2010 and beyond: estate planning in an uncertain tax environment
(The impact of estate tax repeal)
The federal estate tax was repealed for a one year period beginning January 1, 2010. It is slated to return in 2011 at the rules in effect before the 2001 Tax Act: 55% estate tax rate on inherited wealth over $1M ($2M for married couples, if planned properly). For 2009, the estate tax rate was 45% on all wealth above $3.5M ($7M for married couples, if planned properly).
Many expected the 2009 rules to be extended to 2010 and possibly thereafter. In fact, Congress could still extend the 2009 rules by changing the rules mid-year or retroactive to January 1, 2010. Any retroactive change will raise issues of constitutionality and likely cause litigation for years to come.
The 2010 year estate tax repeal will not necessarily be beneficial for estates of many taxpayers dying in 2010. In conjunction with the repeal of the estate tax, beneficiaries inheriting assets from an estate of a person dying in 2010 will take a “carryover basis” in the asset equal to the basis the decedent had in that asset rather than a “stepped up basis” equal to the value on the date of death. Upon a subsequent sale of the appreciated asset, the beneficiary will pay income tax on the sale value less the carryover basis. There are two adjustments to the new carryover basis rule: The basis of appreciated property owned by the decedent may be increased by up to $1.3M (but to not more than the fair market value of the assets) as well as by certain loss carryovers. Secondly, in addition to the first adjustment, property passing to a surviving spouse (whether outright or in an eligible trust for the spouse) can qualify for up to a $3M increase in basis. In both cases, the basis adjustment is allocated among the assets by the executor of the estate.
So, for the estate of a person dying in 2010, rather than being liable for estate taxes, the estate and its beneficiaries may end up being liable for higher income taxes instead, due to the imposition of the carryover basis rules.
There will be numerous challenges to handling the estates of persons dying in 2010, as well as to preparing estate plans for clients for a future which is so uncertain. For estate planning clients, we will want to establish estate planning documents and asset structures which consider the 2009 and 2011 estate tax rules, as well as the 2010 carryover basis rules, in case the client dies in 2010. The key will be to organize an estate plan that considers all the potential scenarios and provides the executor with the authority and ability to make various elections and choices at the death of the client, when we will know the values and basis of the assets, and hopefully, the rules that apply.
For instance, in the case of a married couple with appreciated assets, we will want to ensure that the spouse who dies first has a Will that creates a trust for the surviving spouse that qualifies for a potential step up in the basis of the assets, yet at the same time ensures if or when the estate tax is back in place, that the trust assets qualify for estate tax exclusion on the death of the surviving spouse.
With the uncertainties of the current estate tax and carryover basis rules, we recommend that you arrange for a careful review of your current estate plan to make sure the plan addresses all the different scenarios that could be applicable, and provides your executor with all the available options and opportunities for saving estate and income taxes. Contact Karen Schaefer, Esq at (585) 324-5718 to ask for further help.
Beneficiary designations for retirement plans, life insurance and IRA's
Many assets do not pass through the Will as part of the probate estate, but instead pass outside of the Will by beneficiary designation. Assets such as life insurance, annuities and qualified retirement plans [IRA’s, 401 (k)’s or 403(b)’s] use beneficiary designations to determine the asset’s recipient. Most beneficiary designation forms give the account owner the ability to name a primary beneficiary and contingent beneficiaries, in the event the primary beneficiary either predeceases the account owner or decides to disclaim (give up) his or her interest in the account.
Preparing and filing proper beneficiary designations is essential to implementing a well-coordinated and effective estate plan. Often a couple may execute Wills that establish trusts for the benefit of their minor children or grandchildren. If life insurance or retirement plan assets name the minor children or grandchildren directly as the beneficiaries, rather than the trusts established by the couple’s Wills, the trusts may not be funded and the proceeds of the life insurance and retirement plans will be administered by the court system and distributed when the infant attains age 18. This may be contrary to the trust provisions established by the Wills.
Another example illustrating the importance of proper beneficiary designations involves a credit shelter or disclaimer trust. An estate owner sets up a credit shelter or disclaimer trust in his or her Will to shelter assets from estate taxes. If life insurance proceeds name the decedent’s spouse as the beneficiary, rather than the trust, the trust may be under funded. This may result in the payment of necessary estate taxes at the spouse’s subsequent death. The estate plan, so carefully crafted during the estate owner’s life to minimize estate taxes by using trusts in his or her Will, is defeated.
