Ian Fleming once wrote in one of his James Bond novels that you only live twice. Well, it now seems that you die twice as well. The first is your paper death and the second is your digital death. Digital death is quite a new phenomenon, so most of us simply aren't prepared for it. But your digital death could be far more troublesome than the paper version.
You already know what to do about your good old-fashioned paper death. You write a Will, setting out which of your loved ones will inherit your property and other assets. Of course, half of us still don't bother to do a Will, which is ridiculous, but that=s the topic for another day.
Unfortunately, even fewer of us are prepared for our digital death.
When we die, our body and soul aren't the only things that stop functioning, our online persona will also stop dead in its tracks. This is a big problem, now that we live such active online lives. We have net-based bank and savings accounts, pensions and investment portfolios, and personal effects such as music, movies, photographs, blogs and social media accounts.
As banks, insurers and other financial organizations push towards paper-free statements to save money (and the planet, they claim), the trend will only grow. In the online world, you won't leave a paper trail when you die. This makes it extremely difficult for relatives or fiduciaries to put the online pieces back together.
If you want your loved ones to know about your online activities after you die, you must assemble all the necessary data. You could call it your digital will. If not, your digital effects will effectively be buried with you. Ancient tribal societies used to do this so people could use their most precious possessions in the afterlife.
When people died in pre-digital days, they generally left plenty of paperwork, so relatives could find where the money was. That's not so easy if their personal and financial data are buried on unnamed websites. Even worse (for some people) is if they have a massive digital music collection, but you are struggling to access it from their computer. Most likely their Will doesn't give any clue as to who is supposed to inherit it.
Passwords are another problem. Even if you have a vague idea of where they bought their pensions, annuities and insurance, you will need their login details to access them. If your loved one has uploaded photographs and videos to social media such as Facebook and YouTube, you will need login details for them as well.
People are starting to include this sort of information in their Wills but they're few and far between. The danger is that a Will is a public document, which anybody can view by requesting a copy from the Surrogate Court. You won't want your login passwords publicized this way.
One way to tackle this problem is to write and print out all the account numbers for your pensions, investments, insurance policies, and so on, and hand them to a relative for safekeeping, in case of your death. Unfortunately, even if you're smart enough to do that, you will probably fail to update the information. And don=t forget to include all of your online passwords that seem to change on a weekly basis.
Maybe a better option is to store all the information in one of the growing numbers of online digital legacy lockers. It is quite a problem, and one few of us have faced up to. Dying once is bad enough. Dying twice could be even worse.
When you die, you will leave a digital legacy behind you. You want to leave it to the right people. You also want to prevent online fraudsters (or even greedy relatives) from robbing your digital grave, or even bringing your online ID back from the dead.
Start thinking about it now. Otherwise your digital death could come back to haunt your family.
TAX AND ESTATE PLANNING FOR SAME-SEX MARRIAGES IN NEW YORK
On June 24, 2011, New York joined Connecticut, Iowa, Massachusetts, New Hampshire, Vermont and Washington, D.C., to become the seventh jurisdiction in the nation to permit same-sex marriages. The Marriage Equality Act ("the Act"), which went into effect on July 24, 2011, is having a significant impact on tax and estate planning for New York residents who are parties to same-sex marriages.
Section 3 of the Act simply provides that a marriage is valid regardless of whether the parties to the marriage are of the same or different sex. Even though many New York statutes have changed to be gender neutral, the statement of legislative intent in Section 2 of the Act, makes a very succinct point:
It is the intent of the legislature that the marriages of same-sex and different-sex couples be treated equally in all respects under the law. The omission from this act of changes to other provisions in the law shall not be construed as a legislative intent to preserve any legal distinction between same-sex couples and different-sex couples with respect to marriage. The legislature intends that all provisions of law which utilize gender-specific terms in reference to the parties to a marriage, or which in any other way may be inconsistent with this act, be construed in a gender-neutral manner or in any way necessary to effectuate the intent of this act.
