10/16/2013

Estate Planning Overview

Stacy L. Pettit, Esq. New York State Bar Association CLE, October 2013 INTRODUCTION TO ESTATE PLANNING

Reasons for Estate Planning

 During Lifetime: Management of assets and personal needs, or protection of assets for a spouse or other family member in the event of disability or incompetence.  After Death: Management and distribution of estate assets after death, efficiently and while accomplishing the client's goals.  What We Will Discuss Today:

 Planning Considerations - Family, Spousal and Beneficiary Issues, Assets, Tax issues, Long-term Care Planning, Ethics, and the Documents needed to accomplish the goals

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Importance of an Estate Plan

 No Will: Laws of intestacy govern the disposition of assets that are not covered by beneficiary designation or joint ownership.  Example: H & W have 3 minor children. H has $700,000 in assets. W has $1,000 in assets. House is owned jointly by H & Wife. H dies.  Who gets what?

 W keeps the house as surviving joint tenant.

 Wife receives $375,000 ($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.  THE ASSETS, how they are owned (i.e. jointly, p/o/d, etc.), and the tax consequences (estate and otherwise) 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.

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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.”

. 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.”

 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).

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“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 either or another method 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” 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.

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Who Cannot Take Under Intestacy?

 Divorced spouse.  Abandoning spouse (must be unjustified, without consent and continued through death).  Abandoning parent (failure to provide support).  Distributee Murderer of Decedent.  Adopted Out Children.  Step-Children (Not Adopted).

Asset Information

 Need to Know: When a person dies, assets which are in joint name 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 or other issues to be addressed.

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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

Necessity of Complete Information from Client

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

. A lawyer engaging in estate planning needs a detailed description of the client's assets and copies of all legal documents that might affect the client's estate plan:

. 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

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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.

 Yours, Mine and Ours – Address distribution to current spouse, children of previous relationship, children with spouse.

Joint Representation

 Prepare a written statement regarding joint representation and require clients to consent to such representation in writing, before commencing 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.

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State Law Considerations

 Be familiar with state law 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.

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Community Property

 A client who came to New York State and later dies here 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 one-half passes under the deceased spouse's Will, or, if intestate, 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).

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Non-Marital Partner Issues

 Statutory protections enacted for the benefit of a testator's surviving spouse are fairly clearly only available to the surviving member of a lawful marriage. (see EPTL 5-1.1, 5-1.1-A, 5-1.4, 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 rights are not available.

Estate Planning Advice: Risk to the Attorney

 Executor has the authority (duty) to bring malpractice action against the attorney-draftsperson (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.

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Protecting Yourself as Drafter Even if the client does not ask/want, be sure to:

 Discuss estate tax planning.

 Discuss long term care planning.

 Document, document, document.

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

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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 executor will be limited to ½ commissions if was draftsperson of Will or affiliated with draftsperson.

 Use language in statute.

 Note disclosure form changed 11/16/2004 - if executed after that date and old form used, probably limited to ½ commissions.  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.

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

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Estate Tax Issues

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

 $5 Million exemption (indexed for inflation to $5.25 Million in 2013).

 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

 $1 Million exemption

 Graduated tax rates, top rate of 16%

(More on this topic later.)

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.

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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, who has assets worth $1,000,000. Daughter has 3 adult children.  Instead of accepting her inheritance, 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 would be the 3 grandchildren, who take the intestate estate.

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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.

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