When properly implemented, beneficiary designations can provide flexibility in the estate planning and administration process. This allows the executor and beneficiaries the ability to make decisions after the estate owner’s death, based on information available to them at that time. For example, a life insurance policy may name the decedent’s spouse as the primary beneficiary and a credit shelter trust as the contingent beneficiary. This designation allows the decedent’s spouse to evaluate his or her income and asset needs at the time of the spouse’s death. The spouse may decide he or she needs the liquidity from the life insurance proceeds, so collects the proceeds directly. Alternatively, the spouse may possess sufficient assets apart from the life insurance and instead decide to disclaim the life insurance proceeds with a view towards minimizing estate taxes at his or her death by funding the credit shelter trust named as the contingent beneficiary. Effective estate planning provides options to estate beneficiaries based upon economic, tax and lifestyle considerations existing when the estate owner passes away.
Naming proper beneficiaries for retirement plan accounts is particularly important as most accounts are subject to both estate tax and income tax. Over the past 20 to 30 years, retirement benefits have undergone dramatic transformations. Nearly extinct are defined benefit plans such as pensions, where the employer pays the former employee a regular benefit so long as the former employee lives. Replacing defined benefit plans are defined contribution plans, such as 401 (k)’s or 403 (b),s, where the employer contributes a fixed amount or percentage of the employee’s salary to an investment account. These defined contribution plans may also receive elective deferrals of salary by the employee. The employee, not the employer, often directs the investment of the proceeds and bears the risk of any gains or losses in the account. The employee normally pays income tax when benefits are withdrawn by the employee, not when the contributions or deferrals occur. Deferring income tax allows the account owner to “borrow” the deferred income tax and capture any growth in the amounts deferred over time.
With retirement plans making up a greater percentage of an individual’s total estate, designating proper beneficiaries is of paramount importance. In many circumstances it is desirable to preserve income tax deferral on retirement assets for as long as possible. A surviving spouse may have the ability to roll plan benefits into his or her own IRA and continue to defer income tax. In other situations, a beneficiary must take minimum distributions based on the account owner’s life expectancy. Naming a “designated beneficiary” may allow an individual or trust to establish an “inherited IRA” for the inherited benefits and take minimum distributions over the beneficiary’s life expectancy. Failing to name a proper beneficiary may cause a beneficiary to face immediate income taxation on the retirement plan proceeds, and significantly reduce the long-term growth potential of such asset. Timothy Muck, Esq. may be reached for questions at (585) 324-5727.
Client service and our phone system
Every where you turn these days one hears the words: “Keep your costs within reason” or “In these recessionary times…” One of the ways to keep costs down is to better use the technology that one already owns. How can you use it in such a way that a client won’t perceive it as a negative? Here at Lacy Katzen LLP we have tried 3 methods.
We assigned a direct number to each of our attorneys and staff members. When you call an attorney or another staff member and that person is busy with another client, you go directly into that person’s voice mail and can be sure of the confidentiality of the phone message. You also have the option to mark the call “urgent” or to reach an attorney’s legal assistant.
We gave each person in our firm a direct fax line which sends the fax directly to that person’s computer. No more printed faxes waiting to be distributed. The fax is sent and read by the person for whom it was intended. We centralized our reception calls in Rochester so that you can talk to a person who will understand if you need additional help. You can call any of our offices and speak to someone, whether it is in Batavia or Canandaigua. The receptionist will refer you. It means that you can ask to speak to someone in another office and be transferred. We do not use an automatic attendant that directs your calls by sending you to another menu. Our receptionist staff can also direct your call to an attorney or paralegal if you don’t know to whom you really want to speak. They know which people are best suited to talk about a certain type of legal matter.
It is our intention that all of our calls from clients are returned promptly. We have a standard requiring that your calls are returned quickly. Please send any comments to our administrator, Suzanne Mayer or 585-324-5751.
The Law and the "Cloud"
What is the Cloud? You may be familiar with the term, “the Cloud” from the various advertising campaigns on television. The “Cloud” is an off-premise server solution for your business’ email communication, data storage and program needs.
