COUNSELORS AT LAW 49 North Airmont Road, Suite 101 EDWARD LAUTERBACH (1916-1958) Suffern, New York 10901 Offices in White Plains & Manhattan LEON A LAUTERBACH (Retired) HOWARD GARFINKEL (845) 368-4400 Of Counsel: ROBERT DAMASI' Fax: (845) 368-4446 MICHAEL J. STRULO\\~TZ" JEFFRY HOLLANDER E-mail: Igdh@lgdhIaw.com JARED VIDERS DAVID J. WOLKENSTEIN AliRON WEISSMAN h Admitted in New Jersey only Attorney Advertising THE GUIDE TO NEW YORK ESTATE AND INHERITANCE LAW INTRODUCTION This guide provides an overview of the legal process that ensues after the death of an individual in New York State. If you are a beneficiary, or will be serving as the Executor or Administrator of an estate, this guide will answer most, if not all, of your general questions: What can I expect? What do I need to do? How long will the process take? What taxes are imposed upon the estate and its beneficiaries? Will I need an attorney or accountant? While I have designed this guide to provide a quick and easy grasp of the matters you are likely to encounter, the law - as it pertains to estate administration - is generally quite complicated. Accordingly, legal and related tax issues should be handled by a competent attorney, thoroughly experienced with estate administration. As such, this guide is not intended to serve as a how-to or self-help manual. ASSETS OF A DECEDENT THAT GENERALLY DO NOT REQUIRE COURT INTERVENTION Assets held jointly by the decedent and another individual generally require only proof of the decedent's death before they can be liquidated. Such assets include those titled "joint tenants," "joint tenants with right of survivorship," or similarly designated assets. In general, liquidation of these assets does not require Court approval.
Lauterbach Garfinkel Damast &' Hollander, LLf' The law recognizes that the decedent may not have intended to create a joint account with another individual. Rather, the decedent may have merely intended to create what is known as a "convenience account" (e.g., to allow the other person to sign checks or make withdrawals). If an account is deemed a "convenience account," its assets would pass according to the terms of the decedent's Will. Absent a Will, those assets would pass according to New York State's laws of intestacy (discussed below). Similarly, assets naming a specific beneficiary, such as assets that have been left "in trust for" or "payable on death" to a designated beneficiary, only require proof of the decedent's death before they can be liquidated. These assets commonly include bank accounts, Individual Retirement Accounts and insurance policies. Generally, Court approval is not required to liquidate these assets. In exceptional cases, e.g. where a dispute arises regarding the designation of a certain beneficiary or the designated beneficiary's entitlement to the asset, Court approval may be necessary. Assets held in the sole name of the decedent require the appointment of a legal representative (an Executor or Administrator) before they can be liquidated, redeemed or transferred. This is so regardless of whether the decedent left a Will. Estate Taxes: Unless exempt, all of the decedent's assets are subject to estate taxes (see discussion below). Additionally, assets that were not taxed during the decedent's lifetime (such as IRA accounts) may be subject to both income taxes and estate taxes. SMALL ESTATE PROCEEDING If the decedent's solely-owned assets are less than $30,000.00, a simplified "small estate" proceeding can be instituted in Surrogate's Court to appoint a Voluntary Administrator. This simplified proceeding can typically be handled without an attorney and can be instituted regardless of whether the decedent left a Will. 2
WHEN A PERSON DIES WImOUT A WILL When a person dies without a Will, the person is deemed to have died "intestate." If a person leaves more than $30,000.00 in assets in his or her sole name, an application (petition) for "Letters of Administration" must be made to the Surrogate's Court (typically in the county where the decedent resided). The Letters of Administration names the person appointed by the Court to serve as the Administrator ofthe estate. Prior to applying for Letters of Administration, the applicant must undertake a search to determine whether the decedent left a Will. If the decedent had a safe deposit box, an application must be made to the Surrogate's Court to search the box for a Will. In general, the petition for Letters of Administration is prepared by an attorney on behalf of the decedent's closest competent adult relative( s) (i.e. the "heirs"). Heirs are entitled to be appointed Administrator in the following order ofpriority: (1) Spouse; (2) Adult Child (or Children); (3) Parent(s); (4) Sibling(s); (5) Niece(s) and Nephew(s); (6) Any other eligible