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CAN A TRUST PROTECT FAMILY WEALTH FROM ESTATE TAXES?

Davidov Law Group

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Estate taxes can significantly erode the wealth that you have accumulated throughout your life. One imposition of the estate tax can play havoc with your financial legacy, but it can actually be levied over multiple generations.

The maximum rate of the federal estate tax is 40 percent at the present time. The amount of the credit or exclusion in 2014 is $5.34 million. If your assets exceed this amount, you should be implementing wealth preservation strategies.

If you can position assets outside of your taxable estate you will be protecting your wealth for the benefit of your family. This can be done through the creation of certain types of trusts.

Revocable vs. Irrevocable

A revocable trust allows the grantor (the person creating the trust) to retain incidents of ownership. If you are the grantor of a revocable trust, you can change the terms at will and even revoke the trust if you want to go this route. The assets that you have conveyed into the trust would then become your personal property once again.

Things are different with irrevocable trusts. You cannot revoke them, and you do surrender incidents of ownership. As a result, generally speaking, assets that have been conveyed into an irrevocable trust would not be part of your taxable estate.

Generation-Skipping Trusts

One type of irrevocable trust that can be useful for those who want to protect family wealth would be the generation-skipping trust. As the name implies, you would make your grandchildren the beneficiaries of a generation-skipping trust rather than your children.

Your children could however benefit from the assets that have been conveyed into the trust. They could receive distributions of income earned by the trust and utilize property held in the trust. Under a special power of appointment they may even be able to make decisions with regard to the actions of the trust.

However, they never technically own the assets that have been placed into the trust. Therefore, their access does not result in estate tax liability.

After the death of the children, the grandchildren inherit the trust. Two generations would have benefited from the trust, but there would be just one round of taxation.

Wealth Preservation Strategies

The generation-skipping trust is just one type of trust the can be used if you want to preserve wealth for the benefit of your loved ones. There are other types of trusts (and other legal devices) that can be useful as well.

If you would like to discuss wealth preservation strategies with a licensed estate planning attorney we invite you to contact our firm to schedule your assessment. We will gain an understanding of your financial position, become apprised of your objectives, and explain your options to you.

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Estate planning should extend to what could be called end-of-life planning. When you reach an advanced age you may not be able to make all of your own decisions or take care of your own needs. This is not the most pleasant thing to contemplate, but it is a fact of life.

Most elders are going to need some type of assistance, and a high percentage of people suffer from incapacitation at some point in time. According to the Alzheimer’s Association, nearly 45 percent of people who have reached the age of 85 have the disease. Around 13 percent of those who are at least 65 have Alzheimer’s disease.

If you are suffering from Alzheimer’s induced dementia you are probably not going to be able to make good decisions.

Alzheimer’s is not the only cause of incapacity among elders. Clearly, if you want to be fully prepared for the eventualities of aging you should consider the possibility of incapacity late in your life.

Guardianship or Conservatorship

If you do not take action on your own in advance, the state could be petitioned to appoint a guardian or conservator to act on your behalf.

These terms are used differently state-by-state. In some states, a guardian handles personal decision-making for a ward, and a conservator handles financial matters. In others, including New York, a guardian makes both types of decisions.

A guardianship proceeding is something that you probably want to avoid through proactive planning. One of the problems with a guardianship would be that you do not have any guarantees with regard to the selection of the guardian. The court may empower someone that you would never have chosen yourself.

There is also the matter of immediate need. The guardianship proceeding can take time, and this can pose a problem.

Thirdly, family members may disagree with regard to the correct course of action.

Durable Power of Attorney

You can prevent a guardianship proceeding by executing a legally binding document called a durable power of attorney. With this legal device you could name your own hand-picked decision-maker. This person would handle your affairs in the event of your incapacitation, and there would be no need for a guardianship hearing.

Revocable Living Trust

If you were to use a revocable living trust to arrange for the transfer of your property after you die, you could name a disability trustee. This trustee would be empowered to administer the assets that have been conveyed into the trust in the event of your incapacity. Once again, there would be no need to get the legal system involved.

Take Control

When someone becomes incapacitated, the appointment of a guardian may be necessary. Guardianship is not inherently negative; it is in place to serve a purpose.

