Estate Planning Presentation

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Estate Planning in a Nutshell Page 1 of 14

Timins & Durante, LLP

PRESENT

Estate Planning in a Nutshell:

Living Documents, Effective Estate Transfers, and How to Properly Use Trusts

Seminar held on September 24, 2009



BIOGRAPHY OF SPEAKER

Daniel A. Timins

Timins & Durante, LLP 800 Central Park Avenue, Suite 207

Scarsdale, New York 10583 Phone: (914) 819‐0663 Fax: (914) 372‐1491

www.tdlawoffices.com

Daniel Timins is a Founding Partner of Timins & Durante, LLP, where he practices estate planning, taxation, and elder law. After receiving his Bachelor of Arts Degree from Washington University, he received his Certified Financial Planner designation and worked at the financial firms of Merrill Lynch, American Express Financial Advisors and Alliance Bernstein Investments. Daniel received his Juris Doctorate from Pace Law School and during his schooling worked as a legal intern at the Law Offices of Eugenia Vecchio and Associates in Harrison, New York, and the Pace Investors’ Rights Project. Between 2006 and 2009 Daniel was a member of the New York City Bar Association's Trusts, Estates and Surrogate's Committee, where he helped to draft proposed state legislation for Insurable Interests of Life Insurance Trusts, New York Insurance Law Section 3205, and participated in submitting proposed legislation for the Revocatory Effects of Divorce, EPTL 5-1.4. He is a currently Co-Chair of the Westchester County Bar Association’s Continuing Legal Education Committee and Co-Chair of the Westchester Women’s Bar Association’s Taxation Committee. He is also currently a member of the Nominating Committee for the Board of the Pace Law School Alumni Association, a Board Member of the Westchester Women’s Bar Association Foundation, and a former Co-Chair of the Westchester County Bar Association’s Membership and Member Benefits Committee. In 2009 Daniel was named as a recipient of the “40 Under 40 Rising Stars Award” by the Business Council of Westchester. Daniel is currently a member of the Justice Brandeis Westchester Law Society, the Financial Planning Association’s Greater Hudson Valley chapter, and a former member of the Westchester County Bar and New York State Bar Associations’ Estate Planning and Real Property Committees. Daniel is licensed to practice law in the state of New York.



The Estate Planning Process

THE THREE CORNERSTONES OF AN ESTATE PLAN

INTRODUCTION

Discuss general estate planning; review client’s

desires, priorities and concerns

DATA GATHERING

Review financial statements and property; further discuss the client’s

desires

STRATEGY SESSION

Discuss options that are available; review drafts of documents and

explain significance

EXECUTION CEREMONY

Execute all legal documents; update

beneficiary designation forms and deeds; discuss

future contact

LEGAL DOCUMENTS“Living Documents”

Wills & Trusts

Deeds to Real Estate

GIFTING DURING LIFEGiving Outright or in Trust

529 Plans & UTMAs

Health & Education Expenses

ACCOUNTS & BENEFICIARY DESIGNATION FORMS

Joint & Individual Accounts

Life Insurance Policies

Retirement Plans



“LIVING” DOCUMENTS

Estate Planning begins with preparing for issues that may arise during your life. This is because a person never knows when they will need help with his or her daily legal requirements. Who will make health decisions for a person with advanced stages of dementia? If a family member is physically disabled? Who will have the discretion to make financial transactions for them? A comprehensive estate plan begins with the following documents; if these documents do not exist a family member (or worse, the state) will have to commence a Guardianship Proceeding on behalf of the affected individual, which can be expensive, time-consuming and intrusive on the individual’s privacy.