New York's Estates, Powers and Trusts Law ("EPTL") contains a number of provisions that give special rights to surviving spouses. For example, if an individual dies without a will, his or her surviving spouse is entitled to receive the deceased spouse's entire estate if there are no surviving issue or $50,000 and one-half of the remaining estate if there are surviving issue. A surviving spouse also has the right to elect to take one-third of the assets of his or her deceased spouse regardless of what the provisions of the deceased spouse's estate plan provide. The legislative intent above makes it clear that whether all the statutes in the EPTL governing these rights have been changed to gender-neutral or not, they are to be considered gender-neutral. Before the Marriage Equality Act, there was some judicial precedent for extending the benefits of these provisions to the surviving spouses of same-sex marriages. The Act now provides a statutory basis for this extension. But make no mistake, whether it be a same-sex relation or a different-sex relation, these benefits do not extend to unmarried couples, no matter how long the relation existed.
The application of the New York tax rules to same-sex married couples becomes very complicated because of the fact that federal tax law does not recognize same-sex marriages. For most income and estate tax purposes, New York tax law follows federal tax law. Under the Defense of Marriage Act (DOMA), the federal law provides:
In determining the meaning of any Act of Congress, or of any ruling, regulation, or interpretation of the various administrative bureaus and agencies of the United States, the word "marriage" means only a legal union between one man and one woman (emphasis added) as husband and wife, and the word "spouse" refers only to a person of the opposite sex who is a husband or a wife.
Income Tax
New York law requires that a "husband or wife" file state tax returns in the same manner as they file their federal returns. Federal non-recognition of same-sex marriage prohibits same-sex couples from filing federal joint returns. This means that individuals in same-sex marriages would be required to file federal tax returns separately and to calculate their taxable incomes as if they were unmarried. The New York State Department of Taxation and Finance announced that same-sex married couples can and must file New York personal income tax returns as married individuals even though they were required to file separate federal returns.
This announcement provides various New York income tax benefits to same-sex couples. These benefits include: pooling and splitting income, as well as deductions, potentially saving the higher-earning spouse from entering a higher tax bracket and allowing one spouse's deductions to the income of the other; lower tax rates for some married couples, depending on how much income is earned by each; and deductions that are available only to married individuals who file a joint return. This also forces same-sex married couples to calculate and file very different returns, one for New York and another for the IRS.
Estate Tax
New York's estate tax is also based on federal tax principles. A New York decedent's taxable estate is the same as his or her federal taxable estate. The federal estate tax law permits a decedent's estate to deduct from the value of his or her taxable estate the entire value of the property given to his or her spouse so long as that spouse is a U.S. citizen. This is commonly referred to as the unlimited marital deduction. In addition, the estate is permitted to exclude from the value of the gross estate 50 percent of the value of property held jointly with his or her spouse. Federal non-recognition of same-sex marriages denies these benefits to the estate of a decedent who was a party to a same-sex marriage.
Federal non-recognition could have meant that such estates would also lose these benefits for purposes of calculating their New York estate taxes. Because the federal estate tax is currently imposed only on estates worth more than $5 million and the New York estate tax is imposed on estates with values greater than $1 million, the loss of New York estate tax benefits would likely have had a far greater impact on most same-sex couples than the loss of the federal benefits. This will have a much more devastating effect as of 2013 if the federal exemption returns to $1 million.
Again, the New York State Department of Taxation and Finance resolved the filing conflict by requiring that the estate of a New York decedent who was a party to a same-sex marriage compute his or her taxable estate in the same way as a married individual. This is even though they are not permitted to file the federal return as the estate of a married individual. As with the income tax filing discussed above, this greatly complicates the different filings for New York versus for the IRS.
