement. 8. Military discharge papers. 9. Adoption papers regarding client or client's family members. 10. Health care proxy. 11. Living will. B. Property Interests 1. Savings and checking accounts, investment management accounts and custody accounts. 2. Personal financial statements. 3. Appraisals or documents evidencing ownership of fine arts, jewelry, antiques, furs, or other valuables. 4. Promissory notes and mortgages. B. Property Interests (continued) 5. Inventory of stocks, bonds and securities. 6. Assets over which the client has a general or special power of appointment. 7. Safe-deposit box or private safe. 8. Copyrights, trademarks and patents. 9. Royalty agreements. 10. Deeds to current residence and other real estate. 11. Digital assets. 12. Title insurance policies. 13. Proprietary lease and stock certificate for cooperative apartment. 14. Employee benefit statements. 15. Retirement accounts. 16. Loans and debts owed to client. 17. Loans and debts owed by client. 18. Custodian accounts established under New York UTMA. C. Life Insurance 1. All policies owned by client or client's spouse. 2. All policies owned by client or spouse insuring someone else's life. 3. All policies on decedent's life owned by someone other than the decedent, either in trust or outright. 4. Premium notice regarding insurance policies. 5. Summary Statement of client's insurance program prepared by insurance agent. D. Other Insurance 1. Homeowner's policy. 2. Renter's policy. 3. Floater or fine arts policy. 4. Automobile policy. 5. Health, hospitalization and major medical policies. 6. Disability income insurance. 7. Long-term care insurance. 8. Umbrella (excess liability) policy. 9. Professional malpractice insurance. 10. Annuity contracts. 11. Fraternal benefits. E. Business Interests 1. Agreements concerning joint ventures. 2. Partnership agreements. 3. Shareholders' agreements. 4. Stock redemption agreements. 5. Life insurance incident to an agreement. F. Tax Returns 1. Copies of state and federal income tax returns for past three years. 2. Copies of state and federal gift tax returns that have been filed. 3. Copies of estate tax returns for predeceased spouse and those estates in which the client has received any interest.

III. FACT-GATHERING CHECKLIST (Detailed list not printed here) Checklist includes itemization of questions for each of the following categories: 1. Personal data-client. 2. Personal data—client's spouse. 3. Personal data—client's children. 4. Family tree of client and spouse. 5. Assets, type of ownership and location. 6. Liabilities. 7. Advisors. Joint Representation of Spouses

 Marriages don’t always end on death – there may be divorce or separation, or the financial interests of both spouses may differ now or in the future, especially in 2nd marriage cases.

 Joint Representation - Attorneys must address the implications of joint representation at the beginning of any client relationship. Clients have a right to know the practical implications of joint representation so that they can choose not to participate if it is inappropriate for their situation.

 – Address distributions to current spouse, children of previous relationships, children with spouse. Joint Representation

 Prepare a written statement regarding joint representation and require clients to consent to joint representation in writing before commencing the estate plan. Important points to include:  Attorney's freedom to share information furnished by one spouse with the other.  Attorney's duty to share information furnished by one spouse with the other spouse.  Attorney's obligation to terminate the joint representation when proper. State Law Considerations

 Be familiar with state laws that may impact the client's ability to freely dispose of her/his assets. These include:

 Lack of Restrictions on the Disinheritance of Children or Grandchildren

 Spousal Elective Share Rights

 Community Property

 Rights of Non-Marital Partners

 Understand the impact of divorce, a subsequent marriage, or the subsequent birth or adoption of a child, on the provisions of a Will. Right of Election (Elective Share)

 You cannot disinherit your spouse. . . .without consequence:

 NY law gives the surviving spouse a right to elect to receive the "elective share" instead of what the decedent left her/him under the Will or by testamentary substitute, or by intestacy.

 Election is only available if the surviving spouse receives less than the elective share OUTRIGHT from the decedent.

 The elective share is $50,000 or one-third of the decedent's "net estate", whichever is greater.

 A surviving spouse is not required to elect. . . . .UNLESS:

 A surviving spouse who is receiving Medicaid nursing home benefits will be required to elect against the deceased community spouse’s estate. Community Property

 A client who moves to New York State and later dies here owning property may have community property issues if he or she lived in one of the eight community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas and Washington.  In community property states, the surviving spouse is entitled to one-half of the community property, and the other one-half passes under the deceased spouse's Will or by intestacy to the distributees.  It is possible for the spouses to have separate property, which can include all property owned before the marriage and any property acquired by inheritance, gift or devise, unless the parties agree otherwise.  When separate and community property have been converted and commingled during marriage, it is often difficult for the executor to determine the proper classification of the property. Community Property: New York

 Personal property, wherever situated, acquired as or which became community property under the laws of another state, retains its character as community property in a New York decedent's estate.  Real property located in New York that was acquired with the proceeds from, or in exchange for, community property similarly retains its character as community property in a New York decedent's estate.  Example:

 Decedent owned $200,000 in stocks he acquired while married and living in a community property state.

 Surviving spouse is deemed to already own ½ of stock, and it may not be bequeathed to any other person. Decedent is free to dispose of remaining ½ (no right of election). Non-Marital Partner Issues

 Statutory protections enacted for the benefit of a testator's surviving spouse, such as the right of election, the right to exempt property, and the right to inherit in the absence of a will, are only available to the surviving member of a lawful marriage. (see EPTL 5-1.1-A, 5-3.1 and 4-1.1).  Same sex couples who are married now have marital rights, including entitlement to a marital deduction on estate taxes (see US v Windsor, 133 S Ct 2675 [2013]).

