New York's "New" New Power of Attorney

It was just one year ago, September 2009, that New York instituted sweeping changes to its financial Power of Attorney ("PoA") law. Many of those changes were valuable and well received, by both clients and their advisors attorneys. Unfortunately, the new PoA form was complex and unwieldy, and had certain provisions that were either unclear or potentially troublesome. Since the law was brand new, there was little guidance from the legislature or the courts as to its exact interpretation or implementation, which left estate planning attorneys more than a little concerned as to how our clients would be affected. To address some of these concerns New York State has recently enacted a revision to the September 2009 Power of Attorney law, effective September 12, 2010.

 

Amongst the various "technical corrections" made by the new law are three important changes/clarifications:

1. Signing the default Power of Attorney form no longer automatically revokes all prior PoAs
2. The provisions of the new Power of Attorney law explicitly exempts business or commercial PoAs (including certain real estate deals, corporate matters and hedge fund transactions) from its terms
3. Without a separately signed Statutory Gifts Rider (formally called the Statutory Major Gifts Rider), the named agent is limited to giving away no more than $500 total in gifts per year (the prior law was unclear if the $500 limit was an aggregate or "per person.")

The provisions of the new PoA law are retroactive to September 2009, and do not invalidate PoAs signed since then. However, the "old" PoA form (from 9/09) can no longer be signed after 9/12/10 and new forms have been issued.

 

As always, I invite you to contact me if you have any questions about the applicability of this new law to your personal situation

 

All the best,

Joe Donlon

 

The estate planning law firm of Donlon & Associates, PC provides high quality, focused legal counsel to clients all ages and wealth levels in the following areas:

 

Wills & Trusts
Asset Protection Planning
Estate Tax Planning
Elder Law
Special Needs Trusts
Probate & Estate Administration

 

Donlon & Associates, PC serves clients throughout New York City and Long Island, including Nassau County, Suffolk County, Queens, Brooklyn, Manhattan, and Staten Island.

How to Leave Your Home to Your Heirs

Long gone are the days when your children could simply move into your home after your death and not worry about legal or tax implications.

These days, you must choose between several options for leaving what is likely your most valuable asset to your heirs. And although each one has its own advantages and disadvantages, they all share the same requirement – planning.

Here are six options to consider:

1. Joint Tenancy. This form of ownership involves two or more individuals. When one joint tenant dies, the other immediately becomes the property owner. This strategy is often used for family residences where a surviving spouse plans to continue using the property as his or her home.

If you create a joint tenancy with someone other than your spouse, you can create tax liabilities for yourself. That’s because your home is then treated as a partial gift subject to Federal gift taxes. In addition, the entire value of the home will be counted in assessing Federal estate taxes upon your death! You have certain annual and lifetime tax exemptions that can shield you from estate and gift taxes, and it is important that a qualified attorney or CPA review your personal situation before entering into any joint tenancy.

2. Intestacy. This situation occurs when you die without having a legally valid Will. What results is your assets – including your home – are distributed according to your state’s laws.

In New York, distribution occurs in the following order: your spouse and your children split everything 50/50 (after the first $50,000 of assets). If you die without a spouse or children, your assets would go to your parents, siblings, aunts, uncles and cousins in a specified order. So if you want to leave your property to people other than family members specified in your state’s laws of intestate succession (or in different proportions), you need a Will, trust or other legal arrangement.

3. Will. When you include a provision in your Will stating that you’re leaving your home to your child (or other person), you keep control over your property while you’re alive. After you die, your child will get your home after the property goes through probate. (Warning: Probate can be a lengthy and expensive process.)

A Will also allows you to determine your executor and how your assets are divided up. If you intend to leave your home to your spouse, then taxes aren’t an issue. However, a Will won’t eliminate taxes when you leave your home to another heir without additional planning.

4. Living Trust. The benefit of this strategy is flexibility. You transfer ownership of assets such as your home to the trust, but you remain the trustee. As a result, you can change the terms, while giving away or selling assets as you please.

A living trust doesn’t require any court proceeding to distribute your assets, so the process is quicker and cheaper when compared to probating a Will. In fact, distribution happens almost immediately. As with a Will, a living trust by itself does not reduce estate taxes without specific additional planning. Furthermore, a living trust does not protect your home from creditors or Medicaid.

