Finance & Law

By naming a trustee to decide the amount of distributions to be taken, the account holder can rest assured that the IRA savings won’t be squandered. Stock photo

By Nancy Burner, ESQ.

Nancy Burner, Esq.

One of the most misunderstood planning strategies is that retirement funds, such as 401(k)s, 403(b)s, traditional individual retirement accounts (IRAs) and Roth IRAs, should not name a trust as designated beneficiary. My clients are often advised by their financial adviser to name individuals and not trusts, even minor or disabled beneficiaries. That could be the most expensive mistake made by a retirement account holder and one I often see. The IRA retirement trust is the answer.

First, clients are concerned about protecting their beneficiaries from claims of creditors: that is, divorcing spouses, judgment creditors and Medicaid if the beneficiary needs long-term care.  

While IRA accounts are protected from creditors of the original account holder and surviving spouse, the same is not true for inherited IRAs. The Supreme Court of the United States has ruled that when someone other than the spouse inherits an IRA, the account is subject to beneficiary’s creditors. Thus, if parents want to protect their child, they can name a trust as the beneficiary of the account, instead of naming the child directly. Correctly written, the trust can allow the trustee to use the beneficiary’s life expectancy, commonly referred to as a “stretch IRA.” 

Under federal tax law, designating an individual as the beneficiary of a retirement account results in tax efficiencies by allowing the beneficiary to take the benefits over their life expectancy based upon the beneficiary’s age at the time of the owner’s death and the use of an IRS actuarial table. 

Each year the beneficiary of the IRA must take a minimum distribution from the inherited IRA and must pay income tax on the distribution. The balance of the IRA continues to grow tax deferred, only distributions are taxable. Therefore, a young beneficiary will be able to defer the tax longer (commonly known as “stretch”) and enjoy exponential growth. In the case of a Roth IRA, the account holder has already paid the tax, so the beneficiary can continue to have tax-free growth, not tax deferred, over his or her life expectancy.

In order to use the trust beneficiary’s life expectancy, the trust must meet the following criteria: 

The trust must be valid under state law; the trust must be irrevocable by the time of the account holder’s death; the trust beneficiaries must be identifiable within the trust document; the retirement beneficiary custodian, issuer, administrator or trustee must be provided with a copy of the trust document by Oct. 31 of the year after the year of the retirement owner’s death and there must be an agreement to that information in the event it is ever changed; and all the “counted” beneficiaries of the trust are “individuals.”

Typically, trusts that satisfy the above criteria will qualify for the stretch. The trusts are drafted as either a conduit trust or an accumulations trust. 

The simplest trust is a conduit trust, which allows the trustee to decide on the amount and timing of any and all distributions from the trust. However, any distributions taken must be paid immediately to the beneficiary — who must be an individual. The trust can be drafted to give the trustee the power to take only minimum distributions or distributions more than the minimum.  

The second type of trust is a qualified accumulation trust. This trust permits the trustee to accumulate annual minimum required distributions in the trust after the distributions are received from the inherited retirement benefit and is used for beneficiaries that have existing creditor problems to protect the annual distributions from a creditor’s reach. 

If the payment were to be paid to the beneficiary outright, the creditor would be able to take the distribution. This type of trust is also used for a supplemental needs trust for a disabled individual. Since most supplemental needs trusts are intended to protect government benefits, it is imperative that the distributions be permitted to accumulate in the trust.  

Under New York law, for example, the beneficiary (other than supplemental needs beneficiary) can be her own trustee with the power to make distributions to herself for an ascertainable standard of health, education, maintenance and support without subjecting the trust to claims of her creditors. In cases where the beneficiary is unable to act as trustee, because of lack of maturity, irresponsibility or disability, someone else can be named as trustee. Importantly, the trustee will be the “gatekeeper” and take minimum distributions and exercise discretion to take even more from the IRA if needed and permitted by the trust terms.  