A Power of Attorney [“POA”] is a form that allows you, as the principal, to name an agent of your choice to assist you with financial affairs. Despite the title, an agent does not need to be an actual lawyer. A POA can be extremely helpful during times you are not available to deal with your own finances, either due to health, not being available to do so yourself, or even if you are not interested in maintaining your own financial affairs. Your POA can either be durable, meaning your agent has control immediately, limited, meaning effective for a limited amount of time, or springing, meaning it is effective only after some stated event (such as being disabled). You can revoke a POA at any time, provided you are mentally competent to do so. Because, hypothetically, your agent can abscond with your funds, your agent should be someone you place great Trust in, such as a spouse or trusted child with adequate personal finances and some degree of financial accumen. A Health Care Proxy is a document that allows a named agent to make health care decisions for you when you are unable to do so yourself. An example is when a person is having a surgery and will be undergoing general anesthesia and the attending surgeon would like to do unexpected additional work, or when a person is no longer mentally fit to choose how to take care of themselves. Health care proxies only apply when a person is unable to make decisions for themselves, and is revocable at any time. If a person will be having surgery a hospital will require a person to sign that hospital’s standard health care proxy; however, once the hospital stay is completed the proxy ceases to be effective. A Living Will provides instructions to your health care agent as to whether or not you would like to remain alive if you are dependent on hydration, feeding or respiratory mechanisms and in a “brain dead” state. Additionally, it will provide instructions as to whether you want “maximum pain and relief” in the form of painkillers even if the necessary dosage may inadvertently cease cardiac functions. Living wills effectively “pull the plug,” but ONLY if the attending physician believes the principal will not recover cognitive brain functions.



An Advanced Guardianship Directive is a document that names a guardian for minor children when their parents remain alive but are unable to continue caring for those children. A person can name both a guardian of custodianship and guardian of finances. It should be noted that these are mere preferences: The state is always primarily concerned with what is in the “best interests of the child,” so some AGDs may only encompass a desire as opposed to anything that can be legally enforced. Additionally, one parent cannot divest the minor’s other parent of custodial rights (only a court can do that). However particularly where parents are divorced and one spouse becomes unable to take care of his or her child, it may be possible to name an individual other than the remaining parent as guardian of finances. A Disposition of Remains is a document that states a person’s instructions for administering to his or her remains. Many people have added this preference to their Wills, but since a Will is not admitted to Probate until several weeks after death (at a minimum) these instructions are ineffective for practical purposes. Without a DORA a loved one, already bereaved and facing a multitude of important post-mortem decisions that must be made in rapid succession, may feel pressured to handle your remains as they see fit. Instructions in a DORA include information on purchased burial plots, and can be anywhere from very simple (“I desire to have a traditional Catholic funeral and burial”) to highly detailed (“I would like my remains to be cremated, and have my ashes scattered into the East River on a warm spring day in front of a marching band playing “The Sound of Music”). WHEN YOU DON’T HAVE LIVING DOCUMENTS Some people, particularly those who do not have close friends or relatives, or people who choose to avoid addressing the very serious issues mentioned above are particularly vulnerable when they have a problem that a Living Document would address. Guardianship Proceedings are legal proceedings that take place in the county Surrogate’s Court, and are conducted to handle legal matters for people who cannot do so themselves: Minor children in need of a guardian of custodianship or finances typically must go before the court. Seriously disabled adults whom a physician declares incapable of handling his or her health or financial affairs are also the focus of these proceedings. In the case of disabled adults the Court will tailor a specific guardianship applicable to the diminished skills of that adult. A former physician suffering from dementia who may still be able to make his own rational health care decisions may only have a guardian appointed for his financial affairs. The opposite may be true of a former accountant or financial planner. Guardianship Proceedings can be gut-wrenching events to watch! Not only does the proposed guardian have to take care of the disabled adult (which is difficult enough), but the proposed Guardian AND the disabled individual actually have to plead their case to a judge in person, file papers, pay legal fees, AND in the interim the adult’s funds cannot be used for these costs AND his or her health care decisions are somewhat in limbo AND the Court may or may not choose the guardian whom the adult would have wanted. Guardianship Proceedings can be avoided by having the proper Living Documents, since these documents address the exact affairs these proceedings intend to deal with.