The “Cloud” allows a business to obtain sophisticated technology without the capital outlay and on-site expertise that often prohibits companies from utilizing the latest technology and expanding their IT abilities. It eliminates the need for server rooms, managing IT specialists, costly updating, contingency planning, and archiving. The “Cloud” permits a vendor to benefit from economies of scale and that benefits the vendor’s customers through cost savings and increased capabilities. Vendors are seeking customers to fill their “Cloud” capabilities and there is an opportunity for customers to negotiate a good deal now while this technology is new. A business will contract with a vendor to house its data center using the vendor’s updated servers. Typically you see businesses start out a contract with an email service that eliminates the need for exchange servers or for backup capabilities for e-discovery.
Why is the law important when using the “Cloud?” The technology offered by the “Cloud” is relatively new. How the “Cloud” works creates legal issues that a business must look at in order to protect itself and its own customers. These issues include ownership of the data, ownership of equipment, software and hardware needs, access to the data, security and backup capabilities. With an off site server these issues become more critical than those involving the onsite server solution you may be presently utilizing. Of course, there are also the issues that need to be addressed with any email, data and program solutions, such as downtime, system capabilities and system compatibility. It is imperative that you enter into an agreement with the vendor providing the “Cloud” that protects fully your business and its data.
Attorney Jennifer Chadwick can assist your company in negotiating, reviewing and/or writing an agreement that provides protection for your business when utilizing this new technology. Please contact her directly at 585-324-5721.
Contempt proceedings, a useful technique in enforcing a money judgment
In 1798, Charles Wentworth was sentenced to three days in jail for failing to pay his merchant on a past due bill of $.98 for the purchase of three chickens. In 1817, Michael James was sentenced to six days in jail for failing to pay his bar tab totaling $1.89. In 1847, Ronald Henderson did not pay $2.47 for grooming services on his horse and was sent off to prison for three days. These incidents were commonly told in local papers as true stories of the day.
Flash forward to 2010. Can anyone be sentenced to jail time for failing to pay a bill or not paying a judgment? Of course not. One cannot be “thrown in jail” for failing to pay a money judgment. However, the same does not hold true when an individual fails to comply with an enforcement proceeding in an attempt to collect on a money judgment.
Lacy Katzen LLP’s Collection Department zealously represents creditors in the enforcement of their money judgments and may commence enforcement proceedings against a judgment debtor resulting in an arrest warrant. The most common method used when other avenues of enforcement prove futile is a contempt motion. Though contempt is not available to enforce a money judgment, every court in New York State in which a proceeding to enforce a money judgment may be brought is specifically granted the right to punish a judgment debtor on contempt committed in the context of an enforcement proceeding.
For example, refusal or willful neglect to obey a subpoena, a restraining notice or order granted by the court requiring the judgment debtor to pay money is punishable as a contempt. Thus, a judgment debtor cannot be punished for contempt for failing to pay a judgment, but can be held in contempt for a failure or refusal to be examined under oath when the judgment creditor is trying to enforce the judgment. The mechanism used for a debtor’s failure to comply with the subpoena is known as a civil contempt motion.
The procedure is rather simple and quick. It consists of a notice of motion advising the judgment debtor of the court date and time and the motion which consists of an attorney affirmation. The motion must be served not less than 10 days and no more than 30 days prior to the court date. The attorney affirmation must contain factual statements describing the contempt and a recital that the judgment creditor has been prejudiced, impaired and impeded in the collection of the judgment.
Generally, the motion papers are served upon the judgment debtor by ordinary mail and an affidavit of service is filed with the court.
Where the judgment debtor appears on the motion to punish for contempt, it is generally accepted practice for the judgment creditor’s attorney to offer to withdraw the motion if the judgment debtor agrees to submit to an examination. If such consent is given, the motion is withdrawn, and the examination proceeds either at the court or in creditor’s attorney’s office.
Obviously, the ultimate goal of the judgment creditor is for the judgment debtor to appear in court and be examined for possible assets. The objective is for the judgment debtor to satisfy his or her judgment. However, in many cases, the judgment debtor fails to appear at the hearing. Where there is a default on the contempt motion, the court will sign an order fining the judgment debtor the sum of $250 plus costs and expenses. The fine may be more than $250 where the judgment creditor is able to make a convincing showing that the actual damages, by reason of the contempt, are greater than that amount.
The fining order must contain a provision granting the judgment debtor leave to “purge” the contempt, typically within ten days after personal service of the order by appearing at the judgment creditor’s attorney’s office and subject himself or herself to answer questions at a deposition.
