Thought Leadership Series: Estate Planning Panel – Strategies to Most Effectively Transfer Wealth to the Next Generation

July 19th, 2016

On June 14, 2016, First Long Island Investors hosted a thought leadership breakfast for clients and friends of the firm on estate planning and transferring wealth to the next generation.  The panel discussion included three prominent trusts and estates attorneys:

Patricia Galteri, Chair of the Wills, Trusts & Estates Practice Group of Meyer, Suozzi, English & Klein, P.C., Michael P. Ryan, of Counsel, Trusts and Estates Practice Group of Jaspan Schlesinger, LLP, and David R. Schoenhaar, Chair of the Estate Planning and Administration Practice Group of Ruskin Moscou Faltischek, P.C., and was moderated by FLI’s Executive Vice President and General Counsel, Bruce A. Siegel.

From left: Bruce Siegel, Patricia Galteri, David Schoenhaar, Michael Ryan

Patricia Galteri began the session by sharing with attendees how to design a will or revocable trust by using the core principles of estate planning, the unlimited marital deduction, and the Federal and New York State estate tax exemptions, and sharing best practices for estate planning.  Some of her key points included:

  • When building an estate plan for clients, her group works to understand a client’s family dynamic and wealth transfer goals and his/her philanthropic goals.
  • The unlimited marital deduction allows a married individual to leave property to his or her spouse outright or through a trust for the benefit of a spouse without incurring a federal estate tax and thereby deferring the payment of federal estate tax until the death of the second spouse on all property owned by the first to die.
  • Exemptions are in place that allow you to gift property to non-spouses without tax:
    • The American Taxpayer Relief Act of 2012 made the lifetime estate and gift tax exemption permanent at $5 million per person. Indexed for inflation, that makes the current exemption $5.450 million, able to be used during life, at death or both.
    • Portability – if the first spouse does not use her exemption, the second spouse can use it if certain actions are taken by the Executor of the estate of the first spouse to die.
    • Importantly, New York does not have portability and its estate tax exemption is currently lower than the Federal exemption, but will mirror the federal exemption in 2019.
    • Until that time, it is essential that a will and revocable trust be structured to assure the proper use of the New York estate tax exemption at the death of the first spouse or it is lost since it is not portable.
  • A commonly used and highly efficient strategy to transfer wealth to the next generation in a tax free manner is to make annual exclusion gifts of up to $14,000 per individual (indexed for inflation), or $28,000 per married couple, per recipient. Annual exclusion gifts are in addition to the lifetime estate and gift tax exemption amounts.
  • Establishing trusts may be an important component of a client’s estate planning.  The client’s individual factual circumstances and goals will dictate which type of trust is most appropriate.  Commonly used trusts to freeze the value of assets and remove appreciation from the client’s estate include a grantor trust, a grantor retained annuity trust and a qualified personal residence trust.
  • It is important to keep in mind that Hillary Clinton has proposed that if she becomes President, she will work to reduce the federal exemption and not index it for inflation. She would also plan to raise the top estate tax rate to 45% from 40%.
  • When developing an estate plan, life insurance is a component to consider.

Following Patricia’s overview, David Schoenhaar spent time discussing with the group how to use trusts when developing a good estate plan and focused his discussion on the benefits and drawbacks of a grantor trust.

  • A Grantor Trust is a trust that is not recognized as a separate taxable entity for Federal income tax purposes.
  • Grantor Trusts are typically most beneficial for married couples who have a combined estate of over $11 million and have assets that they can transfer to a trust without effecting their cash-flow and lifestyle.
  • When an asset is transferred to a grantor trust by gift or sale, the asset and any appreciation on the asset will not be included as part of the client’s estate for estate tax purposes, but the client will be taxed on the income. If the asset is sold to the trust, the sale may be in exchange for a promissory note (which note will be included in the grantor’s estate).
  • Since the grantor pays the income taxes on trust income instead of the trust, the grantor effectively makes additional gifts each year to the trust in the amount of the income taxes paid on the trust’s income without gift tax consequences.
  • Other benefits of a grantor trust are that it (a) permits the sale of assets to the trust without generating capital gain tax on the sale and (b) it provides flexibility to transfer life insurance policies.
  • David recommends that clients utilize the following guidelines to determine what assets to transfer to a grantor trust:
    • Assets that you do not rely on to support your lifestyle
    • High-basis assets, as you will not get a step-up in basis in assets transferred to a grantor trust upon death
    • Assets that are likely to appreciate
    • Assets in which you hold a non-voting/minority interest so you can value the assets transferred using discounts for lack of control and lack of marketability
  • Grantor trusts are on the “hit list” of the Obama administration because it sees them as a loophole.

To close out the session, Michael Ryan, who serves on the litigation side of Jaspan Schlesinger’s estate practice group, shared some defensive planning techniques people should consider so that estate monies are not wasted on litigation.

  • He recommends that wills include a disinheritance challenge clause where you:
    • Leave the child you want to disinherit a small amount of money, but large enough that they do not want to lose it.
    • Include a clause in the will that says if anyone challenges the will, they lose their inheritance under the will.
  • Choice of fiduciaries is just as important as the techniques you use to most efficiently transfer wealth.
    • Being a fiduciary is an enormous responsibility and therefore the selection of a fiduciary should be done with care. It can be someone within the family, but if family members do not get along, a lot of money will be wasted on lawyers.
    • You may want to consider an odd number of fiduciaries so there is a tiebreaker.

After a question and answer session, Robert D. Rosenthal, Chairman, Chief Executive Officer and Chief Investment Officer of First Long Island Investors, spoke about FLI’s role in estate planning and how we work with clients and their outside advisors to most effectively devise a strategy that is in the best interest of each client.  He also noted that FLI regularly assists clients to procure life insurance.

The information provided herein is not legal advice, is not to be acted on as such, may not be current, and is subject to change without notice.