Federal Gift, Income and Estate Tax
Because DOMA prevents treating same-sex married couples as married for purposes of any federal law, married same-sex couples will continue to be treated as separate units for federal income taxation purposes, and will not enjoy spousal rights and privileges under federal estate tax laws. In addition, they will not be able to avail themselves of gift-tax benefits afforded to married individuals, such as gift splitting, which enables a married individual to double the amount of their tax-exempt gifts ($13,000 for individuals versus $26,000 for married couples), and unlimited gift-tax free transfers between spouses when the recipient spouse is a U.S. citizen.
Hopefully there is a light at the end of the tunnel. President Obama announced last February that his administration would no longer defend the constitutionality of DOMA as well as a recent introduction of a Congressional bill to repeal DOMA. A judicial or legislative repeal of DOMA would give New York same-sex married couples the same privileges under the federal tax laws that are allowed to different-sex married couples. Unfortunately, for now, under DOMA and the federal law, same-sex couples will not be able to enjoy over 1,000 various rights that different-sex couples have, from gift, income and estate tax benefits to spousal Social Security benefits. Because of this dichotomy between the federal and state laws, any married, same-sex couples should seek the advice of not only an estate planning attorney, but that of a qualified accountant as well.
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ESTATE AND GIFT TAXES
Estate and gift taxes are used to tax large transfers of wealth between individuals. Gift taxes are imposed on transfers made during an individual's lifetime, and estate taxes are imposed on transfers made at the time of death. If you are married, and your spouse is a citizen of the United States, there is no limit on the value of the gift that you may give your spouse. But other than your spouse, there are limits on the amount of money you can pass on before you are taxed on the transfer. Once an individual reaches that exempt amount, everything above that is subject to a transfer tax.
As of January 1, 2011 there has been a substantial change in the federal estate tax. But in order to understand and fully appreciate the change, we need to go through a quick history first and see how we got here.
In 2001 President Bush signed into law the Economic Growth and Tax Relief Reconciliation Act which slowly raised the federal estate tax exemption from $625,000 to $3,500,000 in 2009 and then completely eliminated the estate tax for 2010. The gift tax exemption went up and locked in at $1,000,000. Unfortunately, there was a sunset provision in the Act that had the estate tax revert back to $1,000,000 as of January 2011.
So, for nine years all the Estate Planning attorneys swore that the laws would change and Congress would never let the tax be eliminated. But, low and behold, on January 1, 2010 the tax disappeared. Of course, then everyone began to panic that at the end of the year it will come back with a vengeance. Luckily Congress did not let that happen. Amazingly, they set the exemption at $5,000,000 and added what is now called a Portability provision. They also once again linked the gift tax with the estate tax exemption so it too is now set at $5,000,000. A word of caution; this law also sunsets on December 31, 2012 and again reverts back to the $1,000,000.
The other provision that was always in the various laws was the Unlimited Marital Deduction. This means that you can pass everything you own at the time of your death to your spouse with no tax consequences. This is not because the government is generous, they are just patient. They are waiting for the second spouse to die. As an example, let’s assume that the exemption is $1,000,000 and each spouse individually has $1,500,000. At the death of the first spouse everything goes to the surviving spouse (as per the first spouse’s Will) estate tax free. But now the surviving spouse has 3,000,000.
Without Portability, when the surviving spouse dies, $2,000,000 of that would now be taxable. Portability says that the surviving spouse gets whatever portion of the exemption the deceased spouse didn’t use. So, in the above case, the surviving spouse would have a $2,000,000 exemption and only have to pay tax on the remaining $1,000,000.
Does this eliminate any estate tax planning for couples that have under $10,000,000? I’m not convinced, for two reasons. First, no one knows what’s going to happen as of January 1, 2013. Congress may change the whole structure of the tax exemption or lower it back down or do nothing and let it go back to the $1,000,000. Second, we have been talking about Federal Estate Tax, but here in New York there is also a State Estate tax for everything over $1,000,000 and there are no plans for that changing. New York’s tax rate is about 10% of that overage (versus 45%-55% for Federal). That could still be a substantial tax bite and should still try to be minimized with proper planning.