After service of the order upon the judgment debtor and after the required time passes to purge the contempt, the judgment creditor, through his or her attorney, may apply to the court for an arrest order. This may require another notice and motion to the judgment debtor or may be done without further notice depending upon the court. The court may issue a warrant directing the sheriff to arrest the judgment debtor and bring him or her before the court to be committed or for other disposition.
Normally, after the issuance of the arrest order, the judgment debtor is contacted by the sheriff, requesting the judgment debtor to voluntarily “turn himself in” at the sheriff’s office on a certain date and time. When this occurs, the attorney’s office is notified and will appear at the sheriff’s office to question the judgment debtor.
Lacy Katzen LLP’s experience has been that when the judgment debtor comes before the sheriff, he or she will usually bring in funds to satisfy the judgment, will make payments for the judgment amount or will provide sufficient information at the deposition to garnish wages or restrain a bank account. In other cases, be the judgment debtor may not have any assets to attach and is “judgment proof.”
In conclusion, a contempt motion is used as a last resort in enforcing a judgment. It ultimately provides a wealth of information leading to the payment of our clients’ judgments or confirming the judgment debtor as having no assets. Lacy Katzen LLP takes pride in representing creditors and using the law to its fullest extent in enforcing our clients rights. If you wish to discuss ways of collecting your debts, you may contact Michael Schnittman at (585) 324-5704 or Mark Stein at (585) 324-5706, who are partners in the Creditors’ Rights Department of Lacy Katzen LLP.
John T. Refermat named partner at Lacy Katzen LLP
Lacy Katzen is pleased to announce that John T. Refermat has been named a partner of the firm. He is an experienced trial lawyer whose practice includes complex civil and commercial litigation, real property tax certiorari/eminent domain, zoning and municipal/land use litigation, and environmental matters. Mr. Refermat also handles securities arbitration and construction litigation. An experienced appellate advocate, he has successfully prepared and argued appeals before New York’s Appellate Division and the United States Court of Appeals for the Second Circuit.
Managing Partner Peter T. Rodgers stated that “John’s depth of experience and litigation skills significantly enhance Lacy Katzen’s ability to serve our clients’ diverse needs. We are excited to have John on our team.”
John said “I have long been impressed by Lacy Katzen. We are a full service law firm with the resources and experience to handle a wide variety of litigation and other matters effectively and economically for our clients. I am proud of the firm’s history and look forward to the future.”
John represents property owners, school districts and municipalities in real property tax proceedings and advises both public and private clients on the New York State Environmental Quality Review Act (SEQRA) and the National Environmental Policy Act (NEPA). On behalf of municipalities and other entities, he has successfully defended a variety of proceedings, including those involving SEQRA, landmark designation, and zoning/land use issues.
John is a McQuaid Jesuit graduate who earned his BA in Economics from Hamilton College and his Juris Doctor from Notre Dame Law School. He has served as General Counsel to the Binghamton Housing Authority, Counsel to the Broome County Republican Committee, Special Counsel to New York State Senator Thomas W. Libous and Treasurer of the Monroe County Republican Committee.
His admissions to practice include the New York State Bar, United States District Courts for the Western and Northern Districts of New York, the United States Court of Appeals for the Second Circuit, United States Bankruptcy Court, the United States Court of Federal Claims and the United States Supreme Court.
John is involved with Lacy Katzen’s Marketing and Litigation Committees, and volunteers his time on behalf of various professional and community activities. He serves on the Board of Directors of the Penfield Little League, the Polish Heritage Society of Rochester, and as a member of the George Eastman Legacy Committee and the Eastman House Council. He is also a Deputy leader of the Town of Penfield Republican Committee, and formerly served on the Rochester Childfirst Network Board of Directors, and the Rochester-Monroe County Youth Board.
In their spare time, John and his wife Stacy enjoy a variety of outdoor activities in the Adirondacks and Finger Lakes, and keeping up with their three children, Stan, Reilly and Joe.
Robin Folts rejoins Lacy Katzen LLP as an attorney
Lacy Katzen LLP is pleased to announce that Robin Folts has returned to our firm, as an attorney. Robin earned her Juris Doctor degree at Thomas M. Cooley Law School Cum Laude in May 2009. Robin is joining the Estate and Trust Department focusing on elder care matters as well as the Creditors’ Rights Department focusing on lender recovery of both commercial and consumer obligations.