heirs of the decedent. Although an individual may be survived by a number of relatives, the individual's "heirs" for purposes of inheritance are the closest relatives as defined by law. By way of example, where the decedent is survived by one or more children, the decedent's brothers and sisters are not his heirs for inheritance purposes. Conversely, if the decedent is only survived by one or more siblings then they are his heirs for purposes of inheritance. If necessary, two or more qualified individuals can be appointed to serve as "Co Administrators." The Court requires the applicant to undertake diligent efforts to identify each ofthe decedent's heirs and his/her whereabouts. In the event of a delay in identifying (or locating) the decedent's heirs, a Temporary Administrator can be appointed to administer the estate on an interim basis. Any heir entitled to apply for Letters of Administration must receive notice of any other heir's application. This is accomplished by the Surrogate's Court issuing a 3
Citation (similar to a court summons) to the non-applying heirs. This Citation is subsequently served upon the non-applying heirs who have the right to submit a crosspetition for Letters ofadministration. Alternatively, a person entitled to Letters of Administration can sign a "Waiver, Renunciation and Consent" whereby: he or she (1) waives the right to be served with a Citation; (2) renounces the right to be appointed as Administrator; and (2) consents to the appointment of another eligible person as Administrator. After being appointed by the Court, the Administrator collects the assets held in the sole name of the decedent. The Administrator uses those assets (and any income earned thereon) to pay the decedent's outstanding debts, taxes and administration expenses. After the Administrator has completed collecting the decedent's assets and discharging the decedent's debts, taxes and administration expenses (and a number of other tasks - see discussion below), distribution is made to the heirs in the following manner. Ifthe decedent left: (I) Spouse and no children - spouse receives the entire estate; (2) Spouse and children - spouse receives $50,000.00 plus one-half ofthe balance ofthe estate; child or children (or alternatively, the issue of any predeceased child or children) share the remaining balance; (3) Children but no spouse - children share the entire estate; (4) Parent(s) but neither spouse nor children - parent(s) receives the entire estate; (5) Brothers and sisters but no spouse, children or parents brothers and sisters (including the issue ofpredeceased brothers and sisters) share the entire estate; (6) First cousins (grandchildren of maternal and/or paternal grandparents) maternal first cousins share one-half ofthe estate; paternal first cousins share the remaining one-haif ofthe estate. 4
Where the heirs consist of individuals from different generations, the formula becomes increasingly more complicated. "Issue," as used above, means the surviving heirs of a predeceased heir. PROBATE (WHEN A PERSON DIES WITH A WILL) When a person dies having left a Will, the terms of the Will typically name someone to serve as Executor. The Executor must apply to the Surrogate's Court, usually in the county where the decedent resided, to have the Will "admitted to probate." This is accomplished by the attorney for the Executor filing a Petition for Probate and Letters Testamentary. The Court will initially determine if the Will was properly signed and witnessed. In addition, the Court must be satisfied that: (1) the decedent possessed sufficient mental capacity to make a Will; and (2) that the Will was the voluntary act of the decedent. Ifthe Will passes these tests, the Court admits the Will to probate. Ifthe Will cannot be located amongst the decedent's possessions, a search must be undertaken to locate the Will. If the decedent has a safe deposit box, one must apply to the Surrogate's Court for an order to search the safe deposit box. If there is no safe deposit box, the Will may be on file with office of the attorney who prepared it. The Executor named in the Will is entitled to obtain the original Will without charge or obligation. The Executor can choose to be represented by any law firm he or she desires. If the individual (or bank or trust company) named in the Will is unable (or unwilling) to serve as Executor, the responsibility falls to the substitute Executor named in the WilL Ifthe Will does not provide for a substitute Executor, the Court will appoint a representative for the estate called an Administrator c.t.a. (Administrator with the Will annexed) typically the beneficiary ofthe largest portion of the estate under the Will. The applicant must make diligent efforts to identify and locate the present whereabouts of each of the decedent's heirs regardless of whether that heir is left any property under the Will. Each heir (see definition of heir for inheritance purposes on page 3) has the right to contest (i.e. object) to the Will being admitted to probate. In deciding whether to object, 5