However, you can render the proceedings unnecessary and take personal control in advance by executing the appropriate legal documents.

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There is a $5.34 million per person federal estate tax exclusion in 2014. This is the amount that you can transfer to your heirs free of taxation. Anything that you are transferring that exceeds this amount is potentially subject to the federal estate tax.

If you are married, you may have a question about the federal estate tax exclusion: what happens to your exclusion after you die? Can your spouse use your exclusion?

This is the question of portability. Prior to the enactment of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 the estate tax exclusion was not portable. Your surviving spouse could not use your exclusion.

However, provisions contained within this piece of legislation made the estate tax exclusion portable for two years (2011 and 2012). Just prior to the sunset of this act a new tax relief act was passed called the American Taxpayer Relief Act of 2012. Under the terms of this measure the portability of the estate tax became permanent. A surviving spouse can in fact use his or her own exclusion and the exclusion that was allotted to his or her deceased spouse.

Portability is available, but it is not something that is automatically given to you by the Internal Revenue Service. A representative of the estate must file IRS Form 706 within nine months of the decedent’s passing to opt for portability. It is possible to request a six-month extension if you need one.

Because of the fact that changes to tax laws often fly under the radar, many people were not aware of the fact that the estate tax exclusion was made portable. This includes some financial advisers. There are also those who did not know about the need to file Form 706 to opt in.

The bottom line is that many people who could have utilized portability missed the deadline.

Portability was not afforded to married gay couples until the recent Supreme Court ruling giving gay couples equal rights with regard to federal benefits. There was an interim during which surviving spouses would have no reason to file for portability, because their same-sex marriages were not recognized.

Because of all of the above circumstances the IRS has decided to extend the deadline for filing Form 706. If the decedent in question died between the beginning of 2011 and the end of 2013, the form will be accepted.

This situation underscores why you should always keep in touch with your estate planning attorney. Tax laws are subject to change, and legislators are always entertaining new ideas.

Estate planning lawyers are up-to-date on current laws and filing requirements. When you develop an ongoing relationship with your attorney, he or she will be there to advise you whenever these relevant changes come down the pike

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A high percentage of young adults are unprepared from an estate planning perspective. Many of these people are single individuals who do not have children. However, there are also parents of young children who are going through life without any estate planning documents.

This is a huge mistake that is akin to a gamble. You know you are going to die someday, but you expect to live a normal life span. At the present time the average life span of 78 years. If you are in your 20s, 30s, or 40s, you may decide that you will have time to plan your estate later on.

In truth, statistically speaking you probably will have time, but there are no guarantees. Responsible adults consistently take steps to protect themselves from things that probably won’t happen. This is what car insurance and homeowner’s insurance is all about.

Individuals of all ages pass away, and you never know what the future holds. Catastrophic events do happen, and they can happen to anyone.

When you plan your estate you are taking steps to protect your loved ones. Parents of young children should certainly take action.

Nominating a Guardian

Now that we have provided the necessary background information, let’s look at the nomination of a guardian. When you are drawing up your last will as someone who is a parent of minor children you can include such a nomination.

When you do this you are naming someone to care for your child or children in the event of your death.

Of course, if both parents are alive with legal custody, the surviving parent would take over should the unthinkable take place. The nomination of a guardian would become relevant if there was no one left alive who was legally empowered to raise the children.

If you do not nominate a guardian as you plan your estate, the decision could be left in the hands of the state of New York. The outcome may not be consistent with what you would have wanted. In addition to this, everyone in the family may not be on the same page. There can be contentious interactions that ultimately have a negative impact on the children.

Estate Planning Consultation

Just about every parent would tell you that their children come first. They say they would do anything for their children. At the same time, many of these same individuals are going through life completely unprepared for death.

If you would like to take action to put a plan in place for the well-being of your children, contact our firm to schedule your assessment. We will get to know you, gain an understanding of your family dynamic, and ultimately make the appropriate recommendations.

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Estate planning is an ongoing process. The estate plan that you initially create is going to reflect your life at that time. Things invariably change. In addition to changes within your own life, there can be relevant changes that impact the society as a whole, such as changes to tax laws.

