Friday, December 13, 2013

Cuomo Commission Proposes Significant Increase in New York's Estate Tax Exemption

A report released this month by Governor Cuomo's New York State Tax Relief Commission recommends, among other forms of tax relief, that New York's estate tax exemption -- which is presently the same $1 million per person exemption that was in effect in 2000 -- be increased to the current federal exemption amount of $5.25 million, indexed for inflation, and that the top rate be lowered to 10% for amounts in excess of the exemption.

This would be a welcome change, as it would impose estate tax obligations on only the largest estates, and would simplify estate tax planning for New York residents.  The proposed exemption increase would also help stem the tide of New York residents seeking to establish residency in lower tax states which either already have a higher estate tax exemption or, like Florida, have no separate state estate tax at all.

The full report is found here.

Thursday, December 12, 2013

Planning for Loved-Ones With Disabilities -- Supplemental Needs Trusts

With over 43 million people suffering from some form of disability in the United States, many people face the difficult challenge of assisting a disabled child or grandchild.  A dilemma often arises where the parent or grandparent would like to help enhance a loved-one’s quality of life, but not at the expense of disqualifying either themselves or the disabled person from eligibility for governmental programs such as Medicaid and Supplemental Security Income (“SSI”). Fortunately, we have at our disposal a planning tool called the Supplemental Needs Trust (“SNT”).

There are two basic types of SNT’s:(i) a “third party” SNT established and funded by a person who does not have a legal duty to support a person with a disability (i.e., a disabled adult child or a grandchild); and (ii) a “self-settled” SNT funded with the disabled person’s own assets and/or income. These trusts are specifically authorized in New York under Estates, Powers and Trust Law §7-1.12.

With a typical third party SNT, all distributions from the trust are made in the sole discretion of the Trustee (who is often the person who established and provided the assets for the trust), and are usually paid to third party providers of services to the disabled beneficiary.  If distributions are made directly to the beneficiary, such distributions may reduce or disqualify the beneficiary from SSI, Medicaid and other “means tested” government programs.

Third party SNT’s may be created either during the parent or grandparent’s lifetime (called an inter vivos SNT), or as part of their will or revocable trust, where the SNT “springs” into effect after the parent or grandparent’s death (called a testamentary SNT).Be aware that lifetime transfers into a third party SNT will not qualify for the annual $14,000 gift exclusion and will utilize a portion of the trustmaker’s $5,250,000 gift tax exemption (increasing to $5,340,000 in 2014).  However, gifts made to a third party SNT for the benefit of a disabled child or grandchild will not result in the imposition of a Medicaid “penalty period” for the parent or grandparent making such a gift, even if made within the five-year Medicaid “look back” period.

An additional benefit of a third party SNT is that the state has no right to recover any of the assets in the trust remaining after the death of the beneficiary.  All such assets may be left to other children, grandchildren or any other beneficiaries selected by the trustmaker.

A self-settled SNT operates much like a third party SNT (i.e., the Trustee retains complete discretion to make distributions of principal or income to or for the benefit of the beneficiary), but the assets funded into the trust come from the disabled beneficiary him or herself. Such trusts are often funded with settlement proceeds from a personal injury or similar lawsuit. Or, a disabled beneficiary who is able to work may divert income above the Medicaid allowable level into a self-settled SNT in order to retain eligibility for Medicaid and SSI.  Be aware, however, that use of a self-settled SNT is only viable in New York if funded before the beneficiary turns 65; if used for a beneficiary over 65, the trust assets would be considered countable resources in determining the beneficiary’s eligibility for Medicaid.

A fundamental difference between the third party SNT and a self-settled SNT is that the latter must include a “Medicaid payback” provision. That is, upon the death of the beneficiary, the local Medicaid agency must first be repaid from the trust proceeds in an amount up to the amount of the benefits provided to the beneficiary during his or her lifetime.  Assets that remain in the trust after the Medicaid payback, if any, may be left to other beneficiaries.

Also, under present law a self-settled SNT can only be created by a beneficiary’s parent, grandparent, guardian or a court, even if the beneficiary is an adult and otherwise competent to execute a trust agreement.There is pending proposed legislation in Congress that would amend the law to allow competent disabled adults to create and execute their own self-settled SNT’s.

SNT’s can be extremely beneficial to families facing the already difficult prospect of assisting a loved-one with beneficiaries. Because of the specific legal requirements for establishing and maintaining SNT’s, an experienced elder law and special needs attorney should be consulted to assist with this important planning tool.

Tuesday, December 3, 2013

Estate and Capital Gains Tax Issues Cloud Stan Musial's Estate

A recent post on highlights potential capital gains tax and estate tax issues pertaining to the estate of the late baseball Hall of Famer, Stan Musial.  Specifically, Musial's estate conducted a sale of some of Musial's baseball memorabilia, which brought in a total of $1.2 million to the estate.  The author speculates that while Musial's estate may avoid an estate tax should Musial's total assets be less than the $5.25 federal estate tax exemption in effect for 2013, the estate may nonetheless be subject to the payment of significant capital gains taxes in the event that the date of death value of the items sold at auction -- as determined by an appraisal -- was substantially lower than the actual sale price of those items.

This case highlights that, as fewer estates are subject to the payment of federal estate taxes, it is increasingly important to focus on managing capital gains tax issues when planning an estate during your lifetime -- and providing for flexibility within the plan to minimize capital gains taxes after death.

The Forbes article can be found here.