Lauterbach Garfinkel Damast &' Hollander, LLP an heir has the right to examine: (1) the witnesses to the Will; and (2) the attorney who prepared it. Each heir must either sign a Waiver and Consent whereby the heir agrees to the Will's admission to probate and to the nominated Executor being appointed as Executor or be served with a Citation of the Court and a copy of the Will. If the latter, the heir must appear in Court on the date stated in the Citation. Otherwise, the heir will be foreclosed from objecting to the Will being admitted to probate. If the surviving husband or wife is left out of the Will entirely or receives less than a certain percentage under the Will, the surviving spouse has the right to "elect against the Will." By properly doing so, the surviving spouse will generally receive the greater of (1) one-third of the estate or (2) $50,000.00. The surviving spouse must make this election within strict time limitations. In the event a contest to the Will or other matters delay the probate process, the Court can appoint the nominated Executor under the Will to serve in the interim. Once appointed by the Court, the preliminary executor can administer the assets of the estate. He or she does not, however, have the right to distribute any of the assets to any of the beneficiaries set forth in the Will. DUTIES OF AN EXECUTOR OR ADMINISTRATOR The Executor and the Administrator perform essentially similar functions. These duties (many of which are performed with the assistance and guidance of the estate's attorney) include: - IdentifYing all of the decedent's assets (including bank accounts, stocks, bonds, mutual funds, real estate, pensions, IRA accounts, profit sharing accounts, insurance policies, motor vehicles, jewelry, art and other valuable tangible personal property); - Liquidating and investing (or distributing) the above mentioned estate assets; - Securing the decedent's residence (and other real property holdings) and discontinuing unnecessary utilities; 6
- Detennining and paying the decedent's debts (e.g. mortgages, credit cards, medical bills, leases, utility bills, real estate taxes and funeral expenses); - Paying all taxes (Federal and New York State income, estate and fiduciary) owed by the decedent (or the estate) and arranging for the preparation and filing of all relevant tax returns; - Arranging for insurance policies on decedent's automobile(s), real estate and other property to be kept in force. (Note: the premiums on those policies may be adjusted once the insurance company is notified ofthe decedent's death); - Filing life, health and property insurance claims, applying for social security death benefits and veteran's death benefits, as applicable; - Having the decedent's real estate and personal property professionally appraised; - Detennining whether the decedent made taxable gifts prior to death and, if so, arranging for the preparation and filing of gift tax returns; - Preparing interim and final reports (ajkia accountings) for the estate's beneficiarieslheirs detailing the estate's activities; - Distributing the estate's assets or net proceeds (as applicable), to the individuals entitled to them (be it according to the Will or under the laws of intestacy). Additionally, there may be instances where it is appropriate for the Executor or Administrator to commence litigation on behalf of the estate. Such instances include the following: - If the decedent died because of another individual's negligence (e.g. car accident, medical malpractice, etc.); - If an individual who had control over the decedent's assets (pursuant to a Power of Attorney or as a joint account holder) misappropriated or wrongfully transferred the decedent's assets; 7
- If the decedent's assets are held by another individual who refuses to turn them over to the Executor or Administrator; - Ifreal property partially owned by the decedent must be "partitioned" so that it can be sold or distributed; - Ifa debt is owed to the decedent, the debt must be collected. COMPENSATION OF THE EXECUTOR AND ADMINISTRATOR As compensation for performing duties on behalf of the estate, the Executor! Administrator of the estate is entitled to "commissions" established by statute. The commissions are computed on the basis of the assets and income collected and paid out by the Executor/Administrator. The rates are as follows: (1) 5% ofthe first $100,000.00; (2) 4% ofthe next $200,000.00 (Le. from $100,001.00 to $300,000.00); (3) 3% on the next $700,000.00 (i.e. from $300,001.00 to $1,000,000.00); (4) 2 Y2% on the next $4,000,000.00 (i.e. from $1,000,001.00 to $5,000,000.00); (5) 2% on any amounts over $5,000,000.00. INDIVIDUAL INCOME TAXES TAXES Final Federal and New York State income tax returns are due for the year the decedent died. On the decedent's final income tax returns, the full amount of the standard deductions and exemptions can be claimed, regardless of the date of death. Some assets that were not subject to income taxes during the decedent's lifetime (IRA's, 401-K plans, interest on life insurance, annuities, etc.) will be subject to both income tax and estate tax upon the decedent's death. 8