5. Irrevocable Trust. Irrevocable trusts are often used to eliminate estate taxes (e.g., a QPRT or “qualified personal residence trust”) or protect assets from Medicaid claims (e.g. an IIOT or “irrevocable income only trust”). Similar to a living trust, property transferred to your heirs through an irrevocable trust doesn’t require probate. Unlike a living trust, you can’t change or take back assets transferred to an irrevocable trust.

You are also unable to modify beneficiaries or rewrite any of the trust’s terms. However, if drafted properly, certain types of irrevocable trusts can ensure your property and all future appreciation comes out of your taxable estate, which can lessen tax liability for your heirs. They can also protect your home from liability claims.

6. Life Estate. Life estate transfers are commonly used to protect assets from Medicaid and to avoid probate. In simplified terms, you give your home to your child or other person, but retain a legal right to live in the home, rent free, for the rest of your life. You cannot be forced out of the home and neither you nor your child can sell it without the other’s permission.

At your death, your child automatically owns the home without going through probate (similar to a joint tenancy). Life estate transfers can have significant tax implications, so it is important to seek professional advice before deciding to use the technique.

Regardless of what option you choose, the bottom line is a proper estate plan ensures you (not the state or IRS) control who receives your home. Without a legal plan in place, you risk leaving sizable tax bill behind and causing arguments and fights within your family. But, as you now know, there are ways to avoid tax penalties and prevent family strife. So start setting up your strategy today.

Joseph P. Donlon, Esq., CFP® is a New York estate planning attorney and the founder of Donlon & Associates, PC. He is a frequent lecturer on estate planning topics and is routinely invited to speak before financial institutions, civic groups and business gatherings. Get more of his free tips and insider information about how to protect your family, reduce estate taxes and safeguard your assets at http://www.donlonlaw.com.

Estate Taxes 2010: A Billionaire’s Story

While death is never a joke to those who suffer the loss of a loved one, for some time now estate planning professionals have been quick to quip that if you have a rich relative, 2010 would be the most convenient year for them to check out. With no Federal estate tax in 2010, wealthy folks stand to save their families more than 50 cents on the dollar by being gracious enough to pass on this year instead of waiting until 2011 when the tax returns full force.

The New York Times ran a story yesterday that clearly demonstrates this morbid fact. It is the story of Texas tycoon Dan Duncan who passed away a couple months back at the age of 77. Mr. Duncan was worth an estimated $9 billion, making him one of the richest men in the world. He left much of this fortune to his children and grandchildren. Had Mr. Duncan died in 2009, or in 2011, his family would have faced an estate tax bill in the billions of dollars. Instead, through the sheer happenstance of his dying in 2010, Mr. Duncan’s heirs did not have to pay not a single penny of federal estate taxes!

Somewhere in Washington DC an IRS big wig is shedding a tear at this lost “opportunity.”

The future of the federal estate tax is uncertain, but as 2010 drags on and we draw closer to election season, my expectation of Congressional action dwindles. I am starting to believe we may not see any of the “corrective” legislation that has been promised since mid 2009, and that we should expect the old estate tax laws to resurrect on January 1, 2011. At that point it won’t be just the billionaires who will be affected. The personal exemption amount will drop to $1 million per person and the tax rates will climb to a top rate of 55%.

Have you reviewed your Wills, trusts and estate plan to ensure you and your family will be ready for the coming change? Please don’t hesitate to contact me if you have any questions or concerns.

Finally, let me say that my thoughts and prayers go out to the family of Mr. Duncan. Their loss, and his worth as a man, a father, and a husband, no doubt far exceed any amount of money.

All the best,
Joe Donlon

The estate planning law firm of Donlon & Associates, PC provides high quality, focused legal counsel to clients all ages and wealth levels in the following areas:

Wills & Trusts
Asset Protection Planning
Estate Tax Planning
Elder Law
Special Needs Trusts
Probate & Estate Administration

Donlon & Associates, PC serves clients throughout New York City and Long Island, including Nassau County, Suffolk County, Queens, Brooklyn, Manhattan, and Staten Island.

Critical Factors to Consider When Leaving an Inheritance to Children or Grandchildren

Although plenty of people understand the importance of leaving an inheritance to their children or grandchildren, few have procedures in place to ensure proper money management. The benefit of planning is that it helps you maximize the assets your loved ones receive when you can’t provide for them.

Below are several financial factors you must consider when leaving an economic legacy.