When tax laws change, your existing estate plan may no longer be appropriate. If you are not aware of the lay of the land at all times, your family could ultimately pay a hefty price.

Federal Estate Tax

The maximum rate of the federal estate tax is 40 percent. The imposition of a tax of this magnitude could have a significant impact on the financial viability of your family for generations.

Your estate tax exposure (or lack thereof) will depend on the extent of your assets as they compare to the amount of the federal estate tax exclusion. In 2014 the amount of the exclusion is $5.34 million.

The exclusion is adjusted annually to account for inflation, so you may see a slightly higher figure next year. You should certainly be aware of the exact number, but these relatively small adjustments are probably not going to be enough to render your existing estate plan obsolete.

However, significant changes could come down the pike. For example, last year the White House proposed a budget that would reduce the amount of the estate tax exclusion. It would go down to just $3.5 million in 2018, and the maximum rate would be increased from 40 percent to 45 percent. This $3.5 million/45 percent framework was in place back in 2009.

We would like to emphasize the fact that this was a proposal; it is not a fact of life. However, changes to existing laws are possible. In addition to proposals that would increase the estate tax, there are always legislators that want to reduce it or eliminate it altogether.

As a resident of the state of New York you must be aware of the New York State estate tax as well as the federal estate tax. At the current time the amount of the New York State estate tax exclusion is $1 million. The maximum rate of this graduated tax is 16 percent.

State laws are always subject to change via legislative mandate. You should certainly be aware of the current state-level estate tax parameters at all times.

Ongoing Relationship

When you put your first estate plan in place you should be aware of the fact that it is probably going to need revisions over the years. If you develop an ongoing working relationship with your estate planning lawyer from the start, you can stay in touch and get together for estate plan reviews at regular intervals.

When you are alert and proactive you can be optimally prepared at all times.

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Thanks to monumental advances in medicine and healthcare, as well as an overall better quality of life in the United States, we are living longer. Although we can all expect to live longer today than our grandparents or great-grandparents did, the cost of living longer may be high. In fact, without long-term care planning, a lifetime of savings could be wiped out in a relatively short period of time.

This infographic provides an informational snapshot of long-term care – its actual costs and why New York long-term care planning is important. Though most Americans are not even thinking about it, the numbers say we should.

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When you work and pay taxes you accumulate retirement credits. You can accrue a maximum of four credits per year. Once you have accumulated 40 credits, you qualify for Medicare coverage when you reach the age of 65.

Medicaid is a program that provides health insurance for people with very limited financial resources. You don’t have to accumulate credits to qualify for Medicaid. Most working people qualify for Medicare when they retire, so they don’t need Medicaid at first.

Because of the fact that Medicare will not pay for long-term care, many seniors do in fact enroll in the Medicaid program late in their lives. Medicaid will pay for custodial care.

Because Medicaid is a need-based program there are certain guidelines that you must stay within to be able to qualify.

When someone who is married is applying for Medicaid to pay for long-term care, his or her spouse is allowed to keep a certain amount of property without impacting the eligibility of the soon-to-be institutionalized spouse.

Your home is not counted by the Medicaid program, but there is an upper equity limit of $814,000 in 2014. However, if your spouse is going to remain in the home after you enter an assisted living facility, there is no equity limit at all.

In addition to this, the healthy or community spouse is allowed to keep his or her half of community property up to a particular limit. In 2014 this limit is $117,240.

The healthy spouse is also entitled to a monthly maintenance needs allowance. If the healthy spouse is relying on the institutionalized spouse’s income, the healthy spouse may continue to receive some of this income.

The maximum amount that the community spouse could draw in 2014 is $2931.

Medicaid Planning

Because of the Medicaid program rules it is important to plan ahead with eligibility in mind if you intend to use the program to address future long-term care costs. We have shared a few of the facts here, but there are many other things to take into consideration.

While it is true that your spouse can maintain ownership of some property, you can potentially keep more property in the family by spending down in advance of applying for Medicaid.

Spending down is a term that is used to describe divestitures. You could give assets to family members who would have otherwise inherited these resources. Some people choose to spend down by living it up.

