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With President Trump’s recent immigration reforms impacting the domiciliary status of many New York residents, estate trust administrators are faced with changes to the taxable status of those asset transfers. New York Consolidated Laws, Estates, Powers and Trusts Law (EPTL) applies specific rules to asset transfer procedure when there is a change in domiciliary of a trust holder. The federal Internal Revenue Service (IRS) provides fiduciary income taxation rules for U.S. residents with foreign income (I.R.C. §§ 1, 61), estates, and generation skipping asset transfers (I.R.C. §§ 2001, 2031-2046, 2601). Non-U.S. residents are subject to U.S. income tax from income sourced solely in the country, and are subject to taxation of estate, gift and generation skipping transfer of U.S. situs assets.

New York Rules to Domiciliary

In New York, trust asset transfer falls under three (3) categories of domiciliary: 1) resident, 2) nonresident, and 3) exempt resident.

A recent study suggests that people with moderate to severe anxiety in middle age may be more likely to develop dementia as they get older. The study based its conclusions off of data from four previously published studies that tracked a total of 30,000 individuals over a 10-year period and clearly shows a link between living with anxiety in middle age and developing dementia later on in life.

The findings were published in the BMJ Open, a an online, open access journal, dedicated to publishing medical research from all disciplines and therapeutic areas. While the study was not a controlled experiment designed to prove whether or how anxiety might directly contribute to the development of dementia, it is nonetheless shines light on how mental health is just as important as our physical health as we age.

One of the study’s senior authors believes that dementia may develop after anxiety during middle age because of the increase in and constant elevation of stress hormones may cause brain damages across regions associated with memory. However, that same author is unsure whether treating the underlying anxiety and reducing the levels of elevated hormones would end up reducing the risk of dementia in old age.

The primary benefit of trust and family foundation investment in stock funds, is the transferability of those vested assets to cash. Unlike real property, securities offer wealth enhancement features, as well as a ready source of liquidity. The Securities and Exchange Commission Act of 1934 (“The Exchange Act”) is the legislation binding securities transactions. The Act also applies to rules of securities investment and transfer of shares as part of fund interests or irrevocable trusts within federal and state estate and probate laws.  Section 16(b) amendment of the Act in 1999, improved estate planning benefits of transferable stock options,  no longer requiring stock options to be non-transferable for trust investors to take advantage of tax-exemption rules.

Still, there are qualifying rules for trust investors. A licensed attorney at law experienced at matters of estate planning and probate law can provide professional advice about securities investment and qualifying rules for trust investors.

Qualifying Rules for Trust Investors

In the United States, the inheritance rights of children with unmarried parents are virtually the same as those of children with married parents.

New York estate law allows trust holders to leave property to anyone named in a will, trust, or other joint estate or investment device. Where there is no will or trust naming heirs or beneficiaries, however, estate distribution of assets is left up to the courts. For children of unmarried parents, this latter scenario can lead to lengthy probate litigation. Unmarried parents who have not affirmatively left property in a will, or distributed it in a trust, run the risk of leaving their children a serious legal mess.

The “Illegitimate” Child in Estate Law

The $1.5 trillion tax bill passed last year will likely have far reaching consequences on millions of seniors across the country, some good and some bad. While only time will truly tell how things will shape out, there are a number of areas many tax lawyers and elder law attorneys believe senior citizens and retired persons are likely to see an impact to their finances.

For the most part, the overwhelming majority of elder Americans will not see an increase to their taxes because most senior citizens have incomes that rely on Social Security which for the most part is not taxable at lower levels of income. Furthermore, because most older households do not itemize deductions they are not likely to see an impact because the new tax laws target taxpayer who have major itemized deductions on their taxes, particularly in states where there are high state and local income and property taxes.

The one proposed change to itemized deductions that did not make it into the final draft of the 2017 tax bill was the elimination of deductions for medical bills, a major deduction that would have had far reaching effects on senior citizens. An outcry from AARP, the National Academy of Elder Law Attorneys, the public, and other advocacy groups was successful in preventing any changes to itemizing medical bills and actually expands it for two-years.

Legacy ownership of a business interest can continue to have control over an enterprise if that entity becomes part of a probate estate. Stock transfer to a single, or to multiple trusts, in the interest of continued business operations, is not only a plausible, but legitimate estate planning strategy that allows a decedent and named beneficiaries to capitalize on future earnings. Any risk connected to trust transfer of a distressed business shareholder asset at the time of a decedent’s death, is the obligation of the estate in which it is held. Estate executors and trustees have fiduciary duty to a standard of care in oversight of shareholder voting privileges of a trust-owned business interest under New York Consolidated Laws, Business Corporation Law – BSC § 621 (a)(b)(c)(d). Voting trust agreements.