By naming a trustee to decide the amount of distributions to be taken, the account holder can rest assured that the IRA savings won’t be squandered. Beneficiaries that are not financially savvy can create tax problems by taking distributions without considering the income tax consequences. Not only will the distributions be taxable, the distribution may put the beneficiary in a higher tax bracket for all their income. 

Retirement funds are often the largest assets in a decedent’s estate and usually given the least amount of consideration. Consideration should be given to naming a retirement trust as the designated beneficiary.

Nancy Burner, Esq. practices elder law and estate planning from her East Setauket office. 

Stock photo

By Linda M. Toga, Esq.

Linda Toga, Esq.

THE FACTS: In his will my father names me as the executor of his estate. I filed a petition in Surrogate’s Court to be appointed executor and have been issued letters testamentary. In addition to his home in New York, my father owned a vacation home in Florida, which I need to sell. 

THE QUESTIONS: Do the letters testamentary issued by the New York Surrogate’s Court give me the authority to sell the property in Florida? I was told I had to get authority from a court in Florida that deals with estates. Is that true?

THE ANSWER:  The quick answers to your questions are “no” and “yes,” respectively. Letters testamentary issued by a Surrogate’s Court in New York give you the authority to handle real property in New York. They do not give you the authority to sell property outside the state. That is because New York courts do not have jurisdiction over property in other states. In order to sell the Florida property, you will have to obtain authority from a court in Florida that handles matters relating to estates.

In order to obtain authority from the Florida court, you need to file a petition with the probate division of the circuit court in the county in Florida where your father’s property is located. 

As part of the petition you will need to provide the Florida court with a copy of the petition filed with the New York Surrogate’s court and a copy of the letter testamentary issued to you by that court. You will also need to pay the court a fee based upon the value of the Florida property. Once that court reviews and approves the petition, you will be issued ancillary letters testamentary and will be appointed the personal representative of your father’s estate. Based on that appointment, you will be able to dispose of your father’s property in Florida.

The ancillary probate process can be quite costly, especially if you retain Florida counsel to handle the matter for you. Because of the extra time, effort and expense of an ancillary proceeding, some people avoid the process entirely by creating a revocable trust to hold their out-of-state property. This is especially true when people own property in more than one state in addition to New York. 

If your father had put the Florida property in a revocable trust and named you as the trustee, you would have been able to dispose of the property without the need for court intervention. An experienced estate planning attorney could have discussed this option with your father and helped him determine how best to proceed. 

Linda M. Toga provides personalized service and peace of mind to her clients in the areas of estate planning, wills and trusts, Medicaid planning, estate administration, marital agreements, small business services, real estate and litigation. Visit her website at www.lmtogalaw.com or call 631-444-5605 to schedule a free consultation.  

There are many reasons why estate planning is important.

By Nancy Burner, ESQ.

Nancy Burner, Esq.

Regardless of your age, the creation and maintenance of a thorough estate plan is essential. An estate plan ensures that your needs, your family’s needs and financial goals are met during your lifetime and upon your death. A thorough and comprehensive plan should include a last will and testament, health care proxy, living will and power of attorney. For some clients the creation of a trust is also practical. Through the creation of a last will and testament and/or a trust, you can establish how your assets will be distributed upon your death.

Additionally, you can ensure that the financial needs of your children or disabled beneficiaries are met after you pass away by establishing trusts for their benefit. By creating a health care proxy, you can designate a succession of individuals to make health care decisions on your behalf, if and only if you are incapable of making them on your own. An estate plan would also include the creation of a power of attorney, through which you can designate someone to handle your financial matters in the event you become incapable of doing so.

Once you have taken the time to create your estate planning documents, you must properly store and protect these original documents. This is particularly important with regard to your power of attorney since many banks and financial institutions require the original signed document. Additionally, the executor of your last will and testament must file the original document with the Surrogate’s Court. It is important to remember to not remove the staples from your original last will and testament.

When deciding where to keep your documents, you should consider who will be acting as your agent, trustee or executor. It is important that you keep your documents in a place where your named agent can easily find and access them. It is not recommended to keep your documents in your safe deposit box. Banks have strict rules about who they allow to open and access safe deposit boxes. This is especially problematic should you become incapacitated or upon your death, since you may be the only one with access to the box.

