Estate Planning is the result of complex and technical rules bedeviling most people, and even more so unmarried domestic partners. Without the availability of the unlimited marital deduction, and hostile kinfolk often lying in wait, planning for domestic partners requires more than the traditional "I Love You" wills.
Most estate planning issues are universal; minimizing or eliminating estate and gift taxes, equalizing estates, determining how and to whom assets will be transferred, and long-term care. For a good general discussion of these issues you are invited to review the online presentation "Understanding Estate Planning and Living Trusts" and "Elder Law" sections of this web site.
The following information is about how those general principles apply to domestic partners.
The foundation of estate planning is understanding the exclusions and discounts. An individual may, during his/her lifetime, exclude from gift taxes all amounts paid on behalf of another for medical and educational costs (as long as the payments are made to the institutions). In addition you may exclude all annual gifts of $13,000.00 or less. These gifts may be made to any number of people without incurring any tax liability or requiring the filing of any forms. An exclusion results in no tax consequences either to the giver (donor) or to the receiver (donee) when value is transferred. A discount is the reduction of valuation for gift tax purposes.
If your gift exceeds the $13,000.00 Federal annualexclusion amount to any one person, you will be required to file a gift tax return. This return reduces the "non-taxable" portion of your estate when you die. This "non-taxable" portion, called the applicable exclusion amount is currently $5,000,000 and is scheduled to sunset to $1,000,000 in the year 2014. This means that in addition to the annual exclusion amount of $13,000 a year, you may transfer a total of $5,000,000 during your life and perhaps upon your death. For estates or aggregate gifts (not inclusive of the annual exclusion) exceeding the applicable exclusion, there will be federal taxes. NYS has no gift taxes and the estate taxes begin when the etate exceeds $1,000.000.00
Since every individual can transfer up to $1,000,000 without taxes, if your estates are properly planned, you and your partner can pass up to $2,000,000 to your beneficiaries. This is done by establishing two separate estates and creating two separate trusts.
The trust can be created either by will or by contract. Since a will requires probate and most people wish to avoid a court process, you can create a revocable living trust by contract. The revocable living trust provides you with a separate estate, gives you sole use, benefit, and control during your lifetime and competency, and upon your death can give your partner control, use, and benefits without ownership and tax. Typically when one partner dies, the other becomes the trustee and the beneficiary. As beneficiary, the surviving partner is entitled to all the income and all the principle required for his/her health, education, support and maintenance. However, the trust should be designed in accordance with the creator's objectives.
An added benefit of a trust arrangement is that each partner may appoint whomever he or she wishes to receive the balance of their respective trust estate after both are gone. Unless there are children, partners may want to leave their assets to their respective families. The trust can also be designed to protect the assets against being usurped by the surviving partner's "new relationship." Probably the most important aspect of a living trust for domestic partners, is the avoidance of probate.
Probate is a process to establish the validity of a will. If you have a will, you will have to go to court. Therein lies the difficulty for many domestic partners. In order to go forward with the petition for probate, each and every relative who would have been entitled to inherit your assets if you had no will, is entitled to know exactly what is in your will, and they are provided the opportunity to come forward and object to the validity of your will.
The people entitled to notice, besides those mentioned in your will are set forth by statute:
1. children, and spouse (estranged or not), if none,
2. parents, if none,
3. siblings or their children, if none
4. the obscure or laughing heirs
The thought of inviting others into the private lives of domestic partners is untenable to most.
Because of its flexibility and convenience, the trust has become an essential building block in the structure of an estate plan. A living trust may be revocable or irrevocable, depending on your planning objectives. Tax savings (income tax, gift tax and estate tax) may also result depending on the type of trust and its proper implementation (funding).
Simply, a trust arrangement is one in which one party (the trustee) holds legal title to property for the benefit of one or more parties (the beneficiaries). The beneficiaries are the equitable owners of the trust. The beneficiaries are the owners of the right to the enjoyment of the trust property, the owners of the income produced by the trust property.
The trustee has an obligation to the beneficiaries called a fiduciary duty and as legal title holder of the trust, has certain administrative responsibilities and management authority of the assets. The trustee holds the property, invests it, distributes income, pays trust taxes (if any), accumulates income (if required) and renders services required by law to ensure that the beneficiaries receive the enjoyment and use of the property as directed by the trust agreement.
Generally, the revocable living trust is a legal arrangement (agreement) between a person with assets (the settlor) and the person who manages the assets (the trustee) who holds those assets for the benefit of the beneficiaries. In most states, the same person can be the settlor, trustee and beneficiary. In essence, you make an agreement with yourself to manage the assets for the benefit of yourself.
After the agreement is executed, the assets will be transferred to you as trustee. Retitling the assets (funding the trust) transfers legal ownership from you, to you as trustee.
