Estates Update

Queens Bar Bulletin, 2011 View/Download PDF

By David N. Adler

The year in Trusts and Estates was highlighted by the implementation of new estate and gift tax rules, greater options for the creation of new trusts, and continued participation by the Surrogate’s Court in Bar Association Activities


As of December, 2010, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act seriously modified tax consequences of estates  for the years 2011 and 2012. For those years the exemption equivalent is set at $5,000,000 and indexed for inflation. As such, all estates worth less than $5,000,000 have no Federal Tax consequences. Further, the top tax rate is 35%, a marked lowering of the top tax rate of prior years.

For assets owned by an individual at death, the step up in basis was reinstituted. Thus, for purposes of computation of capital gains on a particular asset, the basis upon which such gain is computed shall be its fair market value as of the date of death. This basically wipes away any and all gains occurring between acquisition of that asset and death.


The gift tax lifetime exemption was reunified with the estate tax lifetime exemption, and set at $5,000,000, also adjusted for inflation. Thus, lifetime transfers provide the same numerical tax free benefit as do testamentary  transfers, subject to the unified cap. The new exemption also remains subject to prior gifts, in that any amount of the gift tax exemption utilized previously shall be deducted from the present lifetime exemption. As an example, if one utilized $500,000 of his gift tax exemption prior to 2011, his present available exemption is now $4,500,000.

Further, the gift tax annual exclusion of $13,000 per person per year was preserved. This is an often neglected planning tool. For  example, a married couple can pass $26,000 to any individual every year completely free of gift tax, and not chargeable to any lifetime exemption. When dealing with children and grandchildren as donees, the amount transferred over a period of years can be significant

Finally, the generation skipping tax exemption amount, applying to  transfers to individuals 2 or more generations younger than the transferor (ie grandchildren), was also set at $5,000,000. This comprises an entire second level of taxation and is often addressed in large estates.


A unique aspect of the new law consists in the fact that any unused portion of a spouse’s exemption amount, may be utilized by the surviving spouse. This approach mirrors one facet of the traditional by-pass trust. In the event that spouse #1(first spouse to die) only utilizes $ 2,000,000 of his exemption equivalent (estate/gift), the surviving spouse would be able to utilize $8,000,000 of exemption equivalents (her own $5,000,000 plus the unused $3,000,000 from spouse #1). Portability must be formally elected by the executor on the deceased spouse’s estate tax return (form 706). Such election must occur even if no estate tax is due on the deceased spouse’s estate.


New York State has not altered its estate tax thresholds in many years. The New York exemption equivalent (state credit) is $1,000,000. As such, many estates will be required to pay New York estate taxes and file a New York estate tax return, but not a federal estate tax return. The State tax rates are significantly lower than federal rates and are capped out at 16%. As a practical  matter, the New York estate tax return (ET-706) essentially requires the preparation and annexation of the federal estate tax return, as part of its return, even if the federal return is not itself required to be filed.

Kindly note that all the above federal taxation laws only operate until December 2012. It is widely anticipated that the exemption equivalents, and tax rates will change by 2013. If is therefore prudent for all tax planners to maintain flexibility in their options, conduct ongoing and frequent document review, and advise clients with respect to the volatility of the tax environment


The capability for creation of new trusts has been expanded by the enactment of Estates, Powers and Trusts Law (EPTL) 10-6.6 (b)-(t). Traditionally, EPTL 10-6.6 permitted a trustee who had absolute discretion to invade the principal of a trust to create a new trust for the individuals for whom he could have invaded that principal. This is generally referred to as decanting. The restrictions on this invasion and creation consist in the fact that no fixed income interest of any income beneficiary is reduced, and no violation of public policy is effected.  The reasons for new trust creation include tax benefits, consolidation of administration expenses, limitation of liability and ease of management. The essential statutory prerequisite to said secondary trust creation was the power of absolute trustee discretion to invade principal.  The new law no longer makes absolute discretion a prerequisite.

Specifically, a trustee with any authority to invade principal on behalf of a beneficiary may utilize said principal in creation of a new trust. An ascertainable standard for invasion (such as health, maintenance, support, and education), or other  limited purpose may substantiate appropriate invasion and creation. Yet, the new trust must maintain the same standards of distribution, and incorporate the same class of beneficiaries as the original invaded trust. Finally, at all times the creator’s intent must be considered and the beneficiaries rights protected. The above represents a basic summary of major provisions, as the new statute is relatively complex and only 6 months old. Its breadth and impact remain to be seen.


The Surrogate’s Court, in conjunction with our Bar Association continues to play a leading role in legal education of all types in this County. In the Spring, Surrogate Peter J. Kelly and Chief Clerk Margaret Gribbon attended a Meet and Greet reception at the Bar Association Building. Both interacted in an informal capacity with our members, and gave interesting and timely presentations on recent Court activity.

In November, Judge Kelly participated as a moderator and speaker in our seminar on Guardian Ad Litem Training. Additional outstanding speakers included Louis M. Laurino, Scott G. Kaufman, John R. Dietz, Gerard J. Sweeny and Michael F. Mongelli.

The seminar served as an accreditation tool and incorporated training in a wide variety of areas, including, but not limited to Probate, Administration, Accounting, Supplemental Needs Trusts, Wrongful Death Actions and Fiduciary Ethics. Both the Meet and Greet, and the Seminar were well attended and continue to enhance our reputation as a source of professional education for the Bar at large. Much thanks to our Surrogate for his interest in our Association, and to our speakers who continue to make our seminars vibrant and state of the art. Let’s go Giants!