While some people believe that having a jointly owned safe deposit box will solve this problem, banks have been known to freeze access to safe deposit boxes even when there is a joint owner. If the bank does not allow access, your agent will need a court order to open the box and locate the documents. The most accessible place to keep your documents is in your home or office. It is important that you tell the individuals you name as your agents where your documents are located. The best way to protect your documents from damage is to keep them in a fireproof and waterproof box. However, if you choose to use a safe, make sure that your trusted agents have the safe lock combination.

Nancy Burner, Esq. practices elder law and estate planning from her East Setauket office.

Chronic Medicaid is the program that covers nursing home care.

By Nancy Burner, ESQ.

Nancy Burner, Esq.

When someone enters a nursing facility, an application for Chronic Medicaid may be appropriate. The average cost of a nursing facility on Long Island is $15,000 per month. This type of cost would exhaust assets very quickly in most cases.

Chronic Medicaid is the program that covers nursing home care. Medicaid is a needs-based program, which means there are resource and income requirements that must be met.

For 2017, an individual applying for Chronic Medicaid can have no more than $14,850 in liquid nonqualified assets, an unlimited amount of retirement assets so long as the applicant is taking a monthly required distribution and an irrevocable prepaid funeral trust. The applicant may keep no more than $50 per month in income.

Chronic Medicaid has a five-year look-back. The look-back refers to the period of time that the Department of Social Services will review your assets and any transfers that you have made. To the extent that the applicant has made transfers or has too many assets in their name to qualify, they will be ineligible for Medicaid. If the applicant gifted or transferred money out of his or her name in order to qualify for Medicaid, the Department of Social Services will total the dollar amount of gifts and for each approximately $12,811 that was gifted, one month of Medicaid ineligibility is imposed.

For example, if an individual gifted away approximately $50,000 within the five-year time period, the Department of Social Services will impose a four-month penalty. It is also important to note that the ineligibility begins to run on the day that the applicant enters the nursing home rather than on the day that the gift was made.

If the applicant entered the nursing home in September, the four-month penalty would run for September, October, November and December. Medicaid would pick up starting in January and the applicant would be responsible for the nursing home bill from September through December. If the applicant exceeds $14,850 in liquid assets, there are certain planning mechanisms that can be used in order to qualify the applicant for Chronic Medicaid benefits. One of those mechanisms is establishing an irrevocable pre-need funeral. New York State law mandates that pre-need burial trusts for applicants or recipients of Medicaid be irrevocable.

This means that the prearrangement may not be canceled prior to death nor can funds be refunded if the actual funeral costs are less than then funded agreement. Thereby, an individual with a revocable agreement would have to convert it to an irrevocable agreement if they were to require Medicaid in the future.

The Medicaid applicant is also permitted to set up pre-needs for a spouse, minor and adult children, stepchildren, brothers, sisters, parents and the spouses of these persons. The timing of when these pre-need funeral trusts are established can be crucial to the Medicaid application.

It is important to note aside from the irrevocable pre-need there are other exempt transfers that can be used to qualify an individual for Chronic Medicaid. Transfer of assets to a spouse in an unlimited amount, transfer of the primary residence to a caretaker child, transfer of assets to a disabled child and transfer of the primary residence to a sibling with an equity interest are exempt transfers used to qualify an individual for Chronic Medicaid. Even when there are no exempt transfers, there is last minute planning that can be accomplished that could save approximately half of the remaining assets.

It is crucial to consult an elder law attorney in your area as soon as possible in order to preserve the maximum amount of assets.

Nancy Burner, Esq. practices elder law and estate planning from her East Setauket office. For more information, call 631-941-3434 or visit www.burnerlaw.com.

Many boomers plan on using their assets to make their golden years golden.

By Linda M. toga, Esq.

Linda M. Toga, Esq.

