Goetz Fitzpatrick LLP provides sophisticated services in the area of planning and administration of wills, trusts and estates and private family foundations. The complete range of services provided include the preparation of wills and trusts instruments, representation of executors and administrators in estates administration, trustees of inter-vivos and testamentary trusts, and assistance in fiduciary income and estate tax matters and legal assistance in portfolio management.


    When a person dies, any assets that the person owns in excess of the Applicable Credit Amount  (see below) will be subject to estate taxes.  The federal estate tax ranges from 18% to 45%.  It is important to bear in mind that the proceeds of a life insurance policy could be subject to estate taxes.


    The estate tax has been repealed for 2010.  In 2011, the estate tax will be reinstated at pre-2001 rates.  Prior to 2001, the Applicable Credit Amount was $675,000.
    It is anticipated that the Applicable Credit Amount, and possibly the estate tax rate as well, will be changed prior to 2010.

    The New York State Applicable Credit Amount is $1,000,000.  If a New York State resident dies in 2009 with a taxable estate of $2 million, $99,600 in New York State estate taxes will be owing.  If a New York State resident dies in 2009 with a taxable estate of $3.5 million, $229,200 in New York State estate taxes will be owing.   
    Through the use of a Credit Shelter Trust it is possible to reduce your estate tax liability by approximately $1.5 million.  Assume that a husband and wife each have $3.5 million of assets in their individual names.  Also assume that the husband died in January 2009 and the wife dies in December 2009.  In addition, their Wills both provide that their entire estate passes to the surviving spouse, or if the surviving spouse is predeceased, to the children.  Upon the husband’s demise, no estate taxes will be due since the estate passes to the wife, and assets passing to a spouse are usually exempt from estate taxes.  Upon the wife’s demise, however, $1.926 million of estate taxes will be owing.  If the Wills used a Credit Shelter Trust, estate taxes could have been reduced to $458,400.

    Due to the recent changes in estate tax laws, clients should consider revising Automatically-Funded Credit Shelter Trust Wills since such Wills can produce an unnecessary state estate tax.  Through the use of a Disclaimer Credit Shelter Trust, however, the unnecessary state estate tax can be avoided.  Assume that a husband, who is a New York State domiciliary, died in January 2009 with a net worth of $1,500,000.  Further assume that the wife dies in December 2009 with a net worth of $500,000.  If the husband’s Will has an Automatically Funded Credit Shelter Trust, $64,400 of New York State estate taxes will be owing.  Through the use of a Disclaimer Trust, no estate taxes will be owing.¹

    Clients should be aware of the Generation Skipping Transfer (GST) Tax.  This is a tax on gifts or bequests which are made to beneficiaries who are two or more generations removed from a decedent (i.e., grandchildren, great-nephews, great-nieces, etc.)  This tax is in addition to the estate tax.  Pursuant to the Internal Revenue Code, the rate of this tax is “the maximum Federal estate tax rate”.
    The burden of this tax can be seen by the following example.  Assume a testator has one child and one grandchild.  The testator wishes to leave his entire estate to his grandchild since the child is successful and does not need the money.  Further assume that the testator dies in 2009 with a taxable estate of $7 million.  The bequest to the grandchild will trigger a generation skipping transfer tax of $489,000.  This generation skipping transfer tax is in addition to the federal estate tax of $1,288,000 and NYS estate tax of $638,000.

    A gift or bequest must exceed the GST Exemption Amount before the gift or bequest is subject to this tax.  For 2009, the GST Exemption Amount is $3.5 million.


    Estate taxes can be reduced through the use of the GST Exemption.  By way of example, assume a husband who has a net worth of $2 million dies in 2008, and a wife who has a net worth of $2 million also dies in 2008.  Assume that the couple has a child with a net worth of $5 million.  The husband’s Will leaves everything to the child and the wife’s Will also leaves everything to the child.  As of January 1, 2009, the child’s net worth is $9 million (i.e., $5 million of his own money, and $4 million from his parents²).  If the child dies in 2009, the child’s estate taxes will approximate $2.98 million (federal - $2,062,620 and NYS - $916,400).  Through the use of a GST Trust, however, the child can have use of the parents’ money without that money passing through the child’s taxable estate.  This will reduce the child’s estate taxes by over $2 million.

    A Last Will and Testament does not govern the distribution of assets which pass via operation of law.  An example of an asset which passes via operation of law is an Individual Retirement Account.  Regardless of what the Will dictates, the proceeds of an IRA will be distributed in accordance with the death beneficiary designation.  A failure to review the beneficiary designation could produce undesired results.  Assume, for example, that an individual, whose primary assets are a house worth $450,000 and an IRA worth $450,000, wishes to divide his estate equally among his three children.  When the IRA was established, the testator listed his eldest child as the beneficiary since the testator had no other children at the time.  Upon the testator’s demise, the eldest child will receive $600,000 and the other two children will each receive $150,000.
    Examples of assets which pass via operation of law, include but are not limited to, retirement accounts, jointly-owned assets, life insurance proceeds, In Trust For (ITF) accounts, Payable On Death (POD) accounts, and Transfer On Death (TOD) accounts.
    It is, therefore, necessary that the beneficiary designations be reviewed to protect the desired beneficiaries.

    In the event an individual becomes incapacitated and unable to manage his affairs, a Durable Power of Attorney permits the designated agent to manage that individual’s affairs.  If there is no Power of Attorney, the Court will appoint a guardian to manage the incapacitated person’s affairs.
    There are two types of Durable Powers of Attorney which will allow an agent to manage affairs during incapacity, a Springing Durable Power of Attorney and an ordinary Durable Power of Attorney.
    With a Springing Power of Attorney, the powers of the agent become effective only when a physician certifies that the principal (i.e. the person executing the Power of Attorney) is “suffering from diminished capacity that would preclude the principal from conducting his affairs in a competent manner”.  The agent, therefore, does not have immediate control of the principal’s affairs as is the case with the Durable Power of Attorney, discussed below.  There is, however, a downside with Springing Powers of Attorney.  Since a doctor must certify that the principal is incapable of “conducting his affairs in a competent manner”, a bank or brokerage institution may be reluctant in relying on your doctor’s certification, and may require that an independent doctor chosen by the bank diagnose the principal.  In the interim, no one will be able to manage the principal’s affairs.  Also, there is no assurance that the independent doctor will determine that the principal is incapable of “conducting his affairs in a competent manner”.
    With an ordinary Durable Power of Attorney, the powers of the agent are effective immediately upon execution of the document.  Accordingly, the agent has immediate control over the principal’s assets.  This, however, does not diminish the principal’s control over his own assets.      In both cases, the Power of Attorney will survive the subsequent incapacity of the principal.

    You may have read that the N.Y.S. legislature made several revisions to the laws concerning New York powers of attorney; these new laws take effect in September 2009.  These new laws do not invalidate a New York power of attorney which was properly executed prior to September 2009.


¹It is important to note, however, that with a Disclaimer Trust a surviving spouse may, nevertheless, elect to disclaim the full Federal Applicable Credit Amount and pay the New York State estate tax in order to shelter the full Applicable Credit Amount from future federal estate tax when the surviving spouse dies.
²Each of the parent’s estates would be reduced by $99,600 due to the NYS estate tax.  For simplicity’s sake, the NYS estate tax was disregarded for purposes of this example.