NY Trust Attorney

THE UNIFIED CREDIT AND THE CHAOS CONGRESS CREATED WITH THE 2001 TAX ACT

2007-07-27T06:00:00.000-07:00

It is mid-July, 2007...more than 6 years after the Tax Relief Act of 2001. The Tax Relief Act of 2001 gradually increased the Unified credit from $1,000,000 in 2001 to $3,500,000 in 2009 with a unlimited credit in 2010 and then a sunset provision in 2011 back to $1,000,000. http://www.nytrustattorney.com/estate-tax-exemptions.html

As you can imagine this has created a nightmare for estate planners and clients alike. I never understood the logic or compromise which created this law - what brilliant mind came up with a law that creates a windfall to residents who die in 2010 but penalizes those who happen to live to 2011? That doesn't make any sense - at least not to me.

The theory has always been that Congress will enact a new law before 2011 which establishes a set Unified Credit not a graduated one which phases out. However no compromise has been reached in the last 6 years and 2008 is an election year. I am concerned that in 2009 another "patchwork" bill will be enacted which continues this insanity for even longer. This is patently unfair to clients.

For example, let's discuss a typical client - a married couple who have a $3,000,000 combined assets. How do I advise them?

If I knew that they would die before 2009, I would recommend a credit shelter trust to eliminate their taxes because before 2009, with the proper use of trusts, a married couple can transfer $4,000,000 federal estate tax free.

If they die in 2009 or if they die in 2010, they don't need a credit shelter trust because in 2009, even without trusts, any individual can transfer $3,500,000 without federal estate taxes and in 2010, any individual can transfer an unlimited amount without federal estate taxes.

But if they are unfortunate enough to die in 2011, they need a credit shelter trust AND they will owe taxes when the second spouse dies because the unified credit sunsets back to $1,000,000. In 2011 and beyond a married couple with the proper use of trusts, can only transfer $2,000,000 estate tax free - which means for the above clients, they would owe federal estate taxes on $1,000,000 of their assets ($3,000,000 less a unified credit for both of them of $2,000,000).

In this situation I may advise the clients to execute disclaimer wills which gives the surviving spouse the right to determine the funding of the credit shelter trust, but this is more complicated both in the drafting of the will and also in the administration of the estate than it should be.

And let's be honest here - the only people that benefit from it being more complicated are the attorneys. There is more work to draft a disclaimer will than a simple will; and when the individual dies, there is much more paperwork to be prepared and filed with a disclaimer will than a simple will.

Does this seem fair to any one? Again not to me -- even as an attorney. So it is my hope that soon Congress will realize the mess they have created and correct it.

CHANGING GUARDIANS

2007-05-12T03:54:00.000-07:00

I met with two clients this week, both of whom wanted to change their wills because their choice about who should be guardian of their children had changed. Who you choose for your guardian is personal and I have written an article about choosing your guardian and the characteristics to consider. However, even if the person you have chosen is perfect the day that you sign your will, situations may change.

The person may get married and the spouse does not share the character traits you deem important. The person may move out of state away from the rest of your family. The person may have more children, making the addition of your children too much for him. The person may have taken on a new job. There are hundreds of reasons your chosen guardian may change throughout your children’s minority.

This is yet another reason why you must review your wills at least annually to insure that the document still meets your needs.

I often tell my clients to review their will on January 1st - it is an easy benchmark for you to remember. If the document still works, then put it back in the safe. If it needs to be changed, then immediately contact your attorney to revise it. Revisions of wills usually do not take as long as drafting the original will. And the review and possible revisions of the will are as important a step in your estate planning as was drafting the original document.

CAN WE LEARN ANYTHING FROM ANNA NICOLE SMITH?

2007-04-22T05:40:00.000-07:00

I hesitate to get write about Anna Nicole Smith's death and the ensuing legal battles, especially as my first blog post, except that the Will that has been released as her Last Will is a perfect example of a purely drafted will. And so, I will use it as an example of how not to draft a will and why a carefully drafted will is one of the most important documents you can execute.

It has been reported that her last will leaves everything in trust for her son Daniel and after that provision specifically excludes all other heirs, including her spouse, any future spouse, any children other than Daniel including future born children, and other descendants.