THE FACTS: My husband and I are in our sixties and have three grown children. All were given the same opportunities growing up, but they did not all take advantage of those opportunities or make wise decisions about their futures. Our two daughters are financially secure and doing very well. Our son, however, has struggled and we expect will continue to struggle to make ends meet his entire life.

My husband and I have accumulated significant assets over the years. We have been generous to our children and have made an effort to treat them all the same despite the differences in their financial well-being.

Despite this fact, my son seems to be under the impression that because he needs more, he is entitled to more. He has made comments on a number of occasions suggesting that since we have the means to make his life easier, we should do so. It is clear that he expects that we will be leaving him a sizable inheritance, perhaps even more than we leave our daughters.

We are bothered by these comments for a number of reasons, not the least of which is that my husband and I are planning on using our hard earned money to travel and, if needed, to cover our health care costs. While we fully expect that all of our children will inherit some money from us, I do not believe that we will be leaving any of them substantial assets.

THE QUESTION: How do we make this clear to our son who seems to think he will see a windfall when we die?

THE ANSWER: You and your husband are not alone in having accumulated significant assets that you hope to spend on yourselves. Many boomers benefited by parents who were conservative savers and cautious spenders. Consequently, these parents often accumulated more wealth than they spent and passed that wealth on to their boomer children.

The boomers, on the other hand, may not have been such conscientious savers. Even if they were, they are finding that they are living longer, may need more money for health care and often believe that they need not leave substantial assets to their children since they did so much for them during their lives.

Like you and your husband, many boomers plan on using their assets to make their golden years golden. That is your right. You earned it. You can spend it. However, if you do not want your son to be surprised or resentful when he does not inherit the kind of money he may expect will be coming his way, the best thing to do is to tell him outright.

Perhaps you can share with him the choices you made over the years that resulted in having a significant nest egg. Then tell him how you hope to spend your hard earned money on yourselves while you enjoy a long and healthy life.

You may discover that the comments he has made about a large inheritance were made in jest and that he isn’t really counting on a windfall. That would be the best scenario.

Even if he expresses disappointment and/or anger, you and your husband should feel better about the fact that you were open and honest with him. He can ignore what you say or he can use what you tell him to better plan for his future. In either case, having the conversation will ensure that when you and your husband pass away, he is not blindsided.

Linda M. Toga provides personalized service and peace of mind to her clients in the areas of elder law, estate administration and estate planning, real estate, marital agreements and litigation. Visit her website at www.lmtogalaw.com or call 631-444-5605 to schedule a free consultation.

A trustee must put the interests of the trust beneficiaries before their own

By Nancy Burner, ESQ.

Nancy Burner, Esq.

If you have been named as a trustee of someone’s trust, you may be wondering what you are supposed to do. It is important that the trustee understand his or her duties and responsibilities. The most important thing to remember as a trustee is that the trust assets are not your assets. You are safeguarding them for the settlor and/or beneficiaries, who will receive them after the settlor dies.

As a trustee, you stand in a “fiduciary” role with respect to the beneficiaries of the trust. As a fiduciary, you will be held to a very high standard. The trustee must read the trust document carefully, upon acting initially and when any questions arise. The trust is the road map and the trustee must follow its directions in administering the trust. A trustee should be aware that failing to abide by the terms of the trust document and mismanaging the assets can have serious financial repercussions for the trustee personally such as forfeiture of commissions and surcharge.

This very issue came up in the recent Suffolk County Surrogate’s Court case of Accounting Proceeding the Schweiger Family 2013 Irrevocable Trust decided on Sept. 7, 2017.

The subject trust stated that during the lifetime of the settlor, the trustees in their sole discretion may pay the net income to or for the benefit of the settlor’s beneficiaries or accumulate such income. With respect to principal, the trustees were given the discretion to pay so much of the principal to or for the benefit of the settlor’s beneficiaries. The trust did not require equal principal distributions and same may be made to any or all of the settlor’s beneficiaries.