GIFT & ESTATE TAXES and EFFECTIVE TRANSFERS

FEDERAL ESTATE AND GIFT TAXATION

The “Unified” Credit “Annual Exclusion Gifts” have no impact on a person’s lifetime “Gift Tax Exemption” or post-mortem “Estate Tax Exemption” • A person can gift Annual Exclusion Gifts to any and

every US citizen every year “Gifts” are given during life; any transfer of an amount over the annual exclusion decreases a person’s Gift Tax Exemption • When this amount is depleted Federal Gift Taxes are

assessed on future gifts “Bequests” are given after life and decrease a person’s Estate Tax Exemption • Any use of the Gift Tax Exemption during life

decreases the amount that can be given free of Estate Taxes after life

NEW YORK STATE ESTATE TAXES

MYTH: The Federal Estate Tax affects millions of Americans. FACT: The Federal Estate Tax currently affects only about 1% of Americans. However, if left unchanged, the New York Estate Tax will affect a much larger percentage of households!

Fortunately, there are no New York state gift taxes. Hypothetically, a citizen of New York can gift an unlimited amount of property without assessing state gift taxes. New York currently begins assessing a state estate tax starting at $1,000,000; the approximate rate of taxation is ~9.9% on every dollar over this amount. Additionally, since the passage of EGTRRA, these taxes are now merely a deduction against federal estate taxes (whereas they used to be a credit). Think about that for a moment: If a person in Westchester County owns a home and a life insurance policy, has a modest retirement plan, and a modest amount of personal property (such as a car and some jewelry) his or her estate MAY BE TAXABLE!!!

Estate Tax Exemption

$3,500,000 in 2009

Gift Tax Exemption $1,000,000 in 2009

Federal Estate Tax Exemption = $3,500,000

New York Estate Tax Exemption = $1,000,000

Annual Exclusion Gifts: $13,000 in 2009



TRANSFERRING PROPERTY AFTER LIFE

There are several ways that property is transferred after life. Many people believe having only a Will is enough to accomplish one’s testamentary desires. However, for many people a Will only transfers a very small portion of their property. Effective estate plans include the proper planning of (1) assets that pass by Operation of Law, (2) individually-owned assets that pass by a Will through Testamentary Transfers, and (3) avoiding relying on Statutory Transfers. Operation of Law is the preferred method of transferring property (because distributions are private, inexpensive and fast), but ONLY if proper thought and preparation has been made to handle these assets.

“OPERATION OF LAW” The “Beneficiary Designation Form” Assets which are transferred by operation of law are automatically transferred to the Beneficiary by merely giving a death certificate to the administering institution (a bank where a joint account is held, life insurance company for a life insurance policy, or a financial institution for an IRA). The operative transferring document is the Beneficiary Designation Form or a Deed to real estate, NOT a Will. In the case of joint property (financial or real estate) instructions in a Will are ineffective; the surviving joint owner only needs to produce a death certificate to client the property.

RULE: Assets that are transferred by operation of law are NOT affected by ANY language in a Will (except revocation of Totten Trusts); the joint owner of the property or the Beneficiary Designation Form are the sole means of transferring the asset unless there is a judgment awarded by a court or an agreement among all of the estate Beneficiaries.



JOINTLY OWNED PROPERTY Avoid Using It Too Much!!! Joint property between spouses is considered to be contributed equally by each spouse regardless of who actually provided the funds. Joint property between non-spouses is considered to be given entirely by both parties.

EXAMPLE: Martin and Charlie, father and son, have a joint bank account worth $100,000. Because they are not spouses it doesn’t matter who actually funded the account: Unless they can prove otherwise through thorough documentation, the IRS assumes that if Martin dies first he contributed all $100,000. If Charlie dies before his father the IRS assumes Charlie contributed the entire amount. Then, because the funds are transferred in full to the survivor, when the survivor passes away the same money can be taxed again! In other words, the IRS has the opportunity to assess estate taxes on the same funds twice over this non-spousal joint property!

RETIREMENT PLANS Because retirement plans, such as 401(k)s and IRAs, grow tax deferred income taxes will be owed on distributions, either during the life of the account Owner or after life based on the lives of the Beneficiaries in the form of required minimum distributions [“RMDs”]. The amount that must be distributed is determined by a standard factor set out in IRS life expectancy tables. The younger the designated beneficiary, the lower the required minimum distribution

Retirement Plans Requirement Minimum Distribution Rules for Non-Spousal Beneficiaries RMDs: Death BEFORE RBD RMDs: Death AFTER RBDIf NO Designated Beneficiary (on Beneficiary Designation form)

First Year of Distributions

• All QP & IRA money must be distributed by 12/31 of year of 5th anniversary of Owner’s death – this is an income tax nightmare!