After incapacitation or death, a successor trustee named in the agreement, steps in and proceeds with the administration of the trust. This process eliminates the need for conservatorship or guardianship proceedings and probate.
Reducing the time and the aggravation for your loved ones after you're gone may alone justify establishing a revocable living trust. But the cost savings of avoiding court proceedings may be substantial, depending on the attorney and locale. In some jurisdictions, attorneys charge as much as five percent (5%) of the probate estate. While the costs of establishing a trust are typically between $2,000 and $3,000, these costs will vary, again depending on your attorney and where you live.
What if you don't want to leave your assets to a person? What if you wish to leave your property, not to your partner, friend, or family member after you die, but to your pet animal? In some states, a trust may be established for the benefit and care of a domestic or pet animal (an "animal shelter trust") and is provided court protection.
The New York law has four basic points:
1. The funds must be used solely to or for the benefit of your animals unless expressly stated otherwise. Since you may acquire new or additional pets, it is best not to name your animals specifically. The trust should provide for all animals owned or cared for by you at your death.
2. The trust must end on the earlier of, the death of the last animal or at twenty-one (21) years. Since many pet animals have a life expectancy beyond twenty-one years, this law falls short for their protection. Therefore you can create the twenty-one year animal shelter trust and hope that whomever receives the assets at the termination of the trust will continue to properly care for your animals.
3. On the termination of the trust all remaining property is to be distributed pursuant to the directions of the trust or, if silent, the property reverts (goes back to) to the estate of the people who created the trust. Remaining silent or choosing the wrong persons to receive the trust property upon termination may actually give rise to court challenges because of the fourth point below.
4. The amount of the trust assets may be reduced by a court if it is determined the trust is overfunded (too much money) with respect to the expected needs of the animals. If the well-being and comfort of the animals is more important than that of the ultimate beneficiaries, say so in the trust.
Since timing is everything after death, not for you but for your beneficiaries, particularly with animal beneficiaries, create a revocable living trust which becomes effective as an animal shelter trust upon your death. This will eliminate the time delays created by probate.
There are alternative ways of transferring assets to your surviving partner outside of the probate process. For individuals with smaller estates it may be sufficient to name each other as beneficiaries of life insurance, IRAs or annuities. You could also title assets in joint names with the right of survivorship. These are simple and convenient ways of transferring assets upon death. However, there are some disadvantages of owning property jointly.
If the combined total assets of the partners exceed the applicable exclusion amount, your ultimate beneficiaries will face an otherwise avoidable estate tax. Moreover, if the deceased's estate, inclusive of the jointly owned assets, exceed the applicable exclusion amount, a tax return will be required even if the assets belonged to the survivor.
Tax law provides that the entire amount of "non-marital" joint property will be included in the estate of the first to die unless the estate can show contributions by the surviving owner; only that percentage of contribution proven will be excluded from the deceased's gross estate. This means when you own assets jointly with your partner, 100% of the assets are included in the estate of the first to die unless contributions can be proven. Just because it's jointly owned, doesn't mean it's 50-50.
Aside from the tax considerations, there are other disadvantages to joint ownership. What if one partner is sued, or has financial problems? What if one partner suddenly withdraws all the assets from the "joint accounts"? What do you do when you own real property jointly, there is no partnership buy/sell agreement and the parties can no longer live together?
The American legal system recognizes only a limited number of ways in which two or more persons may share ownership of land. The basic forms of ownership now used in New York are the joint ownership (with rights of survivorship [WROS]), tenancy in common, and tenancy by the entirety. Although the term "co-tenancy" is sometimes broad enough to include all of the above, it must not be assumed that they are similar.
The distinguishing features depend on how, when and who took title. Tenancy in common merely has a unity of possession. Each co-tenant has equal rights to enjoy and possess 100% of the property. A deed will refer to an undivided interest to the whole. Each co-tenant may acquire an interest at different times. Each co-tenant may independently convey their interest.
A joint tenant (WROS)is created when, in addition to unity of possession, there is unity of time, unity of title and unity of interest. A joint tenancy (WROS) must be created at the same time, on the same deed, in equal amounts. Each joint tenant while alive may convey their separate interest. In making such a conveyance, the unities are destroyed, converting a joint tenancy into a tenancy in common.
A tenancy by the entirety has all the same characteristics as a joint tenancy and adds one. A tenancy by the entirety springs from the marital relationship and provides that neither tenant alone may convey his/her interest.
The universal principle is that possession of one co-tenant is possession of all. Each co-tenant has the right to possess 100% of the property but not to the exclusion of the other co-tenants and unless restricted by lease or other encumbrance, each co-tenant has a right of immediate possession which is exclusive against all others, except another co-tenant.