First, all assets left to a minor must be held by a guardian or placed in a trust because minors can’t legally hold and manage inherited money. While directing that your money will be held by your child’s guardian seems intuitive, it can actually cause many problems. Assets held by guardians  are subject to strict and burdensome court supervision. As a result, expensive legal fees and time-consuming court procedures can make it difficult for the guardian access the money and use it for the benefit of your child or grandchild when they need it.

What about your life insurance or retirement accounts?  Unfortunately, directly naming a minor as beneficiary of these assets is risky. The insurance company or brokerage house could hold the assets until the child turns 18 and then turn it over to the child directly. Many companies won’t even release funds to a surviving parent for safekeeping and management without a time-consuming and expensive court decree.

One alternative is an UTMA (Uniform Transfers to Minors Act) account. Controlled by state law, these accounts hold money given to minors. The account is legally owned by the minor (it even includes his/her Social Security number) but the management and access is controlled by the custodian you choose until the child turns 21 – or other age specified by state law.

The UTMA account is a great vehicle, but it raises an important question: Do you believe in your child or grandchild’s ability to manage a large sum of cash at 21? Will that money go to college tuition or a Ferrari and a month in Las Vegas?

If you prefer having your funds held until your child or grandchild is well into adulthood, then an “inheritance trust” is a smart option. A trust allows you to control the use and distribution of your assets after you’re gone. You choose a trustee (who can be a friend, family member, advisor or financial institution) who will oversee the funds and use them for your child or grandchild’s health, education and support. Assets held in the trust are protected from poor spending habits, lawsuits, creditors and divorce. The trust funds will be turned over to your child or grandchild directly at the age your designate, which could be 25 or 30, or even later.

Of course, you can navigate the tricky and often obscure laws of asset protection with competent legal advice. You’ll get a clear understanding of your choices, so you don’t risk creating financial struggles, unnecessary taxes and strained family relations.

Joseph P. Donlon is a New York estate planning attorney and the founder of Donlon & Associates, PC. He is a frequent lecturer on estate planning topics and is routinely invited to speak before financial institutions, civic groups and business gatherings. Get more of his free tips and insider information about how to protect your family, reduce estate taxes and safeguard your assets at http://www.donlonlaw.com.

Grantor Retained Annuity Trusts (GRATs) - an endangered species?

Talk of limiting short term GRATs has been around for a while now, but the discussion seemed to be “back burnered” with the 2010 Estate Tax repeal actually coming into effect, and no signs of life in Congress regarding any Estate Tax reform this year.  Well, that seems to have changed with the passing of HR 4849 in the House on 3/24.

Traditionally estate planners use GRATs that last 2 or 3 years to minimize mortality risk (i.e. the chance the grantor dies during the term thereby causing full estate inclusion and defeating the GRATs purpose) and that are “zeroed out” to avoid any gift tax on the transaction (i.e. the remainder interest is calculated to be worth $0 under IRS formulas even though the grantor and his advisors plan for the assets in the GRAT to appreciate significantly and thus have a large actual remainder value).

The House bill would severely curtail the use of low risk GRATs by requiring a minimum 10 year term and a remainder value greater the zero. The latter requirement doesn’t seem too onerous since no specific value is required and smart estate attorneys tend to report a remainder value of  ~$1 on the client’s Gift Tax return to start the Statute of Limitations running.  The 10 year term, though, would be a much bigger issue. While longer term GRATs actually transfer more value to the remaindermen, the previously mentioned mortality risk is always a concern.

What might this mean?  Well, for one thing, sales to irrevocable grantor trusts (“IDGT”) look more attractive. These transactions are traditionally structured for 9 year terms (but can be longer or shorter) and use more favorable interest rates than GRATs.   They have far less mortality risk since the technique “freezes” the estate tax value of the transferred asset so if the grantor dies in year 5, only part of the value of the asset is pulled back into his estate, and such value would not include any appreciation on that asset during those five years.  Had the grantor died during year 5 of a 10 year GRAT, the entire value (including appreciation) would be pulled back into his estate.  Another advantage for Sales to IDGTs is the ability to allocate GST exemption, something not permitted for GRATs – thus making them preferred tools for multi-generational transfers and Dynasty Trust creation.