Distributions made to any beneficiaries during the settlor’s lifetime shall be considered as advancements in determining the beneficiary’s respective share, unless waived by the remaining nonrecipient beneficiaries in writing. The trustees had no authority to pay principal to the settlor.

Despite the language in the trust document, the trustees made distributions to themselves and to individuals that were not beneficiaries, namely the settlor, their children/grandchildren and the spouse of one of the trustees.

In addition, the trustees indicated in their accounting that several of the distributions that were made to themselves as “per settlor’s request.”

After a review of the facts and the language of the trust document, the court held that even if the distributions to the trustees were at the settlor’s suggestion, those distributions were either impermissible gifts of trust assets by the settlor or distributions that the trustees should have assessed against their respective shares as advancements.

With respect to commissions, the court held that intentionally making distributions to individuals who were not beneficiaries of the trust is, in and of itself, a basis to deny commissions. Further, with respect to their self-dealing, either the trustees were in fact aware of the language regarding offsetting advance distributions and chose to disregard it or they were grossly negligent in their failure to seek professional advice to assist them in understanding the duties and responsibilities associated with being trustees. In the end, the trustees were surcharged approximately $230,000 for their self-dealing and failure to abide by the terms of the trust document.

The take away from all of this is that a trustee must follow the terms of the trust instrument and put the interests of the trust beneficiaries before their own. If this is not done the trustee is at risk of personal liability for any breach of duty in the form of denial of commissions or surcharge.

In addition, if you are the trustee of a Medicaid-qualifying irrevocable trust and fail to abide by the terms of the trust, not only do you run the risk of denial of commissions or surcharge, but you can also nullify any protections that the trust provides to the assets held by the trust. This would make all of the assets in the trust be considered an available resource when determining Medicaid eligibility for the settlor and could result in a denial of Medicaid benefits.

With a trustee’s personal liability at stake, it is advisable to retain an attorney to provide advice regarding the trustee’s fiduciary duties and obligations in administering a trust.

Nancy Burner, Esq. practices elder law and estate planning from her East Setauket office.

A pet trust is effective immediately upon your death whereas a will can take months to execute.

By Linda Toga

Linda Toga, Esq.

THE FACTS: My mother has a dog, Fido, who means the world to her. When it comes to Fido, money is no object. She is very concerned about what will happen to Fido when she dies. Not only does she worry about who will care for Fido but also about who will pay for Fido’s care.

THE QUESTION: Should these issues be addressed in her will?

THE ANSWER: While the long-term care of Fido can be addressed in her will, your mother needs to make arrangements for Fido’s care for the period immediately following her death because the provisions of her will are not effective until the will is probated. That could take some time.

I always suggest that pet owners arrange in advance for someone to take care of their pet in the event they are unable to do so either because of disability or death. It is important that a caregiver is identified and is ready and willing to take the pet on relatively short notice. These temporary arrangements need not be in writing unless the owner feels that people are going to fight over who will care for the pet.

For example, if you and your siblings agree with your mother that Mary will take care of Fido, there is no need to put the arrangement in writing. However, if all of you want to take care of Fido, your mother should put her wishes in writing to avoid conflicts.

As for the long-term care of Fido after your mother’s passing and the cost of that care, I suggest that your mother include in her will a pet trust. When thinking about the provisions to include in the pet trust, your mother should not only consider who will care for Fido for the rest of his life but also whether the appointed caregiver has the resources to cover the costs associated with pet ownership.

Even if money is not an issue for the caregiver, your mother should confirm in advance that the caregiver’s living arrangements are suitable for Fido. Some apartment buildings and residential communities do not permit residents to own pets. If the caregiver of choice lives in such a community, or lives in a setting that is not large enough for Fido, your mother should consider naming someone else to adopt Fido after her death.