The beneficiary of an IRA may elect to defer payment of the proceeds from the IRA, thereby deferring the income taxes as well. Such election must be made within specific time limitations based on the date of decedent's death, whether the decedent was already taking distributions and the relationship between the beneficiary and the decedent. ESTATE TAXES A New York State estate tax return is required for decedents leaving a gross estate of $1,000,000.00 or more. A Federal estate tax return is required for decedents leaving a gross estate of $5,000,000.00 or more. New York State estate taxes are due when the decedent's net taxable estate (i.e. gross estate less allowable administration expenses, debts, marital deductions and allowable charitable deductions) exceeds $1,000,000.00. Federal estate taxes are due when the decedent's net taxable estate exceeds $5,000,000.00. The taxable estate of a decedent includes the taxable gifts made by the decedent during his or her lifetime. Estate taxes are sometimes due well before the estate can liquidate certain types of assets. This is particularly true for a decedent's interest in commercial real estate (which can be difficult and/or financially disadvantageous to liquidate in time to pay estate taxes) and closely held businesses (which could drop precipitously in value when sold quickly in order to satisfy an impending tax obligation). Thus, when a certain percentage of an estate consists of closely held business assets or interests, preferential estate tax treatment (such as the right to make installment payments) is available. All assets (including insurance policies) owned by the decedent are subject to estate taxes subject to the thresholds set forth above. The full value of non-spousal joint bank accounts and other jointly held property are subject to estate tax unless it can be proven that the surviving joint tenant(s) contributed to the acquisition ofthe asset. Estate taxes are also due on assets placed by the decedent in a revocable "living trust." 9
Lauterbach Garfinkel Damast &Hollander, LLP No estate taxes are due on the assets received by either the spouse or by a charitable entity (as a beneficiary of the estate). The charity must, however, be a qualified tax exempt organization in order for the estate tax charitable deduction to be claimed. Federal and New York State estate tax returns due must be filed within nine months after death. Likewise, any estate taxes due must be paid within that nine-month period. A six-month extension to file the Federal and New York State estate tax returns is available via separate applications within nine months of the decedent's death. When sufficient cause is demonstrated, a six-month extension to pay the Federal and New York State estate taxes is available through separate applications to each taxing authority within nine months of decedent's death. It is possible to be approved for an extension by one taxing authority and to be denied by the other. Interest and penalties on unpaid estate taxes accrue from nine months after the date of decedent's death until payment. The 2011 Federal Estate Tax Rates are as follows: Net Taxable Estate Net Estate Tax $ 5,000,000.00 $ 0.00 $ 6,000,000.00 $ 350,000.00 $ 7,500,000.00 $ 875,000.00 $ 9,000,000.00 $1,400,000.00 $10,000,000.00 $1,750,000.00 As of2011, the maximum Federal estate tax rate is 35%. 10
The 20 II New York Estate Tax Rates are as follows: Net Taxable Estate Net Estate Tax $1,000,000.00 $ 0.00 $1,500,000.00 $ 64,400.00 $2,000,000.00 $ 99,600.00 $2,500,000.00 $138,800.00 $3,000,000.00 $182,000.00 On net taxable estates exceeding $3,000,000.00, the New York State tax rate on the portion over $3,000,000.00 ranges from 8.8% to a maximum of 16% (which applies to estate's exceeding $10,040,000.00). A portion of the New York State estate taxes are deductible on the Federal estate tax return. That deduction is not computed in the above net estate tax figures. The Will may specify which beneficiaries bear the estate's estate tax obligations. Absent such a provision (or where the decedent dies without a Will) each beneficiary bears his or her own portion