Mar 10

Trusts and Estates Primer

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 trust instruments, representation of executors and administrators in estate administration and of 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 Federal applicable exclusion amount (commonly but imprecisely referred to as the Federal Unified Credit – see below) will be subject to the Federal estate tax. The Federal estate tax ranges from 18% to 35%. It is important to bear in mind that the proceeds of a life insurance policy are subject to estate taxes however the use of a properly executed and administered irrevocable life insurance trust (“ILIT”) will generally shelter such proceeds.

Federal Unified Credit

The Federal Unified Credit is $5,000,000 for individuals who die in 2011. It is indexed for inflation in 2012 and so rises to $5,120,000. The Federal Unified Credit is the amount of an individual’s assets which is exempt from the Federal estate and gift tax. It is not known, at the current time, what the Federal Unified Credit will be after 2012 but, absent further legislation, it is scheduled to revert to $1 Million in 2013.

Deceased Spousal Unused Unified Credit

In addition to your own Federal Unified Credit, a person may now also use any portion of his/her deceased spouse’s unused Federal Unified Credit. The Deceased Spousal Unused Unified Credit is in effect for the tax years 2011 and 2012. It is not known however whether it will be in effect in 2013 and following. It is, therefore, recommended that Disclaimer Credit Shelter Trusts (see below) continue to be used to ensure that each spouse gets the full benefit of his or her Federal Unified Credit.

New York State Unified Credit

The New York State Unified Credit is $1,000,000. For example, if a New York State resident dies in 2011 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 2011 with a taxable estate of $3.5 million, $229,200 in New York State estate taxes will be owing.

Connecticut Unified Credit

The Connecticut Unified Credit is $2,000,000. For example, if a Connecticut resident dies in 2011 with a taxable estate of $2 Million, zero Connecticut estate tax will be owing. If a Connecticut resident dies in 2011 with a taxable estate of $3.5 Million $108,000 in Connecticut estate taxes will be owing.

New Jersey Unified Credit

The New Jersey Unified Credit is $675,000. For example, if a New Jersey resident dies in 2011 with a taxable estate of $900,000, $27,600 in New Jersey estate taxes will be owing. For all estates above $1 Million, estate taxes will be the same as for a New York resident.


If the Deceased Spousal Unused Unified Credit (discussed above) the main way to maximize each spouse’s unified credit was to set up credit shelter trusts upon the death of the first spouse. The property placed in the Trust from the first spouse’s estate would be held for the benefit of the surviving spouse and, upon his or her death, would pass to the designated heirs free of estate tax. Because of the uncertain future of the Deceased Spousal Unused Unified Credit, and because this credit does nothing to reduce New York State estate tax, it is still wise to utilize credit shelter trust planning.

Through the use of a Credit Shelter Trust it is possible to substantially reduce federal and New York State estate tax liability. Assume that a husband and wife (NY residents) each have $3 million of assets in their individual names. Also assume that the husband died in January 2011 and the wife dies in December 2011. Assume further that their Wills do not include credit shelter trust planning but rather provide that the entire estate passes to the surviving spouse, or if the surviving spouse is predeceased, to the children. Under this very common scenario no estate taxes will be due upon the husband’s demise since the estate passes to the wife, and assets passing to a spouse are generally exempt from estate taxes. Upon the wife’s demise, however, absent the Deceased Spousal Unused Unified Credit, $682,000 of estate taxes would be owed – $171K federal and $511K NYS. Conversely, if the Wills had included a Credit Shelter Trust and such trust was funded with $1 Million after the death of the first spouse, estate taxes could have been reduced to $392,000 (0 federal and $392K NYS), a savings of $290,000. Much of this savings is in New York State estate taxes and so, regardless of the future of the federal Deceased Spousal Unused Unified Credit, the proper use of credit shelter trust planning is still a critical component of any good estate plan. The same concept is true for estates of Connecticut and New Jersey residents although, as discussed above, the tax exemptions and rates differ somewhat from state to state.

Automatically-Funded Credit Shelter Trusts vs. Disclaimer Credit Shelter Trusts

Due to the differences between federal and state estate tax exemptions (discussed above), clients should consider revising Automatically-Funded Credit Shelter Trust Wills since Automatically-Funded Credit Shelter Trusts can produce an unnecessary state estate tax upon the death of the first spouse. Through the use of a Disclaimer Credit Shelter Trust, however, the unnecessary state estate tax can be avoided

To illustrate, assume that a husband, who is a New York State domiciliary, died in January 2011 with a net worth of $1,500,000. Further assume that the wife dies in December 2011 with a net worth of $500,000. If the husband’s Will has an Automatically Funded Credit Shelter Trust, the entire $1,500,000 (less estate expenses) would be required to go to the Trust. Because New York State only has a $1 Million exemption, $64,400 of New York State estate taxes will be owed at husband’s death. If the husband’s Will instead provides for a Disclaimer Credit Shelter Trust, the wife can decide how much of the husband’s estate she wants to go to her outright (which is sheltered from estate tax by the marital deduction) and how much she wants to go to the Disclaimer Credit Shelter Trust (which is sheltered only up to the applicable estate tax exemption). For example, if she decides to take $500,000 outright and disclaims the remaining $1 Million so that it goes to the Trust, there will be no federal or New York State estate tax at the husband’s death because the non-marital portion of his estate (the amount passing to the Trust) does not exceed the New York State Unified Credit. There will be no estate tax at the wife’s death because her assets of $1 Million do not exceed the New York State Unified Credit and the assets in the Trust pass free of estate tax.