Once she has settled on a caregiver, your mother should think about the types of care she wants Fido to receive after she is gone. For example, does she want Fido groomed once a month or to have his teeth cleaned three times a year? Does she want Fido to be fed certain types of food? Does Fido suffer from any ailments that require medication or close monitoring? If so, these things should be addressed in the pet trust. If your mother has been using the same groomer and vet for years, she may want the caregiver to continue using the same providers. This is particularly important if Fido is receiving any specialized care or treatment. If this information is not included in the pet trust itself, your mother definitely should provide this information to the caregiver in a letter.

While the reason for including a pet trust in her will is to ensure that Fido will be cared for after she dies, it can also serve as a vehicle for providing the caregiver with instructions with respect to the handling of Fido’s remains after he dies. This information is important and useful to the caregiver who will certainly want to honor your mother’s wishes.

In addition to setting forth in the pet trust the name of the caregiver and the type of care she wants Fido to receive, both during his lifetime and upon death, your mother will need to allocate a certain amount of money to the trustee of the pet trust.

The job of the trustee is to distribute the funds in the trust to the caregiver as needed to be used for Fido’s benefit. The money will be used to pay for Fido’s food and care, but your mother can also allocate some of the money in the trust directly to the caregiver in recognition of the time, effort and responsibility he/she assumed by caring for Fido. If she wants, your mother can name the caregiver as trustee of the pet trust. She need not name two different people for these roles.

A final decision that your mother will have to make in connection with the pet trust is what happens to any of the funds left in the trust after Fido dies. Many people who have a pet trust direct that any money left in the trust after the death of their pet goes to the caregiver. Another popular arrangement is for the money to be donated to an organization that cares for abandoned and/or abused animals. Of course, your mother can also have the funds left in the pet trust divided between you and your siblings. Regardless of how she wants the funds distributed, it is important to include her wishes in the pet trust.

In light of the number of issues, your mother should discuss if she wants to create a pet trust, and the fact that it will be part of her will, with an experienced estate planning attorney. That is the best way to ensure that Fido will be cared for in accordance with her wishes.

Linda M. Toga, Esq. provides legal services in the areas of estate planning, probate, estate administration, litigation, wills, trusts, small business services and real estate from her East Setauket office.

There are many benefits to naming a minor as beneficiary of a tax-deffered retirement account.

By Nancy Burner, ESQ.

Nancy Burner, Esq.

Many of our clients have retirement assets held in a traditional IRA, 401K, 403(b) or other similar plan. It is important to periodically review the beneficiary designations on these types of plans. A review should confirm that the institution still has the proper designations on file, the clients’ wishes are being followed, the designations fit into the larger estate plan of the client and that the best interests of the beneficiaries are taken into account. This is of special concern if the beneficiaries are grandchildren or other minors.

There are certain benefits to leaving retirement assets to a minor who is a much younger beneficiary than the original account holder. When you leave retirement assets to a nonspouse, the beneficiary has the right to take it in an “inherited IRA.”

The beneficiary of an inherited IRA must start taking distributions the year after the death of the original account holder. These distributions are taken as a “stretch,” meaning they are determined by the life expectancy of the new IRA beneficiary. In that case, the account can grow tax deferred over a much longer life expectancy.

The rule of thumb is that the account will be worth approximately 30 times its value if distributions are taken over the life expectancy of a grandchild. For example, suppose you name your grandchild as beneficiary of an IRA account with a $100,000 balance. If your grandchild takes distributions based upon her life expectancy each year, then the account could be worth $3,000,000 over her lifetime. This is one of the great benefits of naming a minor as beneficiary of a tax-deferred retirement account.

The problem is that you cannot achieve the benefit of the stretch if you name a minor directly as the beneficiary of any account — you must name a trust for the benefit of the minor.

Since she is not an adult, the minor will be unable to take the distributions as required beginning the year after your death. The only way to access the account is for the court to appoint a guardian for the property of the child, usually the parent. First, this will be a costly and unnecessary proceeding. But the result is even worse.

The court will direct the guardian to distribute the entire IRA and pay the income tax. The income tax will be based upon the parents’ income if the child is under 14 years of age, also known as the “kiddie tax.”