of the estate tax. Once the Executor or Administrator pays the appropriate taxing authorities, he or she deducts the proportional amount from the bequest due each beneficiary. The Executor or Administrator must also collect any estate taxes due on assets passing by operation of law (e.g. joint bank accounts, IRA accounts and insurance policies). These taxes will be collected from the designated beneficiary or joint account holder as the case may be. FIDUCIARY INCOME TAXES Federal and New York State Fiduciary income tax returns must be filed by the Executor or Administrator of the estate in each year the estate earns $600.00 or more of gross income. The Fiduciary income tax returns must be filed even when no tax is due. In computing the net amount of fiduciary income, certain expenses may be deducted. They include Executor or Administrator commissions, attorney fees, accountant fees and distributions of income to the estate's beneficiaries. Commissions, 11
legal fees, accounting fees and other administration expenses can be deducted on either the fiduciary income tax returns or the estate tax returns. The fiduciary income taxes rates are based on the following schedules: (Figures are for net income.) Federal Rates (2011 rates) Net Income Less Than Tax $2,300.00 15% of such amount $5,450.00 $345.00 + 25% ofthe amount over $2,300.00 $8,300.00 $1,132.50 + 28% ofthe amount over $5,450.00 $11,350.00 $1,930.50 + 33% ofthe amount over $8,300.00 Net Income More Than $11,150.00 $2,937.00 + 35% of the amount over $11,350.00 New York State Rates (2010 rates) - (2011 rates not yet available) Net Income Less Than Tax $8,000.00 4% of such amount $11,000.00 $320.00 + 4.5% ofthe amount over $8,000.00 $13,000.00 $455.00 + 5.25% of the amount over $11,000.00 $20,000.00 $560.00 + 5.9% ofthe amount over $13,000.00 $200,000.00 $973.00 + 6.85% of the amount over $20,000.00 $500,000.00 $13,303.00 + 7.85% ofthe amount over $200,000.00 Net Income More Than $500,000.00 $36,853.00 + 8.97% ofthe amount over $500,000.00 Estates of decedents who resided in either New York City or the City of Yonkers are subject to additional fiduciary income taxes. INCOME TAXES TO BENEFICIARIES As a general rule, a beneficiary who receives an asset under a Will (or an heir in an estate where there is no Will), does not incur any income tax liability for the inheritance. 12
Lauterbach Garfink.el Damast & Hollander, LLP In any year that income from the estate is distributed to the beneficiaries (most commonly in the year the estate is concluded), beneficiaries may owe income tax on the portion of that income that is distributed to them. This income is reported to the beneficiary (and to the taxing authorities) on a Schedule K-l when the fiduciary income tax returns reflecting that income are filed. If the estate incurs a loss in the final year of the estate (for example, if the allowable expenses of the estate exceed the income), each beneficiary will receive a Schedule K-I reflecting his or her share of that loss. The loss may be deducted by the beneficiary as an itemized deduction on his or her individual income tax returns subject to certain limitations. DISTRIBUTION OF THE ESTATE After the Executor or Administrator has sold or liquidated all of the decedent's assets and paid all of the decedent's debts, administration expenses and taxes, a report is prepared reflecting all ofthe estate's activities from the date of the decedent's death until the estate is concluded. That report includes a calculation ofthe proposed distributions of the estate's net proceeds to each beneficiary/heir. Along with the report, a Receipt and Release is sent for signature to each beneficiarylheir. Once those Receipts and Releases are signed, the assets and income of the estate can be distributed. The time in which the administration of an estate is completed varies based on the particular facts and circumstances of each estate. That being said, an estate which is not required to file estate tax returns can typically be completed within 8-12 months; an estate which is required to file estate tax returns can typically be completed within 18-24 months. If any of the beneficiarieslheirs of the estate believe that the Executor or Administrator has not properly accounted for all of the assets ofthe estate, the estate will not be able to be settled informally. Rather, the Executor/Administrator will be required to file a formal judicial accounting with the Surrogate's Court. The beneficiary will then have the opportunity to file objections to the accounting. The Surrogate's Court will ultimately have to determine if the Executor/Administrator properly fulfilled his obligations to the estate and its beneficiaries. 13