It should be noted though that with very large estates the surviving spouse may wish to fully fund the Credit Shelter Trust (up to the Federal Unified Credit) and thus pay the state estate tax. This ultimately allows more assets to be sheltered from estate taxes at the surviving spouse’s death.

The Disclaimer Credit Shelter Trust clearly provides the most flexibility for the surviving spouse which is especially important in light of the current uncertainty in federal estate tax law. It should be noted however that the surviving spouse only has nine months from the death of the first spouse to execute and file the Disclaimer with the Surrogate’s Court. If Disclaimer Trusts are to be relied upon rather than Automatically-Funded Trusts, it is especially critical that the Decedent’s family engage competent legal counsel as soon as possible after the death of the first spouse.


An individual can make a gift of up to $13,000 per year to another individual without having to file a gift tax return or pay any gift taxes. Please note that the $13,000 annual exclusion is only applicable to gifts of a present interest.


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”. This is currently 35% but could rise after 2012.

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 2011 with a taxable estate of $8 million. The bequest to the grandchild will trigger a generation skipping transfer tax of almost $450,000. This generation skipping transfer tax is in addition to the Federal estate tax of $779,000 and NYS estate tax of $773,000. Conversely, the testator could have provided a bequest in his Will of “a sum equal to the GST exemption in effect at my death” to his grandchild outright (or in a generation-skipping trust for child’s life then to grandchild) and left the residuary (after the payment of estate administration expenses and taxes) to his child outright or perhaps in a trust. This would have avoided the GST tax while still providing for the grandchild.

Generation Skipping Transfer Tax Exemption

A gift or bequest must exceed the GST Exemption Amount before the gift or bequest is subject to this tax. For 2011 the GST Exemption Amount is $5 million and in 2012 it is indexed for inflation and so rises to $5,120,000.


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.


A common estate planning device is the use of a Revocable Living Trust. With this arrangement the Grantor transfers his or her assets into a Trust that he or she creates to hold and manage the assets. The Trust sets forth the provisions for the administration and ultimate disposition of such assets during his or her life and after. The main benefit of such arrangement is the avoidance of the probate process at death without the Grantor giving up control during life.

When properly drafted and administered, the revocable living trust can be a most effective tool in transferring a person’s assets to his or her desired heirs. In cases where the probate process is expected to be difficult for any reason, the Revocable Living Trust is ideal. For example, if a child is to be disinherited the avoidance of probate through the use of a Revocable Living Trust can make it far more difficult for such child to contest the estate plan. Other scenarios where probate may be more difficult and expensive would be where the Testator owns property in more than one state or where the Testator’s next of kin are not known with certainty. For example, where the Testator is unmarried, has no children, living parents, siblings, nieces or nephews, by law the individual’s cousins are his or her next of kin. This means that the Will cannot be admitted to probate until each and every one of Testator’s first cousins is found and given the opportunity to contest the Will. This process can be extremely time consuming and expensive for Testator’s heirs and could result in a Will contest. Conversely, a properly executed and administered Revocable Living Trust would allow for the almost immediate transfer of Testator’s assets to the desired beneficiaries without probate.

The downside to this type of planning is the cost of creating the documents and transferring title (i.e. real estate conveyances) and the possible inconvenience of keeping all accounts and assets out of the Testator’s name. If even one account is in the person’s name at his or her death, probate could be necessary thereby negating much of the benefits of setting up the revocable living trust in the first place. The benefits of avoiding probate should be carefully weighed against the costs of creating and funding the Trust.

There is no estate or gift tax consequences to the use of revocable living trusts because such a transfer is by its nature revocable and thus, the assets are treated for tax purposes as if they continue to belong to the Grantor. The estate tax discussion above applies equally to a Decedent’s assets held in a revocable living trust as it does to assets held in the Decedent’s own name.


In the event an individual becomes incapacitated, a Durable Power of Attorney permits the designated agent to manage that individual’s affairs. If there is no Power of Attorney, it could become necessary for a Court to 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 ordinary Durable Power of Attorney, discussed below. This delay may be desired by the principal but it could also create problems. 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.

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.

New Laws Regarding New York Powers of Attorney

The N.Y.S. legislature has recently made several revisions to the laws concerning New York powers of attorney; these new laws took effect in September 2009. These new laws do not invalidate a New York power of attorney which was properly executed prior to September 2009.

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