Estate Planning and Wills

A last will and testament, commonly referred to as a “will,” governs the disposition and transfer of one’s property upon death.  When an individual dies who has previously executed a will, the will goes through probate court where a judge can approve the disposition in accordance with the will’s terms or consider objections to the will from parties who may contest it (more on that process below).  If an individual dies without executing a will, their estate is considered “intestate,” in which case the individual’s estate is distributed to heirs (or the state in the absence of heirs) according to operation of law.

It is highly advisable that adults who own any meaningful amount of assets—and particularly if they have children—execute a will (the person executing the will is known as the grantor or testator).  While an attorney is not required in order for a will to be valid, it is highly advisable to have an attorney draft and supervise execution of a will.  Additionally, attorneys with experience in estate planning can assist individuals and entities in promoting tax efficiency and protecting assets. 

Executing a Will

Unlike many legal documents, properly executing a will requires careful observation of certain technicalities and formalities that can vary by state.  Most states, including New York, require two witnesses (who should not be beneficiaries under the will and who can attest to the testator’s mental capacity).  Additionally, a notary is required to observe the execution and notarize the document.  Some states allow for electronic notarizations, although the vast majority still do not.  Additionally, prior to and upon execution of the will, an attorney should ask the testator certain questions that the testator should answer in the presence of the witnesses that demonstrate the testator’s mental faculties and clear intent. 

After execution, the testator should keep the original will and leave copies with certain parties, including the attorney and the executor (who are sometimes the same party), and possibly the beneficiaries.  The will should be kept in a place known to the executor, attorney, or other trusted party where it can be retrieved at death for probate proceedings.  The will should not be kept in a safe deposit box, because retrieval generally requires a probate court order, but a probate court order typically requires possession of the will. 

Wills can also be amended through a codicil or replaced entirely.  Again, these changes require careful observation of similar formalities, and testators should consult an attorney about best practices after a will is amended or replaced. 

Other Estate Planning Documents

Very often testators who execute a last will and testament also execute a living will, health care proxy, and power of attorney.  A living will specifies the treatment an individual would like to receive from health care professionals if incapacitated and unresponsive.  For instance, a person may specify “DNR” (or Do Not Resuscitate) if they are ever on life support.  A health care proxy designates a person who is authorized to make life saving or life ending decisions on a person’s part.  Power of attorney designates a person with authority to act on their behalf, typically in the event of certain circumstances (known as springing power of attorney).  Again, an attorney should be consulted to ensure proper observation of formalities and inclusion of any required “magic words” in these important estate planning documents.

More Complex Estate Planning

For many individuals or young families, a will and the basic accompanying estate documents will suffice.  However, for larger, more mature, or more complex estates, there are other estate planning documents, structures, and strategies that can prove critical to tax efficiency, asset protection, and income utilization. 

One aspect of estate planning is ensuring that certain assets remain outside of probate altogether upon death.  For instance, property owned in joint tenancy with a right of survivorship means that the property ownership automatically vests in the joint tenant upon the other joint tenant’s death.  However, it also means that a testator cannot dispose of property owned in joint tenancy with a right of survivorship to a third party in a will.  There also may be gift tax implications for transferring property into joint tenancy.  Transferring property into trust can also avoid the necessity of going through probate.

The world of trusts can be extremely complex and proper estate planning often requires both experienced attorneys and financial advisers.  There are many different types of trusts, including revocable and irrevocable trusts.  Typically, revocable trusts (also known as living trusts) do not effectively transfer ownership of the property outside of the estate of the grantor who created the trust, meaning the property is still included in the grantor’s estate and is not protected from creditors since the grantor maintains “incidents of ownership.”  Establishing and transferring title to property to a living trust, however, can remove that property from going through probate, which can save time and money for heirs in the long-term.

On the other hand, irrevocable trusts cannot be changed and control over those assets in trust are controlled by the trustee, who must be someone other than the grantor or their spouse.  This strategy is often used to remove property from a person’s estate.  Irrevocable trusts sometimes take the form of irrevocable life insurance trusts (or ILITs), which hold a life insurance policy that insures the life of the grantor and for which the trust is the beneficiary.  In order to fund the ILIT and pay the premiums for the life insurance policy, the grantor must contribute cash to the ILIT, which would generally be deemed a gift subject to the annual and lifetime gift tax limitations.  However, use of “Crummey Letters,” which give the beneficiaries of the trust a period of generally not less than thirty days to remove the cash designated for premiums, will remove the cash contribution from being considered a gift.  Additionally, there are advantages to forming the trust first and having the trust apply for an receive life insurance on the grantor’s behalf, as opposed to transferring an existing life insurance policy into the trust, in which case there is a three-year look-back period in which the life insurance proceeds will still be considered part of the grantor’s estate in the event of death. Careful planning and drafting can result in beneficiaries receiving life insurance proceeds tax free and not subject to the estate tax.

Estate Tax Basics

Everyone has heard that life’s two guarantees are death and taxes. While many people think of taxes as something they must pay while alive, without proper planning, death can also be a very tax-punitive event.  Generally, a deceased’s estate is subject to federal estate tax and in some states, including New York, state estate or inheritance tax.  There are other kinds of taxes as well that are designed to limit asset transfers, including gift taxes and generation skipping taxes. 

With certain exceptions, when a spouse dies and is survived by another spouse, the deceased’s estate and property can transfer to the spouse tax free and with a step-up in the tax basis of the deceased’s assets.  Basis refers to the tax baseline used to calculate gain or loss upon disposition.  For example, if an individual purchased a machine for $100 and then depreciated $10 per year for two years, the basis would be $80.  If the owner then sold the machine for $90, the gain would be $10 even though it was purchased originally for $100.  Depending on whether the property was held for more or less than one year, the income would be considered long-term or short-term capital gains, respectively.  The higher the basis, the less tax owed upon subsequent disposition of the asset. 

After the death of a spouse, property transfers to the surviving spouse tax free and with a step-up in basis. Upon the second-to-die spouse’s death, the assets transfer to beneficiaries without a step-up in basis and subject to 40 percent federal estate tax after an exemption of over $11 million for individuals and $22 million for couples (these exemptions are currently set to sunset in 2026 back to the old exemption of approximately half the amount).  That means any estate assets above the exemption amount are subject to the federal estate tax.  The estate tax exemptions are lifetime exemptions, and the limits include lifetime gift tax limits as well.  Lifetime exemptions are also portable, meaning a spouse can transfer to another any unused portion of lifetime exemptions—although this must be designated on an estate tax filing.

One of the critical strategies in estate planning, especially for larger estates, is to reduce the estate’s assets to minimize the amount of assets in the estate that are subject to tax upon death.  Again, that can be accomplished through numerous strategies, including effective utilization of trusts, gifts (eligible for a $15,000 annual exemption to an unlimited number of individuals), and transfer of property into joint tenancy.