In addition, the monies that are left after paying the income tax will be deposited in a bank account earning very little interest. If that isn’t bad enough, the account will be turned over to the child upon attaining the age of 18. This will obviously impact the child’s financial aid when he or she applies for college. This is a financial disaster. In addition to retirement accounts, you do not want to name minors directly as beneficiaries on IRA accounts, annuities, insurance policies, bank accounts or any other account. Any and all distributions for a minor should be distributed to a trust that is drafted for the benefit of the child.

The trust should be created as part of the estate plan, either through a last will and testament or in an inter vivos trust. Providing for the beneficiary’s share to go into a trust will ensure the benefits of inheriting a retirement asset are received.

The beneficiary can get the stretch on the account and the asset will not need to be held by the court. However, be certain that the trust you are naming for the benefit of the minor is drafted for the purpose of receiving retirement accounts; all trusts are not created equal in this respect. A trust must be properly drafted and meet certain requirements set by the IRS in order to accept the IRA distribution and receive the benefits described above.

Before naming a beneficiary on an account, one should check with the institution holding the account. Each plan has its own individual rules regarding the designation of beneficiaries. For example, the New York State Teacher’s Retirement system has certain benefits for which you can name a trust as beneficiary, while other benefits, including pensions, do not allow this type of beneficiary. Retirement savings can be the largest asset one leaves behind. Being sure it is properly designated can protect the best interests of your beneficiaries long after you are gone.

Nancy Burner, Esq. practices elder law and estate planning from her East Setauket office.

A credit shelter trust is a marital trust that allows you to a voice having the same property taxed twice.

By Linda Toga

Linda Toga

THE FACTS: I had my will prepared years ago. The estate tax exclusion amount at the time was considerably less than it is now, so my will contains a provision that directs my executor to create a credit shelter trust to avoid estate taxes. The trust provision mandates that the credit shelter trust be funded with assets equal in value to the estate tax exemption amount in effect at the time of my death.

THE QUESTION: A friend told me the credit shelter trust language that is currently included in my will could result in only a small part of my estate, if any, passing directly to my wife. Is he correct?

THE ANSWER: Without knowing the size of your estate, it is impossible to say how much of your estate might pass directly to your spouse upon your death. That being said, your friend is correct.

Credit shelter trusts are designed to avoid estate tax, but tax avoidance is generally not an issue when the first spouse dies because the surviving spouse is most often the beneficiary of the deceased spouse’s estate.

Regardless of the value of the assets that pass to a surviving spouse as sole beneficiary, there will be no estate tax liability on the first death because both the federal and New York State tax codes include an unlimited marital deduction. That means the assets passing to the surviving spouse pass estate tax free.

In contrast, the value of assets passing to a nonspouse may trigger estate tax. That is why estate tax can become a problem when the surviving spouse dies. If the value of the surviving spouse’s estate exceeds the applicable estate tax exemption amount then in effect, estate tax will be due. This year the federal estate tax exemption is currently at $5.49 million and the New York State exclusion amount is currently at $5.25 million.

If your will directs that assets equal in value to the current estate tax exemption amount go into the credit shelter trust, over $5.2 million of your probate estate must be used to fund the trust. The actual dollar amount will depend on whether your will references the federal or the New York State exemption/exclusion amount. If the value of your assets does not exceed the exemption amount, the only assets passing directly to your spouse will be jointly held assets and assets on which she is a named beneficiary. Assets that are used to fund the trust will be available to your spouse under certain conditions. She will not have unfettered access to those funds.

Credit shelter trusts were very popular with my clients when the estate tax exclusion amounts were significantly smaller. In 2008, for example, when the federal estate tax exemption was $2 million, clients with estates valued at $3 to $4 million felt comfortable funding a credit shelter trust since the surviving spouse would still receive $1 to $2 million outright. However, since the exclusion amount has increased at a much faster rate than the value of most people’s estates, the language in many credit shelter trusts has become a problem.