Robin’s story is an interesting one. She started at Lacy Katzen LLP as a legal secretary for attorneys David MacKnight and Louis Ryen in the bankruptcy department in 1996. At that time her duties were to prepare and file motions and assist with Chapter 11, 13, and 7 filings. Later she was employed by various law firms focusing on creditors’ rights issues and real estate. Robin ultimately worked for a buyer of commercial debt where she broadened her skills in complex lender work-outs. While there, Robin traveled extensively to work out large commercial debts including selling real estate owned assets and other collateral located in the continental United States, in Puerto Rico and the U.S. Virgin Islands.
Robin rejoined Lacy Katzen in 2003 as a paralegal in the Estate and Trust Department and also assisted the Litigation Department. Robin attended Medicaid interviews, worked very closely with clients to assist them in accomplishing their estate planning goals, prepared gift tax returns for the firms’ clients, and worked closely with medical malpractice clients until she departed for law school in April, 2006.
Robin commented: “All through law school my main goal was to return to Lacy Katzen in the capacity of an attorney. I am very happy to be back with the Firm and sincerely appreciate having this opportunity. I plan on making the most of it.”
Our clients have come to know and respect Robin for her excellence, hard work, and compassion. Robin provides the elderly strategies that meet their individual economic goals, and facilitates their long term personal care needs. She also wants to work with business’ for recovery of debtor obligations.
Lacy Katzen LLP is excited to have her back and welcomes Robin in her new role. Robin is very interested in baseball and has won a Telly Award as producer of a short film. She lives in Rochester and enjoys the fact she is back home with her husband and children.
Personal injury? Trust our personal approach
Lacy Katzen LLP is a leading law firm in personal injury and wrongful death litigation in the Rochester area. Lacy Katzen LLP advocates for individuals whose lives have been changed by serious injury or by the death of a spouse, parent or child because of the careless and irresponsible conduct of another. Our attorneys represent victims of auto accidents, dangerous property, medical and surgical error, construction and workplace accidents and defective products. With a team of experienced attorneys, dedicated paraprofessionals and a medical doctor, Lacy Katzen has extensive trial experience in Courts throughout Western and Central New York.
Our attorneys recognize that another’s careless conduct can cause not only serious injury, but the loss of income, benefits, retirement funds and the cost of medical and rehabilitative care. We are experienced in handling the complex issues that arise in medical, surgical and hospital errors, incorrect or delayed diagnosis of serious medical problems, birth injuries, emergency room neglect, nursing home neglect, poor orthopedic care and infectious disease cases.
If you are accused of acting negligently or are named as a defendent in a lawsuit we can also help you. Prompt action is required to protect your interests as strict time deadlines apply.
Peter Rodgers is listed in Best Lawyers in America and New York State Super Lawyers for his work in representing victims of medical and hospital negligence and can be reached at 585-324-5707. Jacqueline Thomas is listed in Cambridge Who’s Who Among Executive and Professional Women and Marquis Who’s Who in American Law. Jacqueline Thomas can be reached at 585-324-5717.
News of the firm
Dan Bryson will Chair the Municipal Law Committee of the Monroe County Bar Association beginning in the Fall of this year.
Tim Muck co-chaired a December 2009 session of the Monroe County Bar Association Business Law Council titled: “Business Law Nuts & Bolts: Operating & Selling a Business.”
On February 10th, Tim Muck and Terry Emmens gave a seminar to financial advisors at a large insurance company on the status of the existing federal estate tax law changes and the challenges the changes presents to our clients.
Terry Emmens gave a seminar to a group of financial advisors and broker dealers regarding elder law and the lawful asset protection strategies available to our seniors should they enter a nursing home.
Peter Rodgers spoke at the Evidence Institute sponsored by the Monroe County Bar Association. He also chaired a seminar sponsored by the New York State Bar Association on “Prosecuting and Defending Medical Malpractice Claims.
Peter has been selected by The American Trial Lawyers Association as a “Top 100” Trial Attorney in New York State. Selection is based upon superior qualifications, leadership and reputation.
Karen Schaefer will address tax and trusts and estates issues for the Monroe County Bar Association in April 2010. Karen Schaefer was appointed Chair of the Governance Committee of Educational Enterprise of New York, Inc.