Estate and Business Planning Legal Blog

The mere mention of the word “probate” usually engenders a rather negative reaction. For many people, the word conjures up visions of extensive delays and enormous expense involved in settling an estate.  Seminars promoting living trusts are pervasive and they promote the misconception that probate is an evil to be avoided.

The truth is that the process of “probating” a will is quite simple, at least if the decedent is a resident of the State of New York.  It involves the preparation and filing with the Surrogates Court of a probate petition and other documents which are typically prepared by an attorney.
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A very common mistake clients make, in their estate planning, is that they name grandchildren, or other persons under the age of 18, as the beneficiary of their retirement accounts, annuities, or other investments.  Since persons under the age of 18 can not legally inherit assets in New York, and in most other states, this creates a serious problem.  Institutions are not permitted to disburse monies to minors; rather, they will normally require that someone be legally appointed as guardian of the minor in order to receive the funds.  That the minor has parents is not sufficient--the parents will be forced to commence legal proceedings in order to be appointed guardian for the purpose of accepting funds.

While it is certainly understandable that one wants to provide for grandchildren, the proper way to do so is by preparing a will that provides for a trust to receive the assets at least until the child attains the age of majority.

Clients are often understandably confused about the differences between revocable trusts, irrevocable trusts, and testamentary trusts.  Very simply, testamentary trusts are those created pursuant to one’s last will and testament. Such trusts do not get established until the death of the person who created the will, and the provisions which govern the trust are contained in the will itself.  These are usually created for the benefit of minors, spouses and disabled children.  These trusts can be changed by the testator at any time, but they become irrevocable at his or her death.

A revocable trust is created during the maker’s lifetime, by a separate document. Revocable trusts, also commonly referred to as living trusts, can be amended or revoked at any time by the maker of the trust (the “grantor”).  Only upon the death of the grantor does the trust become irrevocable. The primary purpose of the revocable trust is to avoid probate.  In order to accomplish this purpose, all assets of the grantor must be transferred to the trust during the grantor’s lifetime.  Contrary to what is often discussed at revocable trust seminars, these trusts do not accomplish any tax savings, nor do they protect assets in the event one needs long-term health care.  

Irrevocable trusts are also created during the grantor’s lifetime, by separate documents.  There are many types of irrevocable trusts and their primary purpose is to achieve tax savings, prevent disabled beneficiaries from losing government benefits, and/or protect assets from long-term health care costs, while also avoiding probate.  They are often used in the case of second marriages, to allow a surviving spouse to receive income from the assets but ensure that upon the death of the surviving spouse, the assets pass to the grantor’s children.  Irrevocable trusts, by definition, may not be amended or revoked by the grantor.  Moreover, they necessarily entail some loss of control by the grantor over the assets transferred to the trust.  Of course, there are many types of irrevocable trusts.  For example, if one’s primary goal is to avoid or reduce estate taxes, one can establish a qualified personal residence trust, a grantor retained annuity trust, or a charitable remainder trust, to name a few.  Life insurance trusts are extremely useful, as they remove the entire value of life insurance proceeds from one’s taxable estate. As is the case with all irrevocable trusts, the grantor may not act as Trustee of these trusts, nor exert any control over the trusts.

         Prior to establishing any type of trust, one should first give serious thought to what objectives one is looking to achieve. Obtaining advice from an attorney who is knowledgeable in the areas of taxation and estate planning will prove invaluable.

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IRS Circular 230 disclosure: We inform you that any tax advice contained in this communication is not intended or written to be used, and may not be used by your or anyone else for the purpose of avoiding penalties imposed under the Internal Revenue Code.

While many businesses were, in the past, run on handshakes with customers and suppliers, it is essential today that that these agreements be put to writing.  Certainly, not everything needs to be set forth in a detailed writing.  Very simple, even handwritten agreements, can be used for many day-to-day items.  For instance, a purchase can be documented simply by a written purchase order, detailing the essentials of the transaction, signed by both parties.  In this way, disputes as to quantity, price, and delivery dates can be avoided.  A simple engagement letter can be used by the company to hire services from other firms.  Oftentimes, simply having a transaction documented in writing will often serve to avoid problems that might otherwise occur. 

Long-term health care insurance is essential for anyone who has assets to protect and does not have the financial ability to pay well in excess of $10,000 per month for a nursing home without jeopardizing one's financial stability.  This is especially true when one spouse becomes ill, and the other is able to live at home but also needs to maintain his/her own standard of living.  While no one wants to go to a nursing home, sometimes it is inevitable.  More commonly, a person will go to an assisted living facility or have  a health professional take care of him/her at home, with the nursing home being the absolute last resort.  Unfortunately, while not as expensive as nursing home care, both home care and assisted living are quite expensive.  In New York, where the cost of care is especially high, purchasing long-term care insurance should be a serious consideration for anyone over the age of 50.

While it is not necessary, nor necessarily desirable, to name beneficiaries on one's savings, checking and investment accounts, it is essential that retirement accounts have named beneficiaries.  Retirement accounts include IRAs, 401ks, TDAs, 403(b) accounts, and the like.  If one does not name an individual beneficiary or beneficiaries, and these accounts pass to one's estate, income tax will be due almost immediately, at the estate income tax rate.  The tax rate for an estate is usually substantially higher than the individual income tax rate.  If an individual is named as beneficiary, that individual can draw the money out over time, paying income tax over time instead of immediately, and usually at a lower rate. An annuity is also an asset which should have beneficiaries named, as the growth in the annuity is taxed at ordinary income tax rates, rather than being treated as capital gains. 

 IRS Circular 230 disclosure: We inform you that any tax advice contained in this communication is not intended or written to be used, and may not be used by your or anyone else for the purpose of avoiding penalties imposed under the Internal Revenue Code.

Business owners often believe that the commercial lease is standard and that the services of an attorney are not necessary.  While commercial leases are usually in a somewhat standard form, there are many important items that deserve special attention and can be negotiated. For example, it is important to obtain from a landlord the ability to assign the lease or sublet space, in the event the business owner experiences financial difficulties. Additionally, provisions dealing with repairs, the condition of building systems, annual rent increases and personal guarantees are not etched in stone and can be modified.  In short, there are many concessions that can be obtained from a reasonable landlord, concessions which will save the business owner a good deal of money.  It certainly behooves one, then, to obtain the services of an attorney who is skilled at negotiating leases. 

A very common misconception is that probate is to be avoided at all costs.  While the probate process in some states can be long and arduous, probate in New York, if handled by a competent attorney, is usually quite simple.  One advantage of going through probate is that the Courts oversees the process, to some extent, and so it forces the parties involved to do the right thing.  Having a will which goes through probate also allows the easy creation of trusts for minor children and it can provide for the distribution of assets in the event of the death of a beneficiary.

If one desires to avoid probate, preparing a revocable living trust is one option.  Another option is to make sure that all of one's liquid assets have beneficiaries listed on them, so that at death the assets will pass directly to the beneficiaries without court intervention.  Clearly, this can not be done with real property. One should take care, however, in naming beneficiaries, to make sure they are all competent adults.  One should never list minor children as beneficiaries, as that causes a good deal of legal complications.  Moreover, problems are created when a beneficiary listed on an account predeceases the owner.