Farrell Fritz Estate and Gift Tax Alert: Breaking News
As you may know, the United States Congress passed the Middle Class Tax Relief Act of 2010 last night. It is anticipated that President Barack Obama will sign this extremely important piece of legislation into law this afternoon.
In addition to providing an extension to unemployment benefits during this difficult economic time, and extending various income tax cuts implemented by President George W. Bush, this bill delivers tremendous, sweeping changes to the federal gift and estate tax. Unfortunately, this legislation is only a two-year “band-aid”; and it appears that we will find ourselves and our government embroiled in the gift and estate tax debate at least until 2013.
In order to keep our colleagues, friends and clients prepared and informed, we have prepared this brief summary of the anticipated impact of this new and revolutionary legislation.
Estate Taxes
Old Law - Prior to the enactment of the new law, no federal estate taxes would apply to the estate of an individual dying in 2010. There is, however, potential for some negative income tax consequences, as there would be a limited ability to “step-up” the basis in inherited property to date of death values for capital gains tax purposes. Most importantly, 2011 would have brought about a revival of the federal estate tax, with a shockingly low exemption amount of $1,000,000 per person and estate tax rates of up to 55%.
New Law - Once the new law is enacted, representatives of the estates of individuals dying in 2010 will have two options which will need to be carefully considered: (1) a $5,000,000 estate tax exemption, with the excess taxed at a rate which will not exceed 35%, along with the unlimited ability to “step-up” the beneficiary’s cost basis in inherited property to date of death value for capital gains tax purposes; OR (2) absolutely no federal estate taxes, but a limited ability to “step-up” the estate beneficiary’s cost basis in inherited property to date of death values for capital gains tax purposes.
Estates of those dying in 2011 or 2012 will be subject to a generous $5,000,000 estate tax exemption (with a 35% maximum rate on the excess) and an unlimited ability to “step-up” cost basis in inherited property to the value at the time of the decedent’s date of death. Additionally, under certain circumstances, a surviving spouse may utilize the unused estate tax exemption of a pre-deceased spouse. Unfortunately, New York State only provides for a $1,000,000 estate tax exemption and no “portability” of unused estate tax exemption between spouses. This disparity will necessitate careful analysis of existing estate plans.
Gift Tax
For 2010, each individual is limited to making lifetime gifts not to exceed $1,000,000 which are not subject to gift tax. Gifts in excess of this amount will be subject to a 35% federal gift tax. Upon enactment of the new law, in 2011 the federal gift tax exemption will be "reunified" with the federal estate tax exemption. This means that starting in 2011, each individual will have a lifetime exemption of $5,000,000. This dramatically increased exemption provides tremendous opportunities for estate planning, especially in the current economic environment, where asset values, and the required interest rates used in connection with estate planning, are historically low. It is important to note that any gifts made during an individual’s lifetime utilizing gift tax exemption will also erode the individual’s estate tax exemption. Accordingly, it is important that any significant gifts made be considered strategically, with the individual’s overall estate planning in mind.
Generation-Skipping Transfer Tax
Presently, the Generation-Skipping Transfer Tax (GST) has been repealed for 2010, thus removing an additional layer of taxation that would otherwise be present when property is gifted or inherited by beneficiaries who are two generations younger than the grantor. This repeal was only temporary, however; and the GST was due to be reinstated in 2011.
Under the new law, 2011 will bring a generous $5,000,000 GST exemption amount, enabling tremendous opportunities for inter-generational wealth transfers with very limited transfer tax consequences.
Summary
In conclusion, it appears that the federal government has temporarily averted a potential gift and estate tax crisis by passing the Middle Class Tax Relief Act of 2010. The new law provides for very generous exemptions and unprecedented opportunities for multi-generational estate planning. On the negative side, this law is only a temporary repair, as we have no guidance as to the future of gift and estate taxes for 2013 and beyond. Accordingly, the window of opportunity to take advantage of the estate planning options which the new law provides is limited. If Congress does not act again before December 31, 2012, we will be in the same uncertain and challenging tax scenario that we were facing only a few days ago.
If you have any questions about the new law, or how it may impact your estate planning, please do not hesitate to contact us. Thank you.