• RMDs over Owner’s remaining life expectancy w/out recalculation

Subsequent Years

RMD is calculated by reducing Owner’s life expectancy by “1”

If a Legitimate “Individual” Designated Bene IS Named (on Beneficiary Designation form)

First Year of Distributions

• RMDs made over bene’s life expectancy from the Single Life Expectancy Table IF the bene commences distributions by 12/31 of the year after the year of Owner’s death

• RMD for designated bene uses bene’s life expectancy for his age on his birthday in the year following the year of the Owner’s death

• RMDs may be made over the longer of: (1) the Owner’s remaining life expectancy, or (2) the bene’s remaining life expectancy

Subsequent Years

• RMD calculated by reducing bene’s life expectancy by “1” from the IRS tables

RMD calculated over bene’s life expectancy from the Single Life Expectancy Table



PRACTITIONER’S NOTE – Always Name Your Spouse as Primary Beneficiary

It is almost always preferable to name a spouse as Primary Beneficiary of a retirement plan, even if estate tax issues are involved. Spouses receive preferential RMD treatment – unlike other beneficiaries, spouses do not have to take immediate RMDs unless they too are 70 ½. The spouse can either “roll over” the plan to his or her own IRA, create an “inherited” IRA, or Disclaim the funds and transfer them to the Contingent Beneficiaries. If the contingent beneficiaries are children it is preferrable to name a See-Through Trust as the contingent beneficiary, and name the children as beneficiaries of the Trust. The children will receive the benefits of holding funds in Trust, such as creditor protection, while simultaneously maintaining a favorable RMD based on their longer life expectancies.

Suggestions for Naming Children as Primary or Contingent Beneficiaries to a Retirement Plan

1. Split up IRA accounts so each child is a contingent beneficiary of his or her own account for RMD purposes (this can be done instead of using See-Through Trusts, or can be done after life)

2. Younger beneficiaries are able to “stretch” RMDs for longer periods of time due to their increased life expectancy, allowing for a longer period of tax deferral.

3. If a child needs the funds now and the retirement plan does not have a Trust as the beneficiary RMD rules won’t matter – they need the money now, so they will take it.

4. If the Owner’s estate shall be subject to income in respect of a Decedent consider (1) converting the plan to a Roth IRA to minimize future income taxes, and (2) having desired charitable legacies paid for out of the retirement plan.

5. Name a “See-Through Trust” as the beneficiary of the plan.

RULE: Even if the non-spousal “inherited” IRA is a Roth IRA the beneficiary MUST begin taking RMDs, even if they are under 70 1/2.

LIFE INSURANCE

Naming the correct Beneficiary on a life insurance policy is very important, particularly when there has been a divorce. Unlike transfers to ex-spouses by a Will (which are invalidated by divorce) insurance pass to the named individual in the Beneficiary designation form (because it transfers by “operation of law”). If you are concerned that a child may get divorced it is best to have the policy pay to a Trust with that child named Trust Beneficiary.



TESTAMENTARY ASSETS Testamentary Assets are those that pass by a Last Will and Testament. These include all assets that don’t transfer by Operation of Law or Statutory Transfers. Unlike Operation of Law transfers, there is no need to complete Beneficiary designation forms: Any asset that is a Testamentary Asset is automatically considered part of your “Probate Estate,” and will be transferred by the terms of your Will.

Testamentary assets include:

Remember that Testamentary Assets are transferred by a Will. If you have a valid Will you die Testate and you are the Testator. If there is no Will these assets become “Statutory Transfers” under the laws of Intestacy (see below). If there is a valid Will it is submitted to Probate in the Surrogate’s Court, which then oversees the Probate process. Probate is public, meaning that anyone can view another person’s Will once it is admitted to Probate. For that reason (and many others) most estate planners recommend creating and funding Trusts during lifetime.