Take extra care with the plan if a couple is not married, since many automatic rights are not available. Estate Planning Advice: Risk to the Attorney

 Executor has the authority (duty) to bring malpractice action against the attorney-draftsperson (see Schneider v Finmann, 15 NY3d 306 (2010 ).

 The Court of Appeals reversed the long-standing precedent that there was no privity between the legal representative of the decedent's estate and the attorney who provided estate planning advice to the decedent.  Beneficiaries do NOT have a right to sue the draftsperson; but. . . Remember that the Executor has a fiduciary duty to the beneficiaries. Protecting Yourself as Drafter Even if the client does not ask or want to discuss certain issues, be sure to:

 Discuss estate tax planning.

 Discuss long term care planning.

 Document, document, document.

 Terminate the relationship when plan is complete, i.e. send a “We’re done - we did what you wanted” letter to get the statute of limitations started. Testamentary Capacity

 “Testamentary Capacity” for purposes of Will execution is knowing generally, without prompting:

 Nature of the act performed (Will execution);

 Nature and extent of assets to be disposed of;

 Names and relationship of persons who are the “natural objects of one’s bounty” (distributees) Attorney - Executors

 Disclosure statement per SCPA 2307-a, signed by testator, generally executed when Will is and witnessed by one witness.

 Must be filed with probate petition, or attorney/executor will be limited to ½ commissions if was draftsperson of Will or affiliated with draftsperson.

 Use language in statute.

 Note disclosure form changed in 2004, and the statute changed in 2009 to add language acknowledging that the attorney executor would only receive ½ commissions if the disclosure statement is not executed.

 Fees and commissions are fixed by Court. Estate Tax Issues

 To perform the estate planning function properly, the lawyer must have a working knowledge of estate tax planning.

 If inexperienced, advisable to develop a familiarity or work with a lawyer who specializes in estate tax matters.

 Tax savings must not blind the lawyer to the primary objective of carrying out the testator's wishes. Estate Tax Issues

 You must consider both FEDERAL and STATE estate tax:  FEDERAL ESTATE TAX

 $5,430,000 current exclusion in 2015

 40% Tax Rate

 Portability- Unused exemption of first spouse to die passes to and can be used by the surviving spouse.  NEW YORK STATE ESTATE TAX

 $3,125,000 current exclusion 4/1/2015 to 3/31/2016

 Graduated tax rates, top rate of 16%

 No Portability Elder Law: Medicaid Planning

 An attorney also needs knowledge of elder law topics, such as Medicaid planning (planning to protect the client’s assets from nursing home costs).

 All clients may be concerned about the implications of nursing home costs and the designation of someone to make health care decisions for them if they subsequently become unable to do so.

 Schneider v. Finmann Reminder: Attorney draftsperson’s duty extends past Testator’s death. Drafting the Estate Plan

 An attorney must know how to draft a will or trust, and be able to answer the following questions:

 What items should be placed in a will?

 What forms of gifts, outright or in trust, should be considered to accomplish the client’s goals?

 Should there be provisions for minor or disabled beneficiaries?

 Who should be the fiduciaries and what authority should they be given? Post-mortem Estate Planning

 Estate Planning Opportunities do not end on death. Example:  Mom dies first, assets are joint with Dad, who survives.  Dad dies without a will, and has assets worth $300,000. He has one child – Daughter (age 65) who has assets worth $1,000,000. Daughter has 3 adult children, and she would like them to receive the inheritance.  Instead of accepting her inheritance and then gifting to her children, Daughter files a RENUCIATION/ DISCLAIMER of her interest in Dad’s estate (EPTL Section 2-1.11)  Daughter is treated as if she predeceased decedent. Dad’s distributees are then the 3 grandchildren, who take the intestate estate. WHAT ARE THE REQUIREMENTS OF A RENUNCIATION?  Must be in writing, signed and acknowledged.  Must be filed in the Surrogate’s Court that would have jurisdiction of the decedent’s estate.  THE TIME PERIOD FOR FILING IS CRITICAL. Renunciation must be filed within 9 months of the death.  Statute requires various documents must accompany the renunciation (affidavit of renouncing party, notice to fiduciary and persons whose interests are created, etc.  Renunciations may not be filed on behalf of infants, incompetents or decedents without authorization of the Court, which must be obtained in a formal proceeding. BEWARE OF RENOUNCING IN FAVOR OF THE WRONG PARTIES.  If the renunciation of an interest under a Will is made, the terms of the Will, and any applicable statutes, control who will receive the property, as if the renouncing party predeceased the decedent. The renouncing party may not choose who receives the property.

 EXAMPLE: Decedent’s will leaves her Adirondack camp property to her son and her daughter. Daughter filed a renunciation in the property, believing her brother would receive the camp.  Unintended consequences: Daughter has 2 minor children, and the anti-lapse statute applies to cause her renounced interest to pass to her minor children as if she predeceased the decedent, which, of course, was not what was intended.  Note: All renunciations are IRREVOCABLE, and cannot be undone once filed. THANK YOU!

I’m looking forward to seeing your brilliantly-drafted estate planning documents in Surrogate’s Court!