In a sense each co-tenant becomes a fiduciary, a trustee for each other, charged with the care and preservation of the property. While each co-tenant is entitled to the quiet enjoyment of the property, they may use the property in accordance with the nature and character of the property and may not take from the property anything which is not ordinarily severable. In other words, a co-tenant cannot "waste" the property. In addition, each co-tenant is entitled to a proportionate share of the rents and profits received by a third party derived from the joint property.
Jay and Jerry purchase a home as co-tenants. After several years, the relationship sours. Jay leaves. As a general rule an individual, Jerry, may occupy the common property without incurring liability (rent) for the use of the premises as long as Jerry does not prevent Jay from re-entry. If Jay attempts to re-occupy the premises and is prevented from doing so, Jay has been ousted. The result is that Jerry is now liable to Jay for the rental value of Jay's interest for the period of exclusion subject to offsets for expenses of maintenance, payment of taxes, assessments and discharge of liens.
The burden of upkeep and maintenance is the responsibility of all co-tenants in proportion to the respective interest unless otherwise agreed to. Any income derived from rental should first be applied to necessary expenses. In this above example, however, Jerry as co-tenant in sole possession has a duty to pay for ordinary repairs. If Jerry and Jay were still together and Jerry paid more than the proportional share, Jerry would be entitled to contribution from Jay and shall be entitled to an allowance or credit when the property is sold.
During Jay's absence, the house needs a new roof, a permanent improvement. Jerry pays for it but does not seek reimbursement. A co-tenant is not an agency, therefore a co-tenant in sole possession who makes improvements without obtaining the consent of co-owners is deemed to have made the improvement for his own benefit, even if Jay knew about the improvement but did not consent. However, if Jay acted in any manner in which agreement can be inferred, equity may compel relief.
Jerry is now so bitter that he wants to sell the house, pay off the mortgage and move. Jay refuses and doesn't have enough to buy out Jerry. Jerry's only option is partition. Partition is an action between co-tenants to put an end to the tenancy by dividing the land, if divisible, or to obtain their respective share of the proceeds because of a voluntary or judicial sale of the property. Much of this may have been avoided if the parties had entered into a partnership agreement before purchasing the property.
There are several estate "freezing" or discounting techniques which may be utilized, GRITS, GRATS, GRUTS, PRT, FLPS, installment sales using private annuities, or self-canceling installment notes, just to name a few. But perhaps the easiest estate equalization method (e.g. building up a poorer partners estate) is by using life insurance.
A gift of life insurance is a useful tool in equalizing your estate with your partner's. Life insurance is only included in your estate if you own the policy or have incidents of ownership.
Therefore, if you make your partner or an irrevocable trust the owner of your existing life insurance policy, the death proceeds (after three years) are estate tax free. But be careful, an existing policy may have a cash value in excess of the $13,000.00 annual exclusion. The three-year rule doesn't apply to new policies purchased by your partner or trust.
Anyone can make a gift of a dollar (or $13,000) and have that dollar and its future appreciation removed from their estate. But it takes planning to remove a dollar from your estate, have it discounted (valued at less than a dollar) for gift tax purposes, and continue to receive the income earned from that dollar for a period of years. This technique, known as a Grantor Retained Income Trust, discriminates against "related" family members and works best between the unrelated, or remote family members, such as nieces or nephews.
A Grantor Retained Income Trust, commonly known as a GRIT, is an irrevocable trust in which the grantor retains the income interest for a specified period of time after which the remaining principal passes to the named beneficiary. The objectives in establishing a GRIT are to:
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"G", a wealthy unmarried individual with no children wants to reduce the estate tax liability on his assets. His beneficiary is his partner, "P." G establishes an irrevocable trust for ten years with $100,000 reserving the income for himself, the remainder to P. Assume the trust grows at 6% per year after the payment of net income to G. At the end of ten years the trust would be worth $179,085. So how much did G save?
In calculating the estate tax savings, one must first calculate the value of the gift. The gift is determined by using Table B of the IRS Regulations. Table B is a series of statistics establishing the value of income interests and remainder interest at different percentage rates. The rates are issued monthly by the Treasury under Sec 7520 (Also known as applicable federal rates and can be found on the net).
Assuming the AFR to be 6.6%, the remainder value of the gift is .527750 or $52,775.00. This is the amount used to calculate gift taxes payable, if any. Gift taxes will be paid only if the applicable exclusion amount , now $650,000, has been used up. If available the applicable exclusion amount will be reduced by the value of the gift and no money will need to be paid.
How much did G's estate save?
The value of the trust in G's estate is…………… $179,085
Less the value of the gift ………………………..$ 52,775
Net value reduction …………………………….$126,310
Taxes saved at 50% ……………………………$ 63,155
The tax savings can be even greater with a longer term or higher AFR. However:
Caveat 1: G must survive the term of the trust in order to achieve the tax savings or else the value of the trust will be included in G's estate.