Testamentary Assets may or may not constitute a large amount of a person’s estate. For a person who jointly owns a house, holds a large amount of funds in jointly-owned bank and brokerage accounts, and has a decent amount of money in retirement plans, Testamentary Assets may constitute a very small percentage of the gross estate. PROBATE (WILLS) v. TRUST ADMINISTRATION Contrary to public opinion, Probate isn’t a “bad thing.” However, Probate can be (1) expensive and time-consuming. (2) Probate is a completely public affair – you can review everyone’s Will that has been admitted to Probate by the Surrogate’s Court. (3) Probate also requires a substantial amount of paperwork to be submitted to the courts, and while court fees are quite reasonable, (4) the legal fees to prepare these documents can be substantial. (5) Probate requires court supervision and oversight. Even under ideal circumstances, (6) distributions of testamentary assets can take many months.

Probate

Business Interests (sometimes)

Real Estate (if not owned by a trust and not jointly owned)

Individually owned bank and

brokerage accounts &

personal property



Trust Administration is (1) a completely private affair, thus disowned heirs have limited knowledge of estate distributions. (2) No court paperwork is required, and (3) the court will not interfere unless there are formal legal proceedings. (4) Legal fees are substantially less than under Probate.

TRUSTS – A SOLUTION FOR LIFE AND THEREAFTER PARTIES TO A TRUST

There are three (3) parties to every Trust: the Creator (also known as the Grantor or Settlor), the Trustee (and often Co-Trustees or Successor Trustees) and Beneficiaries (and often Contingent Beneficiaries if there could be any remaining Trust assets after the death of the Primary Beneficiaries).

A person can serve as all three parties at the same time – they can create a Trust, name themselves a Trustee during his or her life, and also be the sole Beneficiary during that time. The largest benefits of this arrangement are that (1) if the Creator becomes disabled a Successor Trustee can continue to use Trust funds for the Creator’s benefit without requiring court approval, and (2) upon the Creator’s death the Successor Beneficiaries can receive the remaining estate without the need of going through Probate and the associated publicity and expenses of this process.

EXAMPLE: Phil and Ruth create Revocable Trusts during their lifetimes and retitle all of their assets to either “The Phil Revocable Trust” as Owner or “The Ruth Revocable Trust” as Owner. They name each other as Co-Trustees and initial Beneficiaries of each other’s Trust. During this entire period either spouse can revoke his or her own Trust (perhaps there is a falling-out with a contingent Beneficiary, and they want to disinherit him). When Phil has a stroke and is in the hospital recovering Ruth is able to use funds from his or her Trust for his medical expenses and other affairs. When Ruth pre-deceases Phil he can (if he is capable) continue administering both his and her Trust for his benefit or have a Successor

Creator / Grantor / Settlor> Creates the Trust

> Determines Terms of the Trust

> Funds the Trust

Beneficiaries> Entitled to the property underthe terms of the Trust

Trustee> Manages the trust property

> Follows the Terms of the Trust

> Entitled to a Commission



Trustee administer the Trust (again, for his own benefit). When the second spouse passes away the Trust can be distributed to the contingent Beneficiaries (here Phil and Ruth’s children) without having to go through Probate.

BENEFITS OF TRUSTS

Whereas a Creator cannot gain protection from his own creditors by placing funds in a Trust, all Trusts, whether they are Stand-Alone or Testamentary Trusts, allow for Creditor Protection for Beneficiaries; just make sure to choose an appropriate Trustee and include the power for them to name a disinterested Co-Trustee. Potential Creditors of Your Beneficiaries• The Internal Revenue Service and State