NYSBA Trusts & Estates Law Section to Discuss Recent Decisions
Dear Readers,
At the Fall meeting of the NYSBA's Trusts and Estates Law Section (October 7-8 in Rochester), I will be moderating a panel discussion on the Court of Appeals' three most recent pronouncements in the area of trusts and estates law, Matter of Singer, 13 NY3d 447, 449 (2009) (addressing "safe harbor" provisions of SCPA 1404), Schneider v. Finmann, 2010 NY Slip. Op. 05281 (June 17, 2010) (addressing malpractice liability of estate planning attorney), and Matter of Hyde, 2010 N.Y. Slip Op. 05676 (June 29, 2010) (addressing allocation of legal fees among beneficiaries).
The discussion panel will include, among others, Bronx County Surrogate Hon. Lee L. Holzman and Albany County Surrogate Hon. Cathryn M. Doyle. I welcome you to forward me questions and/or issues for discussion by the Panel about these three important cases.
(FYI, an excellent article discussing the Schneider and Hyde cases, by Charles F. Gibbs and Colleen F. Carew, appears in today's New York Law Journal. Their article discussing Singer was published in the Law Journal on February 26, 2010.)
Regards,
Eric Penzer.
Estates May Pursue Legal Malpractice Claims on Behalf of Decedents
The Court of Appeals has rendered a landmark decision, chipping away at privity in holding that an estate fiduciary may maintain a legal malpractice claim against its decedent’s estate tax planning attorneys for negligent representation. Until now, privity, i.e., a legal connection between two parties, was a strict condition precedent to maintaining a legal malpractice claim.
In Estate of Schneider, 2010 NY Slip Op 05281, decided June 17, 2010, the estate argued that the decedent should have been provided advice that would have decreased his estate’s tax liability. Specifically, it was asserted that the decedent’s attorneys should have advised him to transfer, or not to transfer, his $1 million life insurance policy to or from an entity of which he was the principal owner in order to reduce his gross taxable estate.
The Supreme Court dismissed the claim for failure to state a cause of action, but the Court of Appeals reversed. In upholding the claim, the high court equated the relationship between an estate and its decedent to one of privity, or one “sufficiently approaching privity” for purposes of pursuing a legal malpractice action. It aligned its reasoning with that of the Texas Supreme Court, and opined that “‘the estate essentially stands in the shoes of the decedent’ and therefore ‘has the capacity to maintain the malpractice claim on the estate’s behalf’”.
In determining the foregoing, the Court stated that its holding complies with EPTL 11-3.2(b), which permits the fiduciary of an estate to “maintain an action for ‘injury to person or property’ after that person’s death”. The Court further noted that its decision had no altering effect on the strict privity rules against beneficiaries bringing legal malpractice claims against a decedent’s estate planning attorneys.
It would not be surprising if the natural outgrowth of this decision is an increased number of legal malpractice claims against estate planning attorneys.
Tales from the Crypt: Disposing of Human Remains in New York
Trusts and estates litigators often see families at their very worst, fighting over everything from money to decision-making authority, and virtually anything else imaginable. So, it should come as no surprise that there have been disputes over the disposition of human remains, which necessitated legislative action to resolve these conflicts.
New York Public Health Law section 4201 “sets forth a prioritized list of [individuals] who shall presumptively have the right to direct the disposition of a decedent’s remains” (Maurer v Thibeault, 20 Misc 3d 631, 632 [Sup Ct, Cortland County 2008]). An agent appointed in a written instrument executed in accordance with section 4201 shall have first priority (Public Health Law § 4201 [requiring, among other things, that the principal and agent sign the instrument]). Absent a written instrument, the following individuals shall have priority to control the disposition of a decedent’s remains, in descending order:
(1) “the decedent’s surviving spouse;”
(2) “the decedent’s surviving domestic partner;”
(3) “any of the decedent’s surviving children eighteen years of age or older;”
(4) “either of the decedent’s surviving parents;”
(5) “any of the decedent’s surviving siblings eighteen years of age or older;”
(6) “a guardian appointed pursuant to article seventeen or seventeen-A of the surrogate’s court procedure act or article eighty-one of the mental hygiene law;”
(7) “any person eighteen years of age or older who would be entitled to share in the estate of the decedent as specified in section 4-1.1 of the estates, powers and trusts law, with the person closest in relationship having the highest priority;”
(8) “a duly appointed fiduciary of the estate of the decedent;”
(9) “a close friend or relative who is reasonably familiar with the decedent’s wishes, including the decedent’s religious or moral beliefs, when no one either on this list is reasonable available, willing, or competent to act, provided that such person has executed a written statement pursuant to subdivision seven of this section [stating that he or she has no knowledge that the decedent executed a written instrument containing directions for the disposition of his or her remains]; or”
(10) “a chief fiscal officer of a county or a public administrator appointed pursuant to article twelve or thirteen of the surrogate’s court procedure act, or any other person acting on behalf of the decedent, provided that such person has executed a written statement pursuant to subdivision seven of this section” (id.).