THE ROLE OF THE ATTORNEY FOR THE ESTATE The Executor or Administrator of the estate relies heavily on his or her attorney to insure that the estate is administered properly, efficiently and accurately. While the services of the attorney vary depending on the facts and circumstances of each estate, they typically include the following: - Preparing the petition and all related documents necessary to: (1) probate the Will of the decedent with the Surrogate's Court; and (2) obtain Letters Testamentary for the nominated Executor (or obtain Letters of Administration for the Administrator, as applicable). This includes arranging for the execution and filing of these documents and appearances at, and communications and correspondence with, the Surrogate's Court in relation to the application; - Reviewing the decedent's financial and personal records. This includes locating and contacting third parties to identify the decedent's assets; - Examining the contents of decedent's safe deposit box(es). This includes any applications to the Surrogate's Court and other legal documentation required by the bank to access the safe deposit box( es); - Obtaining an employer identification number for the estate from the Internal Revenue Service; - Communicating with the representatives of each financial institution where the decedent maintained an account to effectuate the liquidation or transfer of the decedent's assets. This includes preparing all paperwork necessary to liquidate or transfer those assets; - Communicating with the decedent's creditors including the decedent's credit card companies and health care providers. If necessary, this includes effectuating a compromise ofthe outstanding bills; - Determining the date-of-death values of each ofthe decedent's assets; 14
- Completing the documents and submitting the proofs necessary to process the life insurance policies insuring the decedent; - Determining whether the decedent's estate or family members have a viable lawsuit for the manner in which decedent died or for any injury or loss suffered by decedent prior to death; - Arranging for appraisals ofthe real property and tangible personal property in which decedent had an interest and reviewing the appraisals to confum that they accurately reflect the date-of-death values of those assets; - Applying for releases of estate tax lien on the decedent's real property from the Internal Revenue Service and New York State Department of Taxation and Finance as required; - Handling all tax-related matters pertaining to the estate. These include preparing the Federal and New York State estate tax returns, preparing the decedent's final Federal and New York State income tax returns as well as the estate's Federal and New York State fiduciary income tax returns. Preparation of those returns should include an analysis of how to synchronize the receipt of income and the payment of expenses and distributions in order to produce maximum income tax savings; -Preparing, if required, an estate tax plan for one or more of the Beneficiaries. This may include preparing renunciations/disclaimers and all related documentation on behalf of the spouse or other beneficiaries of the estate and have same filed and accepted by the Surrogate's Court; - Preparing an informal accounting ofthe estate's activities from the date of decedent's death to its conclusion; - Preparing receipts and releases on behalf of the Executor/Administrator certifying that each of the beneficiaries of the estate has received the share to which he or she is entitled to and acknowledging that the Executor/Administrator has performed his or her duties in a proper manner. 15
The above list is general in nature and does not include services that would be required if a Will contest is instituted, if assets or debts become the subject of litigation or if a judicial accounting proceeding is required. ABOUT THE AumOR Howard Garfinkel is the managing member of the law firm of Lauterbach Garfinkel Damast & Hollander, LLP. The firm, with offices in Rockland, Westchester and Manhattan, was originally established in 1916 by Edward Lauterbach. Howard Garfinkel concentrates his practice in the areas of estate planning and administration and represents individual and institutional Executors and Administrators in estates of all sizes and levels ofcomplexity. This Guide is intended for general information purposes and every attempt has been made for the information contained herein to be accurate. No liability is assumed for any errors contained herein. Any person requiring legal advice is urged to contact an attorney experienced and competent in the legal and tax aspects of estates and their administration. Howard Garfinkel, Esq. 49 North Airmont Road, Suite tol Suffern, New York 10901 845-368-4400 - Office 845-368-4446 - Fax howardg@lgdhlaw.com Copyright 2011 Howard Garfinkel Attorney-at-Law 16