Caveat 2: If G funds the trust with appreciated property, you must calculate the loss of the basis step up (increase of cost after death) resulting in capital gains tax as an offset to the estate tax savings.
A NO-BRAINER – THE QUALIFIED PERSONAL RESIDENCE TRUST
This time assume a discount rate of 10.6%. The grantor creates an irrevocable trust and transfers a personal residence valued at $400,000 to the trustee (funds the trust). The trust provides that the grantor shall live in the residence for a ten year term. At the end of ten years, the personal residence will pass to the remainderperson (partner or ultimate beneficiary).
The present value of the right of the grantor to live in the personal residence for ten years is $253,948. The value of the future interest at the time the trust is funded, "the gift," is $146,052. The entire amount of $146,052 is considered a taxable gift and the $13,000 annual exclusion will not apply. If the grantor has not already utilized the applicable exclusion ($5,000,000) the gift tax may be sheltered.
If the $400,000 property appreciates at a rate of 5%, the property at the end of ten years will be valued at $651,558. If the grantor survives the ten year period, none of the trust assets would be in the estate.
Should the grantor die before the expiration of the ten years, the trust assets would be included in the estate at the date of death value. There would be no federal death tax saving. However, the beneficiary would receive the benefit of the "stepped up basis" (date of death value) of the residence, thereby avoiding any capital gains tax consequence upon the sale.
When considering discounting appreciable assets, you must first balance the estate tax savings against future income or capital gains tax. The value (basis) to the recipient (donee) of a lifetime gift is the lesser of the asset's fair market value on the date of the gift or the donor's cost.
Upon the sale of the asset the donee is required to pay capital gains tax (now 20%) on the difference between the donee's basis and the sale price. However if the asset is included in the donor estate at the time of death, the donee's basis is the fair market value at that time and no capital gains tax would be owed if sold at it's date of death value.
In addition to the estate and gift tax previously discussed, the federal government imposes a high tax on gifts to a skipped generation. In the case of family members, this means grandchildren, great-nieces or -nephews. This does not apply if the intervening family member is deceased, i.e., the child or the niece or nephew.
"Unrelated" persons are assigned to generations according to their ages relative (excuse the pun) to the transferor. A person not more than 121⁄2 years younger than the transferor is in the same generation. Succeeding generations are on the basis of twenty-five years increments. The next generation is a person 121⁄2 to 371⁄2 years younger than the transferor and a gift or inheritance to someone more than 371⁄2 years younger than the transferor is considered a skip-person.
The good news is that every individual is allowed to make aggregate transfers to skipped persons of up to one million dollars (to be adjusted for inflation) either during life or at death . The bad news is that if you're wealthy and older with the intent of transferring more than one million dollars to someone more than 37 1⁄2 years younger; a lack of planning could result in significant taxes.
One of the biggest concerns facing domestic partners is the possibility of being excluded by family members in making financial or medical decisions for their partner, or even worse, being deprived of hospital visitations. If you become too sick to make financial or health care decisions for yourself, someone else must decide for you.
Health care professionals often look to family members for guidance. But the State Health Care Proxy Law gives you the power to control all that. The New York Health Care Proxy Law allows you to appoint whomever you wish to decide about your health care treatment should you lose the ability to decide, and hospitals, doctors and other health care providers must follow your agent's directions as if they were your own.
To emphasize the point, it is recommended that language be added to the Health Care Proxy directing "all discussions and questions to the health care agent before any other person, notwithstanding that he/she is not related by blood or marriage." As additional precautions against family intrusion, language should be added to a Living Will which gives your partner first priority in visitation over all other persons if you are institutionalized, whether or not your partner is acting as your proxy.
Appointing someone to make decisions about financial and personal decisions is accomplished by executing a power of attorney. A power of attorney is a written document which states that one person, called the "principal," is delegating authority to another person, called the "agent" or "attorney in fact," to act on the principal's behalf. The delegation of authority may be very broad or quite specific. A specific power of attorney is commonly used to delegate decisions in financial transactions.
The new power of attorney form has a specific provision and rider regarding the ability of the agent to make gifts to themselves. Having a valid power of attorney may be the most important estate planning documents given that it may be needed for the protection of assets in the event a nursing home costs become a factor.
GARY LEVINE* & SUSAN HTOO, PC. ATTORNEYS AT LAW Estate Planning & Elder Law
Main Office: Poughkeepsie Tel: (845) 452-2366 Fax: (845) 232-2032 Member: New York and *Florida Bars E-Mail: LevineandHtooLaw@aol.com
Ancillary Sites: New Paltz, Montrose, Cornwall
Home consults upon arrangement
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