Sales to IDGTs do have one significant danger: valuation risk.  Much like a GRAT, when implementing an IDGT sale, one must value the transferred assets and often will take discounts on that value for various reasons. If the IRS later challenges those values and discounts, the effect can be significant.  In a GRAT, a changed value has no effect since most GRATs are drafted using percentage payouts as opposed to fixed dollars amounts.  If an asset value changes, this language “captures”  it and no adverse effects occur.  In contrast, IDGT sales use specific dollar amounts in their provisions which means a change in asset value after the terms are set could cause the transaction to be treated as a part sale / part gift and trigger gift taxes. Furthermore, if GST exemption had been previously allocated, a new asset value might cause the Inclusion Ratio for the IDGT to change, causing a whole host of problems. (New rulings on so called “defined value clauses” can be applied to IDGTs to reduce these risks. Such a discussion is well beyond the scope of this post though)

Of course, all of this discussion may be premature – the Senate still needs to vote on the Bill and the President needs to sign it.  However, given the fact these anti-GRAT provisions are specifically designated as ”revenue raisers” for the Jobs Bill, I suspect the likelihood they will be implemented is be better than 50/50.

The current low interest rates and a rebounding economy that is causing assets to appreciate and business to start picking up means we are in a perfect environment for GRATs.  If you (or a client, if you are an advisor) are on the verge of a liquidity event (e.g. business sale, IPO, etc) or have assets that are depressed in the current market but are expected to rapidly appreciate in the coming couple of years, now is the time to get moving - there is no way to know how long this window will remain open.

As always, please don’t hesitate to contact us if you have any questions or we can be a resource to you in any way.

All the best,
Joe Donlon

The estate planning law firm of Donlon & Associates, PC provides high quality, focused legal counsel to clients all ages and wealth levels in the following areas:

Wills & Trusts
Asset Protection Planning
Advanced Planning for Business Owners & Professionals
Elder Law
Special Needs Trusts
Probate & Estate Administration

Donlon & Associates, PC provides trusts & estates and asset protection services to clients throughout New York City and Long Island, including Nassau County, Suffolk County, Queens, Brooklyn, Manhattan, and Staten Island.

New York Elder Law & Medicaid Planning News

The Regional Rates for 2010 are:

Long Island:                $11,227
NYC (5 Boroughs):       $10,285

The Regional Rates are used to determine the length of Medicaid ineligibility caused by an uncompensated transfer of assets from the applicant (or spouse) during the so called "look back period."  The "look back period" currently includes any transfers made from February 2006 onward. 


You can find the 2010 Resource (asset) Allowance and Income limits in my December 1st, 2009 post, below.

Please don't hesitate to contact us for more information.

The New York law firm of Donlon & Associates, PC focuses exclusively on:
Estate Planning
Elder Law
Asset Protection Planning
Family Business Planning

Donlon & Associates, PC
www.donlonlaw.com

The State of Estate Taxation in 2010

Well, January 1 has come and gone and Congress has taken no action regarding the federal transfer tax system (estate & gifts taxes).  What does this mean?  As of 01/01/2010, the major rules are as follows:

1. There is no Estate Tax
2. There is no Generation Skipping Transfer Tax (GST)
3. The Gift Tax remains in effect, although the tax rate drops to 35%.  The annual exclusion for 2010 is $13,000, and the lifetime exemption remains unchanged ($1,000,000).
4. The "Stepped Up Basis" rule has been eliminated except for two situations:
• The first $1.3 million of built in gains (total) transferred to non-spouse beneficiaries and
• The first $3.0 million of built in gains transferred to a spouse

As discussed in previous posts, if Congress takes no action all year, on January 1, 2011, the law will change again, and the Estate Tax, GSTT, and Stepped Up Basis rules come back in full force (and with higher rates and lower exemptions than what existed in 2009).

What will happen now?

No one can predict what Congress will do, but there have been assurances from important figures that estate tax reform is high on the agenda, and the intention is to pass such legislation and make it retroactive to January 2010. Many commentators question whether such a move would be constitutional.  Either way, you can be sure we'll have years of lawsuits to look forward to on this one.


I invite you to contact me directly with any questions or concerns you might have.  The new laws, regardless of how short lived they might be, provide significant tax saving opportunities for many people. At a minimum it is highly recommended that you review any documents and plans you currently have in place to ensure they will achieve the desired results for your family in this greatly altered and highly unpredictable environment.  As a dedicated estate planning law firm, Donlon & Associates continues to provide our current and prospective clients with the highest quality tax advice and legal counsel in this field.

Joseph Donlon, Esq.