Tax authorities • Standard Lenders: Mortgage Company,

Credit Cards, etc. • Claimants of Lawsuits against the

Beneficiary • Spouses and Minor Children

Additional Benefits of “Stand-Alone” Trusts

AVOIDING ANCILLARY PROBATE

Some people have to go through Probate in more than one state! A valid Will drafted for a New York domiciliary may cover a person’s financial and personal property as well as real estate in New York, but will NOT affectively transfer real estate in another state, such as Florida. Probate or Intestacy proceedings have to take place in this second state for the real estate located there. This process is known as Ancillary Probate, since the only piece of property being transferred by this second Probate is the Real Estate. Ancillary Probate leads to a second-round of court filing fees, attorney fees, Beneficiary involvement, etc. By having this second piece of real estate outside of New York owned by a Trust you can AVOID Ancillary Probate (much like having your Trust own your New York real estate avoids having to have it pass through Probate in New York). The Deed to this property outside of New York should have the Trust named as its Owner to make this strategy affective. MAKING A TRUST “EFFECTIVE”

RULE: An unfunded Trust is INEFFECTIVE!!! The most important aspect of having a Trust become effective is both that (1) the Trust document is drafted, and (2) the Trust is named as the Owner of the property, which effectively “funds” the Trust, either in the form of a Deed for real estate or as the named Owner of a bank or brokerage account. Once these steps have been taken the Trust becomes the Owner of the property, and the Trustee now administers the property under the terms of the Trust.

Decreased Estate Administration costs (Avoids Probate &

decreases attorney fees)

Continuity of control

over property; faster

distributions of estate funds

Minimizing or completely avoiding

high Executor Commissions

Avoids the publicity associated

with Probate



PRACTITIONER’S NOTE: How to Name a Trust as Owner of Accounts and Real Estate

The title of a bank or brokerage account is no longer owned by Sam Smith, but is instead titled as The Revocable Trust of Sam Smith. If Sam is the Trustee and the Trust names him as Beneficiary Sam can use Trust funds however he desires. The Deed to your house or vacation home in Florida is no longer in the name of Cindy Jones, but is instead owned by The Revocable Trust of Cindy Jones. Again, based on the terms of the Trust, Cindy can live in the house as long as she wants, sell it, rent it out, etc., AND the Florida vacation home now avoids Ancillary Probate because it is transferred by a New York Trust. Make sure to fund your Trust! An estate plan that includes a Trust but has no property that is explicitly owned by the Trust is an ineffective shell; all of the property the Creator thought was owned by the Trust (and should have been distributed under Trust Administration) will be transferred via Will, Operation of Law or the laws of Intestacy. ESTATE TAX CONSIDERATIONS & “CREDIT SHELTER TRUSTS”

A Credit Shelter Trust [“CST”] holds aside a pre-determined amount of money in Trust at the death of the Testator or Creator that qualifies up to the federal or state estate tax exemption. The surviving spouse continues to spend his or her own funds and can invade the CST if needed. In the interim the funds in the CST grow. Upon the death of the surviving spouse all of the funds in the CST, including investment gains, pass to the contingent Beneficiaries (typically children or younger family members) estate tax free. Most people with older estate planning documents have the federal estate tax exemption as the defining amount of their CST. As already discussed, New York domiciliaries may want this amount to be defined as the New York estate tax exemption. Also, since stating dollar amounts may lead to future estate tax inefficiencies (due to ever-changing estate tax exemption amounts) using a Formula Provision (“I leave the then-applicable state estate tax exemption in a credit shelter trust”) will allow for the optimum amount of desired funds to be transferred in a CST free of estate tax.



NAMING TRUSTEES

Care must be given to the exact powers that fiduciaries can control: Giving complete discretion may lead to tax problems and lack of creditor protection.

Due to the wide range of powers available to Trustees special attention must be given to determining these power to maintain Beneficiary creditor protections afforded to Trust asets. Since the Grantor will typically name himself as Trustee of his Revocable Trust and has no creditor protection the focus should be on naming an appropriate Successor Trustee. In order to avoid creditors from having a valid, enforceable claim against a Beneficiary one should be careful to avoid people considered “Beholden Trustees” to the Beneficiary. Allowing a Trustee to name either a Successor Trustee or a Disinterested Co-Trustee (I.e. a person or institution with no interest in the Trust other than Trustee commissions) should avoid this consequence.

Spouses of the

Beneficiary

Children of the

Beneficiary

Employees of the

Beneficiary

Siblings who are Trustees of each other’s Trust

Beholden Trustees