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IRA DISTRIBUTION
Do you want to hand your heirs big tax problems? Would you like to hand the IRS a sizable chunk of your inheritance? Probably not. But if you misunderstand the rules when it comes to inherited IRAs, you just might. Here are some mistakes that IRA owners and IRA heirs often make.
1 - Many clients think that a will or a trust can facilitate the transfer of IRA assets. IRAs don=t pass to heirs through wills or trusts (a few rare exceptions aside). The beneficiary form takes precedence. This is the form the IRA owner filled out and signed when opening the account.
Problems arise when:
The IRA owner dies without designating a beneficiary;
The designated beneficiary has passed away before the IRA owner; or
No one can find the beneficiary form (not even the IRA custodian, i.e., the financial institution that hosts the IRA).
In these circumstances, IRA heirs commonly end up playing by the IRA custodian=s rules. The resulting beneficiary often ends up the IRA owner=s estate and must be paid out within five years of the owner’s death. This is usually a very undesirable tax consequence. It might be a contingent beneficiary B perhaps a very undesirable emotional consequence. The best thing to do is to keep the beneficiary form handy, keep it up to date and to let your heirs know where it is.
2 - Too often, non-spousal IRA heirs see the inherited assets as money to spend. They withdraw the entire IRA balance as soon as it=s given to them. Unfortunately, what happens is all that money will be subject to federal income tax. Due to this move, they may lose a third of the IRA assets (or more).
Instead, non-spousal beneficiaries need to open an inherited IRA to house the inherited assets and simply take Required Minimum Distributions (RMDs) from that inherited IRA under the appropriate schedule. This will allow the beneficiary to stretch the IRA over the course of his or her lifetime.
With a traditional IRA the age of the original account holder is a big factor. If the original IRA owner is under age 70-1/2 and hadn=t taken any RMDs when the beneficiary inherits the IRA, distributions must occur within five years of the original IRA owner=s death. Under this Afive-year rule@, the entire account balance must be distributed to the beneficiary within those five years. If the account holder was over age 70-1/2 and had already taken RMDs, then the inherited IRA assets may be distributed gradually over the projected lifetime of the beneficiary according to IRS tables. If you don=t have to go by the Afive-year rule@, the invested IRA assets may keep compounding across many years with the added benefit of tax deferral.
You can also disclaim or renounce some or all of the inherited IRA assets, which could be a wise move for tax purposes if you don’t need the inherited funds.
3 - If a spouse dies, the surviving spouse that inherits an IRA has some options and must choose carefully. He or she can:
Roll over the assets into a beneficiary IRA
Convert the inherited IRA into your own IRA
Take a lump sum distribution
Disclaim up to 100% of the deceased spouse=s IRA assets
- There are compelling reasons to go with the rollover. The widowed spouse can set up an RMD schedule based on his or her life expectancy. This second point is really important, because the rollover allows the surviving spouse to put off the RMDs that would otherwise soon need to happen. In fact, the surviving spouse can wait until the year in which the original IRA owner would have turned 70-1/2 to start taking required withdrawals from the IRA.
- If the spouse converts the IRA into his or her own IRA, the surviving spouse can name a beneficiary for the inherited assets, keep contributing to the IRA, and potentially avoid RMDs until he or she turns 70-1/2.
- If the widowed spouse wants to take distributions from the inherited IRA before age 59-1/2, a rollover is probably not the way to go. If that is the desire, those withdrawals will be slapped with the 10% early withdrawal penalty plus the requisite income taxes once it=s rolled over. Either way, there will still be income tax consequences to be considered.
- Or, a surviving spouse who doesn’t really need inherited IRA assets can Adisclaim@ them, meaning that they will go to the named contingent beneficiary. Sometimes this can be a wise move for tax purposes. The surviving spouse cannot direct where the IRA assets go. Disclaiming an asset acts as if you have predeceased the original owner.