One way to address the problem is to have a new will prepared that does not direct your executor to create a credit shelter trust. However, if you are concerned about estate tax liability, another option is to have a new will prepared that includes language limiting the value of the assets that must be used to fund a credit shelter trust. That way you can be sure that there are sufficient assets passing to your spouse outright.

A third option is to include a discretionary marital trust in your will, rather than a credit shelter trust. A disclaimer trust, for example, can be used by married couples to avoid estate taxes and has the advantage of allowing the surviving spouse to decide how much money will go into the trust. If the surviving spouse feels comfortable doing so, she can have the trust funded with assets equal in value to the applicable exclusion amount. However, she can also decide to fund the trust with a lesser amount or to not to fund the trust at all.

The surviving spouse has nine months to decide whether it makes sense taxwise to fund the trust. Because of the flexibility offered by disclaimer trusts, and the ability to essentially do post-mortem planning, many people whose estates are valued at over the exclusion amount find disclaimer trusts a good option. To figure out what would be best for you, you should discuss your situation with an experienced estate planning attorney.

Linda M. Toga, Esq. provides legal services in the areas of estate planning, probate, estate administration, litigation, wills, trusts, small business services and real estate from her East Setauket office.

Portrait of Elderly man lost in thought

By Nancy Burner, ESQ.

Nancy Burner, Esq.

Much of the estate planning discourse revolves around planning techniques for the married couple, whether it be for tax planning or asset protection planning. However, for seniors who have never married or for those whose spouse is deceased, what, if any, special considerations need to be made? This article will focus on some of the unique challenges that the unmarried senior may face.

For the single individual who is living with another person but is unmarried, planning should be done to specifically provide for that partner, if so desired. It is important to recognize that partners are not given rights to property the way spouses are. Even if a person has resided with another for decades, without proper estate planning, that partner will not be entitled to assets of the decedent. If the plan is to give property to a partner after death, one should make sure that they designate that partner as a joint owner or as a beneficiary.

Having a will that designates a partner as the beneficiary of the estate can also ensure that property passes to the partner. However, in order for the will to be carried out, it must go through probate.

In New York, the probate process includes notifying and obtaining the consent of the decedent’s heirs. For instance, if a single individual with no children dies, but the parents or siblings of that individual survive, consent must be obtained from those parents, or if deceased, the siblings.

If the family members do not consent, they have the opportunity to present objections to the will that leaves assets to the partner. If their objections are successful, the will is invalidated and the law of intestacy prevails, which assumes the deceased person would have wanted their estate to be distributed to their family members, and not their partner. If a potential conflict may arise between a partner and family members, planning to avoid probate should be a primary goal of the estate plan.

For the unmarried person who is “unattached” and does not have a close relationship with any relatives, avoidance of probate is likely also an important goal particularly if they are charitably inclined since consent of family members is still required even when the beneficiary of a will is a charity. In addition, singles who are living alone should consider planning techniques that will allow them to maximize their assets so that they can get long-term care.

Being cared for in old age is difficult enough when you have a spouse or partner to help you, but if you live alone, you’ll want to preserve assets and income to the fullest extent so that you can get the care you need. This may include looking into long-term care insurance or doing asset protection planning, or both!

What if a single person is living with a partner and is desirous of providing for that partner, but wishes for their estate to ultimately be distributed to other family members? It is very common that a widow or widower has a relationship with someone for whom they wish to provide but wants to ensure that their assets go to their children after both partners are deceased.

The best technique for implementing this kind of plan is to use a trust. Trusts can hold assets for the lifetime of the partner but distribute the assets to other family members after the partner’s death. Trusts also avoid probate so that potential contests are avoided. Depending on the type of trust utilized, trusts can also protect assets in case either partner needs Medicaid to pay for long-term care.

In addition to the foregoing considerations regarding leaving assets at death, it is equally important to remember that partners, friends or indeed family members do not have rights to make decisions without proper planning. An estate plan is not complete without comprehensive advance directives that allow loved ones to make health care and financial decisions for you if you are incapacitated.

Nancy Burner, Esq. practices elder law and estate planning from her East Setauket office.

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