You have to plan ahead in advance if you want to engage in a spend down because of the five year look back. If you give away assets within five years of applying for Medicaid a penalty is applied, and your eligibility is delayed.

If you would like to learn about Medicaid planning in-depth, we invite you to download our free report on the subject. To access the report, click this link: New York Medicaid Planning Report.

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The process of estate planning should ideally be a broad and comprehensive one. Recording your wishes regarding the distribution of your assets is only part of what you should take into consideration. You should also address the postmortem aspect.

On the other side of the coin, you should address the period of time that would logically precede your death. This can include the execution of a power of attorney to appoint someone to act on your behalf in the event of your incapacitation.

Power of Attorney Kew Gardens NY

Different Types Of Powers Of Attorney

There are different types of powers of attorney. These legal devices are used in all different areas of the law. One type of power of attorney is a general power of attorney.

With a general power of attorney you are giving the agent or attorney-in-fact that you choose the power to act in a sweeping, comprehensive manner. There are no particular limitations. The agent could do anything that you can do for yourself.

Another type of power of attorney is a limited power of attorney. With this type of power of attorney you give someone the ability to act on your behalf under limited circumstances.

For example, let’s say that you own a real estate investment company. You could empower your assistant to sign certain types of business documents on your behalf. His or her ability to act on your behalf would be limited by the precise terms of the document.

Durable Power Of Attorney

Whether it is limited or general, a standard power of attorney that is not designated as durable would no longer be in effect if the grantor was to become incapacitated. If you want to appoint someone to act on your behalf in the event of your incapacity, you should execute a durable power of attorney.

If you don’t execute a durable power of attorney naming your own hand-picked decision-maker, a guardian could be appointed by the state to act on your behalf if you become incapacitated.

A guardianship proceeding can be lengthy, and the need for immediate decision-making may exist. In addition, the guardian that is chosen by the court may not be someone that you would have chosen. And, members of your family may not agree with regard to the optimal course of action. They could clash in court, delaying things even further as hard feelings start to develop.

You can prevent all of these negative consequences if you take the time to execute a durable power of attorney naming your own hand-picked decision-maker. Hopefully you will never become incapacitated, but if you do find it difficult to handle your own affairs late in your life you will have an effective plan in place.

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Everyone should have an estate plan in place. If you die without leaving behind any instructions with regard to the transfer of your property you will die intestate. Under these circumstances, the state will be forced to step in and sort things out.

Intestate Succession Laws

The state of New York will make an effort to find your next of kin if you die intestate. In many cases blood relatives will come forward, so there will be no particular need to conduct an exhaustive search.

There are clear-cut rules of succession, but they vary slightly from state to state. Generally speaking, your closest living blood relative or relatives inherit the intestate property that you leave behind.

In the state of New York, if you have children but no living spouse, your children would inherit all of your intestate property. Conversely, if you leave behind a surviving spouse but no children, your surviving spouse would be your sole heir.

Your parents would inherit all of your intestate property if you had no children and no surviving spouse. State law would allow for your siblings to inherit everything if you had no surviving parents, children, or spouse.

No Will, No Living Relatives

If you die without a will or any other estate planning document expressing your final wishes and you have no relatives still alive, the state can capture your resources under escheat laws.

There would be a three-year period of time during which a relative can come forward. If there are sufficient resources to finance such an effort, the court may allow a court-appointed personal representative to conduct a search.

If this period of time elapses without anyone materializing to claim an inheritance, the coffers of the state of New York would absorb the intestate estate.

Avoiding Intestacy

Intestacy succession laws would come into play if you die without a will or any other estate planning documents. There is no reason to submit to these specific parameters. You could be certain that your assets are distributed according to your preferences by executing an estate plan.

Many people go through life without making any plans for something that is absolutely inevitable because they think that they will always have time to handle the matter later on. In fact, no one has a crystal ball, and people pass away unexpectedly every day.

Another thing to take into consideration if you are procrastinating is the fact that incapacity is common among elders. You may not be in a position to execute a valid estate plan if you put it off until you are no longer capable of sound decision-making.

Intestacy is really not an option for responsible adults. If you are currently going through life without an estate plan, feel free to contact our firm to schedule your assessment.