(By way of disclaimer, I have not read the Will. So I am using the information disclosed as a fact pattern in this discussion not as a commentary on the specifics of her estate nor what may happen in the end after her will is probated and battled out.)

Now let’s dissect the problems with those provisions (many of which have come to fruition).

First in New York and in every state that I can think of, you cannot disown your spouse – a spouse is entitled to a portion of your estate regardless of what is contained in your will. He can renounce his or her interest after you die, or can by way of pre nuptial or post nuptial agreement agree not to exercise his rights against the estate but other than that, a spouse can claim a portion of your estate even if you write as Anna Nicole did in her will that you want to exclude him. This is known as a right of election. Other than your spouse, you are not obligated to provide for any other person. Accordingly, she could legitimately disown her future children, her heirs, etc. But her spouse is entitled to a portion of her estate even though she thought she disowned him.

But this Will gets even more sloppy. She did not provide in the Will what would happen if Daniel predeceased her. We all wish we had a crystal ball and could tell when we will die and who will die before us, however that is not reality. Reality is that you do not know when you will die nor who will survive you. You have to assume when you write your will that there is at least the possibility that the person to whom you would like to leave your estate will not survive you. It is insanity to not provide for a contingent beneficiary in the event Daniel did not survive her.

Further complicating the matter on her Will is that the assets were put in trust. A trust usually provides that the income goes to an individual for his life or a set period of time and at the end of that time, will be given either in trust or entirely to someone. Who was to get the money at the termination of her trust? I haven’t read the will, so I do not know what it provides. But let’s assume it provides that it goes to Daniel’s issue (which is a legal term for children if they are living, or if they are dead, then their children, down the line).

When she wrote the will, Daniel was not married nor did he have children. Someone cannot assume in a situation when the beneficiary of a trust is young, not married and without any children, that he will die having children. Yes the likelihood is that he may but there is a possibility he won’t.

Provide for what you hope will happen and also provide for what you want if that does not happen. Otherwise you have a mess. Does it go to Daniel’s heirs (which would be the case if the will doesn’t have the provision that Daniel must survive her)? Or her heirs (which would be the case if the will says that in order for the trust to be created Daniel or his issue must survive her)?

So the possible end result in a case such as this is that the people she specifically excluded (her spouse, her future born children, her heirs) will all get the assets. How does that accomplish the goals of the client?

Let’s assume again by way of argument, that her after born child will inherit the assets (assuming for a minute that she was not legally married - a question that will be battled out in court). Many commentators have stated that the father of the child now is “in control” of the assets of the after born daughter.

Assuming that she died in NY and again in every state I can think of, that is not entirely true. Without a trust created under the will for the after born child, the money will be deposited into accounts which will be overseen by the court. There will be annual accountings required and no money may be spent for extraordinary expenses. The court takes very seriously the job of protecting those assets for the child. It is not a blank check for the father of the child. In fact, it is probably more limited than had she written a trust where she could delineate under what circumstances she wanted the principal or the income of the trust used for the child.

Then (to be honest this is the part that bothers me the most), when the after born child turns 18, she gets the money – all of it. No one is overseeing it; no one can tell her how to spend it or how to save it. In my experience, I have never seen an 18 year old (or for that matter a 21 year old or a 25 year old) that can handle that kind of money. The best case in my opinion would be she would spend it all on luxuries…the worst case would be that she spends it on drugs and partying.

Now the final piece that bothers me as an estate planning attorney is the fact that no estate tax planning was contained in this will – she could have sheltered (deferred) all or a portion of the estate from taxes by creating a credit shelter trust. She could have offset the taxes by purchasing life insurance and placing it into an insurance trust. She could have created a trust where Daniel gets the money for his life and then a portion of it goes to a charity, thus minimizing her taxes.

In my opinion, the will as it is reported will benefit two groups – the government and the attorneys who will litigate this forever. Now I have yet to meet a client who wants either of those groups to get their assets when they die. A carefully drafted document (although it would still be subject to the claws of the above groups) would limit the exposure.

There are probably a hundred reasons she didn’t have a properly drafted will and I will not postulate on any of them. But that does not excuse others from learning from her mistakes.