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Reviewing Your Estate Plan is Essential After a Divorce
By: Carole M. Bass
Reviewing your estate plan following a divorce (and even before the divorce is final) is essential. Earlier this summer, in Sveen et al. v. Melin, 584 U.S. _____ (2018), the U.S. Supreme Court provided a reminder of the importance of post-divorce estate planning. In Sveen, the Court upheld the retroactive application of Minnesota’s revocation-on-death statute, revoking the designation of the decedent’s ex-wife as the beneficiary of his life insurance policy where the decedent failed to file a new beneficiary designation form following the couple’s divorce.
While the result in Sveen is the correct one in most cases (as most people are not seeking to benefit their former spouses) – the financial and emotional toll of litigating this case could have been avoided if Mark had simply signed and filed a new beneficiary form after his divorce.
There are also some instances where the ex-spouse is still intended to be the beneficiary of a life insurance policy and, in such cases, the automatic application of a revocation-on-death statute can be avoided by completing a new beneficiary designation post-divorce that names the ex-spouse as the beneficiary.
New York, like Minnesota, has a revocation-on-death statute, which is contained in Section 5-1.4 of the Estates Powers and Trusts Law (“EPTL”). The New York statute provides that unless otherwise provided by the express terms of a governing instrument, a divorce, judicial separation or annulment revokes any revocable “disposition or appointment of property made by a divorced individual to, or for the benefit of, the former spouse, including, but not limited to, a disposition or appointment by will, by security registration in beneficiary form (TOD), by beneficiary designation in a life insurance policy or (to the extent permitted by law) in a pension or retirement benefits plan, or by revocable trust, including a bank account in trust form . . .”
It is especially important for individuals to revisit the beneficiary designations on their retirement accounts following a divorce. With respect to plans governed by the federal Employee Retirement Income Security Act of 1974 (“ERISA”), including most defined
In This Issue
Reviewing Your Estate Plan is Essential After a Divorce
2017 Tax Act—Estate Planning Issues For Connecticut Residents
Use of Increased Gift Tax Exemption to Forgive Intra-Family Debt
Planning For Your Safe Deposit Box
In the Spotlight:
Moses & Singer congratulates Carole M. Bass - Estate & Probate, Arlene G. Dubin - Family Law, Rebecca A. Provder - Family Law, Gideon Rothschild - Estate & Probate, Daniel S. Rubin - Estate & Probate and Irving Sitnick - Estate & Probate who were chosen for inclusion in the 2018 Metro Edition of New York Super Lawyers® and Kerrie C. Horrocks - Estate & Probate who was chosen for inclusion in the 2018 New York Metro Rising Stars.
Gideon Rothschild is recognized in the 2018 edition of Chambers HNW, a guide listing the leading professional advisors in 50 countries.
Arlene G. Dubin and Rebecca A. Provder co-authored “Prenup Tutorial: A Survey of Recent Case Law” which appeared in the NY Law Journal Special Family Law Section on July 30th.
Gideon Rothschild and Daniel S. Rubin have been selected for inclusion in the 2019 Best Lawyers in America for their outstanding contributions in the areas of Trusts & Estates and Trusts & Estates Litigation.
Upcoming Events:
Carole Bass, Gideon Rothschild and Daniel S. Rubin will be presenting at the University of Miami’s Heckerling Institute in Orlando from January 14-18, 2019.
Daniel S. Rubin will also be presenting at the FPA National Meeting, at the NYSBA Senior Lawyer’s Section Meeting, at the Annual UJA Meeting and at the California Bar/UCLA Meeting.
Gideon Rothschild will also be presenting at the FPA Orange County Chapter and the New York Historical Society.
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contribution and defined benefit plans such as 401(k) plans, it is well established that state law revocation-on-death statutes are preempted by ERISA. See Egelhoff v. Egelhoff, 532 U.S. 141 (2001) (holding that state statute providing for automatic revocation of spouse as beneficiary upon divorce was preempted as applied to ERISA benefit plans).
While provisions in favor of a former spouse under a will or in a revocable trust are automatically revoked under EPTL §5-1.4 if there is a final decree of divorce, a judicial separation, or an annulment, revocation does not occur upon commencement of a divorce proceeding. Changes need to be effectuated by executing a new will or by amending or restating a revocable trust.
