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.
Getting to Know New York's New Power of Attorney Law
Thanks in large part to the efforts of individuals and organizations advocating to curb the epidemic of financial abuse of the elderly, New York Governor, David Paterson, signed into law a broad transformation of Title 15 of the New York General Obligations Law pertaining to Powers of Attorney on January 27, 2009, apparently targeted directly at a reduction in “DPA” or “Durable Power of Attorney Abuse” in New York State.
This new legislation, which was unanimously approved on December 15, 2008 in the senate, is currently scheduled to take effect on March 1, 2009. However, in light of the drastic modifications which this new law portends, many in the legal community are clamoring for a six month reprieve in order to fully digest the implications of this sweeping change. In order to avoid the mass chaos that a retroactive repeal would bring, the new law mercifully provides that these changes do not affect the validity of any power of attorney executed prior to the effective date of this new law. Nevertheless, it is certainly advisable for estate planners and elder law attorneys to familiarize themselves with the new law and incorporate it in into their practice as soon as possible.
Section §5-1501 of the New York General Obligations law, which contains the existing statutory short form power of attorney, has been repealed in its entirety. New Sections §5-1501, §5-1501A and §5-1501B have been added in its place. In the interest of clarity, the new law provides ample definitions for the terms used within Title 15 (see §5-1501); and in order to prevent miscommunication and possible fraud, it also provides that a valid power of attorney must be: (i) legibly typed in no less than twelve-point font, (ii) signed and dated by a principal, (iii) with capacity (as defined within the statute), (iv) in the manner prescribed for the acknowledgement of a conveyance of real property (see §5-1501B).
The most significant change to the law is the establishment of the “Statutory Major Gifts Rider” (“SMGR”), a supplemental document in which the principal may “authorize major gift transactions and other transfers” as detailed in the new §15-1514. Gifting powers may no longer be granted to an agent within the context of a durable power of attorney, instead the principal must sign a SMGR to accomplish this.
The statutory form of SMGR or a non-statutory form may be used. However, if the principal wishes to use any SMGR he or she must so authorize by initialing the appropriate box on the new durable power of attorney form. The practitioner should be mindful that the SMGR will only be valid if it is executed simultaneously with the power of attorney form, and is both acknowledged and witnessed by two disinterested witnesses.
In the absence of a SMGR, the only gifts that the agent, as attorney-in-fact, will be permitted to make on behalf of the principal are gifts which the principal had customarily made to individuals and charities, not to exceed $500.00 per beneficiary, per calendar year (see §5-1502(I)). Obviously, this will not serve to accomplish many significant estate planning objectives.
Another significant change to the statutory form is that it provides that all prior powers of attorney are revoked upon the execution of a new power of attorney, unless the principal affirmatively states the contrary in the “Modifications” section provided. This can pose obvious problems to a distracted or misinformed client, and extreme caution must be taken to insure that estate planning powers are not accidentally revoked by clients when granting limited powers to another individual subsequently.
In order to sign a power of attorney, the principal must have capacity, which is defined by the statute as the “ability to comprehend the nature and consequences of the act of executing and granting, revoking, amending or modifying a power of attorney, any provision in a power of attorney, or the authority of any person to act as agent under a power of attorney” (see §5-1501). All Powers of Attorney are considered durable unless the document expressly states otherwise. Accordingly, the Non-Durable Power of Attorney form has likewise been repealed, and may be replaced by the new statutory form with an added statement indicating that this Power of Attorney should not survive the principal’s incapacity.
The new law provides that particular sections entitled “Caution to the Principal” and “Important Information for the Agent” must be included in the form using prescribed language (see §5-1513). These sections provide enhanced warnings to the prospective principal, emphasizing the significance of executing a durable power of attorney. They also give explicit instructions to the agent with respect to his or her obligations in serving as an attorney-in-fact and a reminder of their fiduciary duties. The agent’s responsibilities are more fully set forth in §5-1505 of the new law, and this section is referenced within the cautionary sections of the statutory form.
In another departure from the old law, prior to use, the power of attorney must also be executed by the agent and acknowledged. This change is likely due to the legislature’s desire that the agent be fully aware and bound by the instructions and warnings which appear on the new form. However, the document need not be executed by the principal and agent simultaneously.
Other significant changes include:
- Third-parties may not refuse to honor a statutory form power of attorney “without reasonable cause.” To avoid confusion, the new law enumerates a non-exclusive list of circumstances which can constitute reasonable cause for third-party refusal to honor a power of attorney; as well as some circumstances that are specifically deemed unreasonable cause for refusal (see §5-1504). One example of unreasonable cause, is the common situation faced by agents encountering financial institutions who only want to utilize their own form of power of attorney, and unjustly refuse to honor a general durable power.
- An agent under power of attorney is not entitled to compensation unless same is expressly provided for within the document (see §5-1506). The statutory form provides a box to be initialed if the agent is to receive “reasonable compensation.” Reimbursement of the agent’s expenses are permitted without an affirmative provision.
- Unless the principal expressly provides otherwise, co-agents must act together. However, even in the absence of an authorization for the agents to separately act, in certain emergency situations, as defined in the statute, one co-agent may serve alone (see §5-1508).
- The statutory form provides a section which provides the principal with the opportunity to appoint a “Monitor” who may compel the agent to produce records, receipts, etc. on a going forward basis (see §5-1509).
- If the agent fails to produce records as required, or other questions arise with respect to a power of attorney, a new special proceeding established under §5-1510 of the new law may be commenced by specific interested parties.
- A power of attorney executed in another state or jurisdiction, in compliance with the laws of that state, is valid and enforceable in New York (see §5-1512).
Practitioners should begin familiarizing themselves with the new statute as soon as possible and begin preparing their new forms. These new requirements concerning power of attorney will undoubtedly require some adjustment by practitioners who are used to the comparatively simple old statutory forms.
