Articles Posted by Elizabeth Candido Petite

Most clients do not want their lawyers to inherit their property. Yet sometimes the plans they desire to put into place are simply asking for that to happen. Litigation is expensive, and many states permit the attorneys’ fees to be paid from the trust or estate assets before anything is distributed to the beneficiaries. In addition, these proceedings are often lengthy and emotional, something that few wish to ever endure, and especially not after the death of a loved one.

Often trust and estate litigation can be avoided by careful planning. Thus, it is important for practitioners to recognize “red flags” during the planning process and to know how to advise their clients so that their estates are not settled in the courtroom, with the lawyers being the only ones walking away with full pockets.

Unequal distribution of assets amongst children

Elizabeth Candido Petite, a member of Lindabury’s Wills, Trusts & Estates practice group was interviewed by Faith Saunders of Princeton TV for her series; “Discover a New Future.” Elizabeth discusses some common issues concerning wills, trusts, and what happens to one’s property upon death. Among the questions Elizabeth answers are:

• Who gets my property if I die and do not have a will?
• Who can write a legally binding will?

Increased exemptions for 2019. The IRS has announced that the gift and estate exemption has increased to $11.4 million per person in 2019. The exemption amount in 2018 was $11.18 million. This means that in 2019, an individual can make gifts during life or at death totaling $11.4 million without incurring gift or estate tax. In addition, a married couple can now transfer $22.8 million worth of assets during life or at death tax-free. The annual gift tax exclusion amount remains at $15,000 per recipient ($30,000 if spouses elect gift-splitting).

IRS addresses estate and gift tax exemption “clawback.” The Tax Cuts and Jobs Act (“TCJA”), which was signed into law in December 2017, increased the gift and estate tax exemption from $5 million to $10 million, indexed for inflation (see current rates above). The TCJA also provides that the exemption amount will revert to $5 million in 2026. This led many practitioners to wonder: what happens if an individual makes a gift in excess of $5 million now, and dies in or after 2026 when the exemption amount is only $5 million? Because the gift and estate tax exemption is unified, this could mean that estate tax would be due since the individual’s gross estate, which includes the prior gift made, would exceed the applicable exemption at the time of death.

However, in November 2018, the Treasury issued proposed Regulations addressing this “clawback” of the exemption amount (Prop. Reg. Sec. 20.2010-1(c)). The Regulations provide that in the situation described above, the applicable estate tax credit will be based on the greater of the two amounts. For example, if an individual makes a gift of $9 million in 2019 when the exemption amount is $11.4 million and then dies in 2026 when the exemption is $5 million, the individual’s estate may use the higher exemption of $11.4 million to ensure that tax will not be due on the amount in excess of $5 million. Thus, if you are considering make a large gift (or a series of gifts), now is the time to do it, when the exemption amount is the greatest it has ever been.

State and local tax deduction workarounds rejected. The workarounds to the new federal cap on deductions for state and local taxes (“SALT”) are not likely to be effective, according to proposed regulations issued by the IRS in late August. The Tax Cuts and Jobs Act, signed into law by President Trump in December 2017, capped the SALT deduction at $10,000 for taxpayers who itemize their deductions. As a workaround, several states (including New Jersey and New York) have permitted municipalities to establish charitable foundations to collect property taxes, thus allowing residents to claim a charitable deduction for the property taxes paid, and the states have enacted state tax credits for such charitable donations. However, the IRS has indicated that these strategies will not work to the full extent envisioned by state and local leaders. The proposed regulations provide that taxpayers who itemize deductions shall be eligible for a federal deduction that equals only a small fraction of the state tax credits for such charitable donations. Local leaders have vowed to challenge these new regulations.

Income tax deductions for trusts and estates confirmed. The Treasury stated in Notice 2018-61 (issued on July 13, 2018) that trusts and estates are entitled to income tax deductions for administration expenses paid solely as a result of being an estate or trust. This guidance was necessary to explain the impact on trusts and estates of Internal Revenue Code Section 67(g), which was added as part of the Tax Cuts and Jobs Act. The new Code section suspends miscellaneous itemized deductions for individuals for tax years 2018 through 2025. Notice 2018-61 clarifies that trusts and estates may continue to deduct certain administration expenses, and states that Treasury intends to issue regulations confirming this position. Regulations will also be issued regarding the deductibility of such expenses for the individual beneficiaries of trusts and estates in the final year of administration, when deductions are typically passed through to the beneficiaries.

The New York “trust decanting statute” (EPTL 10-6.6) was significantly revised in August 2011.  Although commentary and analysis of the new statute appeared almost immediately from practitioners, it was not until late 2013 that the judiciary joined the conversation. In Matter of Kroll,¹ the Surrogate’s Court of Nassau County was faced with a challenge to a trustee’s exercise of appointing trust assets from a lifetime trust to a supplemental needs trust (SNT). The decision is noteworthy not only because it is the first to analyze the revised statute, but also because it serves as an important reminder for all trustees and attorneys to draft flexible trust instruments, to stay current with the needs of beneficiaries, and not to delay when changed circumstances necessitate a change to the trust.

A. Statutory Background

In 1992, New York was at the forefront of trust law when it enacted EPTL 10-6.6, which allowed trustees with unlimited discretion over distributions of principal to appoint trust assets to another trust. The statute was essentially unchanged for almost 20 years, during which time it became evident that the statute had limited applicability. The revised statute now permits all trustees, regardless of their scope of authority, to decant, but they must maintain certain provisions of the original trust in the new trust and cannot eliminate or reduce the interests of current beneficiaries.