Even if the will is changed, a surviving spouse retains the right to claim the statutory elective share during the pendency of a divorce proceeding, unless he or she is otherwise disqualified as a surviving spouse under state law. If there is no will in place, it is important to sign one in order to avoid intestacy (where the spousal share is larger than the elective share) while a divorce is pending. As with the elective share, a surviving spouse is not automatically disqualified from inheriting under intestacy upon commencement of divorce proceedings.
People also must be cognizant of statutory automatic restraints imposed by New York law during a divorce case, which prohibit either party from changing beneficiary designations on life insurance policies, changing title of joint accounts, or taking certain other actions during the pendency of the proceeding without the written consent of the other party or an order of the court.
Significantly, even after a divorce is finalized, provisions in favor of the former spouse's relatives are not automatically revoked under EPTL §5-1.4. See, e.g., In re Estate of Lewis, 114 A.D.3d 203 (4th Dep't 2014) (holding that will provision nominating the father of the testator's ex-husband, as alternate executor and alternate beneficiary was not revoked under New York law by virtue of the divorce).
It is imperative that estate planning be addressed at the commencement of a divorce, and again when the divorce is finalized.
2017 Tax Act—Estate Planning Issues For Connecticut Residents
By: Carole M. Bass
On May 15, 2018, Connecticut’s budget bill became effective maintaining an exemption from Connecticut estate and gift tax of $2,600,000 for 2018 and $3,600,000 for 2019, but providing that the match to the federal basic exclusion amount will
phase in gradually rather than being effective in 2020 as would have been the case under prior law.1 Under the budget bill, the Connecticut exemption amount will be $5,100,000 in 2020, $7,100,000 in 2021, $9,100,000 in 2022 and will match the federal basic exclusion amount (currently $11,180,000) effective January 1, 2023.
There is a wrinkle, however, in that another piece of Connecticut legislation provides for the Connecticut estate and gift tax exemption to remain at $2,600,000 for 2018 and $3,600,000 for 2019, but to match the prior federal exemption of $5,490,000 in 2020 with no additional increase after 2020.2 It remains to be seen what will become of the Connecticut exemption.
As you may recall from our prior Wealth Advisory newsletters, the new federal tax law increases both the federal estate and the federal gift tax exclusion to $11,180,000 per person (a $10,000,000 basic exclusion amount indexed annually for inflation). However, since the increased federal exclusion is scheduled to sunset on January 1, 2026 and revert to the pre-2018 basic exclusion amount of $5,000,000 (indexed), absent future Congressional action, the increased federal exclusion will only apply to gifts made and estates of individuals dying between 2018 and 2025.
In general, readers with estates in excess of the pre-2018 federal exclusion of $5,000,000 (indexed) may wish to take advantage of the increased federal exclusion by making current lifetime gifts in case the exclusion decreases in 2026 (or potentially sooner if there is a change of administration in 2020). For those readers who are residents of Connecticut, however, there is a complication because Connecticut has the distinction of being the only state that imposes a state level gift tax. As noted above, the Connecticut exemption is not slated to match the federal exclusion until January 1, 2023 (or not at all depending on what happens with the conflicting legislation).
Connecticut residents might, therefore, wish to make their gifts gradually over the next several years to avoid making taxable gifts exceeding the Connecticut exemption. In addition, Connecticut residents may, if applicable, wish to make gifts of out-of-state real or tangible property, which are not subject to Connecticut gift tax.
For Connecticut residents with assets that are expected to appreciate significantly before 2023 there are techniques available to freeze the asset value for estate tax purposes while gradually taking advantage of the increasing Connecticut exemption.
EXAMPLE: Let’s assume that a Connecticut resident individual owns an interest in a business that is currently valued at $5,000,000. It is anticipated that the value of the business will appreciate significantly over the next several years. If the individual gifts his interest in the business to a trust for his descendants he would have sufficient federal exclusion to
Wealth Advisory/Fall 2018
shield the gift from federal gift tax, but would incur a substantial Connecticut gift tax on the value of the gift in excess of $2,600,000. Under the Connecticut budget bill, the Connecticut gift tax on the $2,400,000 difference amounts to $186,600. If the individual instead makes a partial gift to the trust equal to the current Connecticut exemption of $2,600,000 and sells the remaining portion of his interest in the business to the trust in exchange for a promissory note, he can gradually forgive the note each year as the Connecticut exemption increases, making gradual gifts that will not incur Connecticut gift tax.