4 - Non-spousal heirs fail to re-title an inherited IRA. If this isn’t done by the year following the year in which the original IRA owner passed, then there can be no direct rollover of the inherited IRA assets and no Astretch@ for those assets. A non-spouse beneficiary cannot roll inherited IRA assets into their own IRA. It must be re-titled as an inherited IRA. The IRS will treat those inherited IRA assets like a fully taxable cash distribution BB 100% of it is subject to income tax.
The bottom line is that the beneficiary must think before he or she acts in order to avoid unwanted taxes and penalties.
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ESTATE AND GIFT TAXES
Estate and gift taxes are used to tax large transfers of wealth between individuals. Gift taxes are imposed on transfers made during an individual's lifetime, and estate taxes are imposed on transfers made at the time of death. If you are married, and your spouse is a citizen of the United States, there is no limit on the value of the gift that you may give your spouse. But other than your spouse, there are limits on the amount of money you can pass on before you are taxed on the transfer. Once an individual reaches that exempt amount, everything above that is subject to a transfer tax.
As of January 1, 2011, there has been a substantial change in the federal estate tax. But in order to understand and fully appreciate the change, we need to go through a quick history first and see how we got here.
In 2001, President Bush signed into law the Economic Growth and Tax Relief Reconciliation Act, which slowly raised the federal estate tax exemption from $625,000 to $3,500,000 in 2009 and then completely eliminated the estate tax for 2010. The gift tax exemption went up and locked in at $1,000,000. Unfortunately, there was a sunset provision in the Act that had the estate tax revert back to $1,000,000 as of January 2011.
So, for nine years all the Estate Planning attorneys swore that the laws would change and Congress would never let the tax be eliminated. But, low and behold, on January 1, 2010 the tax disappeared. Of course, then everyone began to panic that at the end of the year it will come back with a vengeance. Luckily, Congress did not let that happen. Amazingly, they set the exemption at $5,000,000 and added what is now called a Portability provision. They also once again linked the gift tax with the estate tax exemption, so it too is now set at $5,000,000. A word of caution; this law also sunsets on December 31, 2012 and again reverts back to the $1,000,000.
The other provision that was always in the various laws was the Unlimited Marital Deduction. This means that you can pass everything you own at the time of your death to your spouse with no tax consequences. This is not because the government is generous, they are just patient. They are waiting for the second spouse to die. As an example, let's assume that the exemption is $1,000,000 and each spouse individually has $1,500,000. At the death of the first spouse everything goes to the surviving spouse (as per the first spouse's Will) estate tax free. But now the surviving spouse has 3,000,000.
Without Portability, when the surviving spouse dies, $2,000,000 of that would now be taxable. Portability says that the surviving spouse gets whatever portion of the exemption the deceased spouse didn't use. So, in the above case, the surviving spouse would have a $2,000,000 exemption and only have to pay tax on the remaining $1,000,000.
Does this eliminate any estate tax planning for couples that have under $10,000,000? I'm not convinced, for two reasons. First, no one knows what's going to happen as of January 1, 2013. Congress may change the whole structure of the tax exemption or lower it back down or do nothing and let it go back to the $1,000,000. Second, we have been talking about Federal Estate Tax, but here in New York there is also a State Estate tax for everything over $1,000,000 and there are no plans for that changing. New York's tax rate is about 10% of that overage (versus 45%-55% for Federal). That could still be a substantial tax bite and should still try to be minimized with proper planning.
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Martin S. Glass is Of Counsel to Campolo Middleton & McCormick, LLP. Mr. Glass's practice focuses on elder law, trusts, estate planning, long-term care, special needs planning and asset preservation. Mr. Glass is an active member of the New York State Bar Association's Elder Law and Trust and Estates Sections and the Suffolk County Bar's Elder Law and Surrogate Court Committees. He is also a member of the Senior Umbrella Network (SUN) of Suffolk County and is currently their Council Treasurer. http://www.cmmllp.com/
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