It’s probably not something you think about every day—or that's especially pleasant to contemplate at any time—but the fact remains: without a thoughtfully constructed estate plan, there is a significant risk of your assets ending up in unintended hands upon your passing. By executing a thorough, binding will that spells out exactly how you want your estate handled, you can ensure that your assets are distributed properly.
Passing It On
The typical plain vanilla, boilerplate will that leaves “everything to my children” does little to ensure that one's grandchildren benefit upon the death of their parent, as opposed to that parent's spouse. Even if I love my son- or daughter-in-law, I may not wish to have my assets commingled with those of his or her new spouse.
Therefore, it is advisable to direct that assets, otherwise passing to a child who predeceases me, go instead to one's grandchildren. This is easily accomplished by adding the words “per stirpes” (which is the Latin term for “through the roots”) after the name of a beneficiary. If, for example, my entire estate goes to my sons, Mark and John, per stirpes, then Mark and John's children—and not my sons' respective spouses—will take Mark and John's share in the event that either son predeceases me.
The more common concern involves ensuring that one's grandchildren ultimately benefit, even if their parents survive the grandparent. For example, if my son John dies after me, what can be done to prevent his wife (likely John's primary beneficiary under his will) from inheriting what were originally my assets?
My clients tend to have mixed feelings on this point. Some resign themselves to a “what will be will be” stance. On the other end of the spectrum are clients who leave everything enrolled in a lifetime trust for their children. This arrangement permits the child to benefit from the assets, but upon his or her death, any remaining assets pass automatically to the grandchildren, bypassing the deceased son or daughter's surviving spouse. This option is especially advisable if the son or daughter had creditor issues, an unstable marriage, or if the client wishes to avoid having the assets exposed to a second layer of taxes within the deceased son or daughter's estate.
Another option is to leave everything to one's children but add the following clause: “It is my sincere hope that my children take steps within their own estate planning to ensure that my estate assets eventually pass to my lineal descendants.” My son can then “blame it on me” when setting the assets aside for the eventual benefit of my grandchildren.
Another shortcoming of the typical, plain vanilla will is that in addition to not providing for more specific asset allocation, it's also incapable of shielding any portion of our assets from estate taxes or long-term care expenses.
Under current New York State law, an individual can pass up to $1 million to his or her heirs free of transfer taxes. For purposes of determining the transfer (estate) tax, life insurance proceeds, pension plan, and annuity death benefits as well as liquid assets, real estate and securities are counted toward this total. To reduce the tax bite, it may be advisable to create an estate tax trust. We can then “gift” some part of our assets into the trust and thereby remove it from our gross taxable estate. The caveat is that we cannot retain any rights to the property in the trust. We can, however, retain the right to remove and replace the named trustee.
Married couples need to take extra steps to ensure that they don’t unwittingly waste the $1 million credit of the first spouse to die. If, for example, a couple with $1.5 million has simplistic wills leaving everything to each other and the remainder to children, there will be significant taxes to pay. Because of the unlimited marital deduction provided for in the Internal Revenue Code, there is no tax liability on transfers to a spouse.
One way to preserve both credits is for each spouse to create credit shelter trusts. Each will should then leave everything to the spouse with the exception of whatever amount the surviving spouse chooses to “disclaim” into the credit shelter trust. If this is done within 9 months of death, the estate tax credits of both spouses will be preserved.
A simple will is also incapable of protecting one's home against claims that arise during one’s life—such as long-term care expenses. However, another type of trust can be used to shield one’s home from being lost to future possible such expenses.
Unique Challenges for Co-ops
Owners of cooperative apartments face unique challenges when setting up trusts. Many corporations still do not permit trust ownership of the apartment because many co-op bylaws require owner occupancy. We have on many occasions negotiated with a co-op’s attorney to permit an owner to transfer 99% of his or her shares into a trust and retain 1% in his or her individual name. Alternatively, some co-ops do permit trust ownership, provided that the shareholder sign a guarantee ensuring that all aspects of the proprietary lease are honored.
Every individual has unique planning needs, concerns and family dynamics—and most of us would benefit from a thoughtful and collaborative estate planning process. A simple boilerplate will is usually not the way to insure that our ultimate objectives are satisfied.
Ann-Margaret Carrozza is an elder law and estate planning attorney, who also served for 14 years as a New York State Assemblywoman. A frequent media guest, her law offices are located in Bayside, Glen Cove and Port Jefferson, N.Y.
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