Shareholder Rights, Maximum Value

Executors and Trustees considering whether to continue shareholder interest in a business operation, may find it more appropriate to sell those shares in order to maximize value of the estate or trust for the heirs or beneficiaries. Valuation of shareholder assets may result in a beneficiary’s decision to convert a certificate(s) to a different investment vehicle in exchange for higher earnings, or to cash out at time of contract expiry. Transferred shares can also be surrendered and cancelled for reissue under the name of another trustee or trustees. The statute of limitations for transfer of shareholder interests to other voting trustee shareholders for purposes of conferring voting rights is ten years (BSC § 621 (a)).

High income retirees could see some of their Medicare premiums skyrocket up to 203 percent in 2018 due to shifts in the income brackets that are used to determine how much older Americans will pay for their Medicare Part B and Part D coverage. Those predictions come from an analysis by HealthView Services, a provider of health-care cost projection software used to prepare current and future retirees for the impact of health care costs which includes Medicare costs, long-term care expenses, and Social Security optimization strategies.

The additional surcharges for Medicare Part B, which covers preventive services, and Medicare Part D, which covers doctor visits, could end up diverting larger portions of the income seniors and future retirees expected to put towards their retirements. For example, a 55-year old couple earning a combined $140,000 could anticipate their lifetime Medicare surcharges rise by over $120,000 due to the changes to how the health-care program charges its beneficiaries, according to the Health View Services analysis.

The factors driving up the cost of Medicare for seniors comes from a 2015 bill known as the Medicare Access and CHIP Reauthorization Act or “DocFix” law which adjusted the way premiums are calculated for high-income individuals. The bill also lowered the range for the third, fourth and fifth-income brackets, which moved some retirees into the next higher bracket thus increasing their Medicare costs. Those changes began to take effect in 2108.

Since congressional ratification of the “Tax Cuts and Jobs Act” of 2017 (“TCJA”), federal Internal Revenue Service (“IRS”) guidelines effective tax year 2017 have proven to be a challenge for estate planners. Reform introduced to “simplify” the tax reporting process for entities, the Act modifies estate income tax guidelines; imposing a new set of rules for transfers and exemptions.

Guidelines to Tax-free Transfers

Specifying rule changes affecting both estate and gift tax exemptions, as well as generation skipping transfer exemptions, the new law increases the amount to $11,180,000 from $5,490,000 per person with inflationary adjustments assigned annually. Portability election rules continue, allowing a deceased spouse’s estate and gift tax exemption to carry over to a surviving spouse for use while living. Effective January 1, 2018 through December 31, 2025, the Act now makes it possible for a married couple to transfer a total of $22,360,000 without tax on gifts or estate transfers to family, heirs, or other beneficiaries.

If the interest of a family-owned corporation part of an estate or trust has been violated, a derivative action lawsuit can be filed on behalf of those shareholders alleged to be harmed by improper fiduciary conduct. In probate litigation matters, family-owned corporation interests can complicate execution of an estate or trust. Derivative actions filed on behalf of inheritors of the shares of a family-owned business are subject to what is called “demand futility” analysis in court. This double-bind principle can be frustrating for beneficiaries seeking timely transfer of estate or trust family-owned business shareholder assets.

Demand Futility and Exceptions

The rule of “demand futility” is enforced by a court if it is determined that the plaintiffs who have filed a claim against a party allegedly making an independent and disinterested business judgment of detriment to the other shareholders. Such lawsuits are often dismissed by the courts, however, on a motion of the defense. The reason for dismissal? “Demand futility” – where it is deemed that the corporation suing itself is not in majority interests on basis of no adequately cited exception.  

A will that establishes an estate or trust based on outdated federal or state income tax exemption guidelines can be tied up in probate for an extended period and divest heirs of millions of dollars. With President Trump’s 2017 tax reforms increased exemptions for the ultra-rich have estate and trust planners scrambling. Evidence that the “Tax Cuts and Jobs Act” of 2017 (“TCJA”) will be pivotal to maximizing the high net wealth of some estates in the next eight (8) years. The new tax law has quite literally doubled the total asset amount allowable for transfer to beneficiaries. For dynasty trusts, the enhanced estate and gift tax exemption rules are a major opportunity to transfer wealth to beneficiaries tax-free.

Federal v. State Tax Exemptions

While state tax exemptions will remain at lower levels than the $11 million per person federal rules now provide, the incentive to take advantage of federal Internal Revenue Service (“IRS”) exemptions on transfers right now is significant. New York law allows for exemption of $5.25 million from estate tax. This leaves $5.75 million left open to state taxation. Sheltering assets from taxation, then, will still be relevant for many New York estates and trusts. Spousal and generation-skipping estate and gift transfer exemptions continue, however.