Readers who are Connecticut residents should contact us to discuss strategies for lifetime gifting.
1Conn. Pub. Act No. 18-81 (effective May 15, 2018). 2Conn. Pub. Act No. 18-49 (effective May 31, 2018).
Use of Increased Gift Tax Exemption to Forgive Intra-Family Debt
By: Edward Becker
The new tax law, which took effect on January 1, 2018, doubled the exemptions from federal estate, gift and generation-skipping transfer tax to $11,180,000 per individual, with inflation adjustments going forward and with a reversion to the base $5,000,000 exemption (with inflation adjustment) on January 1, 2026. This temporary increased exemption presents a number of planning opportunities, one of which is to forgive outstanding intra-family debt.
One by-product of the historically low interest rate environment of the past several years is the increased use of intra-family transactions involving promissory notes. These notes play a key role in many estate planning transactions and their prevalence has made them a worthy target for the IRS.
One of the more popular estate planning strategies consists of a sale to a grantor trust whereby the value of the property sold is frozen in the hands of the seller in the form of a promissory note. This transaction can produce substantial estate tax savings to the extent that the property sold to the trust outperforms the interest rate on the promissory note. Since the sale is made to a grantor trust, the transaction is disregarded for income tax purposes. No capital gain is recognized on the sale and the interest paid pursuant to the promissory note is not subject to income tax.
If the seller dies while the promissory note remains outstanding, the note's then value is included in the seller's estate for estate tax purposes. The IRS has yet to adopt a definitive position as to how this scenario is treated for income tax purposes. Some commentators opine that no capital gain is
realized and the note's income tax basis is stepped-up to equal its value in the seller's estate. Other commentators maintain that there is no basis step-up and capital gain is recognized to the extent the amount due on the note exceeds the seller's original cost of the asset(s) sold. By choosing to forgive the note now, the potential income tax exposure that may result upon death can be eliminated.
Forgiving the note may unlock other tax planning opportunities. After the debt is eliminated it may be possible to convert the trust to a non-grantor trust. This switch could potentially eliminate state income taxation on the trust's income, an especially welcome result given that the new tax law limits state tax deductions to $10,000 per year. Furthermore, using the additional, but temporary, gift tax exemption to forgive and thereby eliminate intra-family debt can help safeguard existing estate planning transactions from IRS scrutiny.
The decision to utilize gift tax exemption to forgive intra-family debt requires a detailed analysis. We encourage you to discuss these options with one of our estate planning attorneys.
Planning For Your Safe Deposit Box
By: Kelly Zerillo
Safe deposit boxes are a common way to store valuables at a secure location. Renting a safe deposit box is a simple transaction but few understand the headaches the box can cause your loved ones upon your death. Below are two common avoidable traps for renters of safe deposit boxes.
Issue 1: Deceased Individual as the Sole Renter of the Safe Deposit Box.
When an individual who is the sole renter of a safe deposit box dies, the box will be sealed and there will be no ability to access the box until an executor or administrator is appointed by the court or a Will Search Order (discussed below) is obtained from the court. Naming a joint renter on the box will not preclude the box from being sealed once the bank is aware of the deceased renter’s death; however, if the individual’s death is not sudden, the joint renter will be able to retrieve any assets from the box prior to the co-renter’s passing. This allows the joint renter to obtain the contents of the box without probate, administration or a court order.
Issue 2: Storing Important Documents in a Safe Deposit Box.
Because of the difficulties in obtaining access to a safe deposit box after the renter’s death, it is important not to store important documents such as your original will or life insurance policies in your safe deposit box. If, however, your loved ones find themselves in the situation where they believe
Wealth Advisory/Fall 2018
Wealth Advisory/Fall 2018
you may have left your will in your safe deposit box, a Will Search Order can be obtained from the Surrogate’s Court authorizing an individual to search your box for the purpose of retrieving a will, the deed to a burial plot and any life insurance policies. This order is of limited utility as it does not permit any other contents to be removed.
Many individuals view safe deposit boxes as a convenient and safe place to store valuables, however, it is necessary for the individual to consider the impact the box will have on their estate administration. Storing important documents or valuable items in a safe deposit box may unduly delay your loved ones gaining access to these items when needed and the process of opening the box may be more involved than you anticipated.
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