The person with priority must faithfully carry out the decedent’s directions to the extent permitted by the law and the circumstances (id.).
In Maurer v Thibeault, the petitioner did something that no parent should have to do, she requested permission to determine the disposition of her deceased daughter’s remains after the daughter died under suspicious circumstances (20 Misc3d at 632-37). Although the respondent, the decedent’s husband, asserted that he should decide how his wife was laid to rest, the petitioner argued that the respondent should not be given priority because he was estranged from the decedent and, therefore, did not qualify as her “surviving spouse” under the statute (id.).
Noting that the decedent never executed a written instrument in accordance with section 4201, the court then addressed whether the respondent had priority over the petitioner as the decedent’s surviving spouse (id.). The court concluded that he did not (id.). In doing so, the court relied on evidence that established the decedent’s hatred, loathing and fear for the respondent immediately before her death (id.). The court also referenced the police report she filed against the respondent just one month prior to her death, accusing him of attacking and strangling her “to the point of unconsciousness” (id.).
Based upon those facts and the line of cases precluding a separated or estranged person from qualifying as a “surviving spouse,” the court rejected the respondent’s claim of priority (id.). The court also granted the petitioner’s request for permission to control the disposition of the decedent’s remains (id.). As the decedent’s surviving parent, the petitioner had priority to do so, since there was no written instrument, the respondent did not qualify as a surviving spouse, and the decedent had no domestic partner or child age 18 or older (id.).
In New York, the disposition of remains is presumptively governed by section 4201. Absent a valid written instrument appointing an agent for that purpose, section 4201 sets forth which individuals shall have priority to make decisions concerning the disposition of remains.
Widow Barred from Bringing Legal Malpractice Action against Husband's Estate Planning Attorneys
Trusts and estates practitioners often provide joint representation to married couples as they create their estate plans. Questions as to the existence of joint representation may arise if husband and wife retain the same estate planning attorney, but do not meet or communicate with counsel together; instead, creating their own separate estate plans. These were the circumstances in the recent case of Leff v Fulbright & Jaworski, LLP, et. al. (Sup Ct, New York County 2009), in which a widow brought a legal malpractice action against her estate planning attorneys in the context of their actions as counsel to her late husband. The result is food for thought, and perhaps may encourage attorneys and their married clients to assume more clearly defined roles.
Joel B. Leff (“Decedent”) died in 2002 with an estate valued at approximately $90 million. In 1974, the Decedent entered into a Separation Agreement as part of a divorce settlement with his first wife, with whom he had a son. Said Agreement provided that the Decedent would bequeath to his son by Will no less than one-half of his probate estate, assuming his first wife remarried. Years later, the Decedent retained an estate planning attorney, who had no involvement in the drafting of the Separation Agreement. A copy of the Separation Agreement was given to the attorney, and remained in his file throughout his representation of the Decedent.
In 1998, the Decedent married Plaintiff. Prior to their marriage, they entered into a prenuptial agreement providing that each spouse “would have the right to dispose of his or her property . . . as each party sees fit,” but further stated that the Decedent would bequeath the marital residence and devise a specific amount to Plaintiff (id. at 2). Thereafter, the Decedent, represented by Defendants, executed a number of Wills and Codicils. At no time in the drafting of these instruments were the terms of the Separation Agreement considered by Decedent or his attorneys.
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