Ed Koch, former three-term mayor of New York, passed away recently with an estate valued at over $10 million. The mayor accumulated the majority of his funds after he left office in 1989. During his retirement, Koch had a number of endeavors that helped him build his substantial estate. Among those endeavors was his work as an author, a judge on “The People’s Court,” speaker’s fees, radio host and his affiliation as a lawyer with the BryanCave firm in Manhattan. Koch helped the accumulation of his estate by choosing to live well beneath his means by residing in a rent-controlled apartment and not owning a car.
Koch created a Will to distribute the assets of his estate. The Will was filed on March 11, 2013, in New York Surrogate’s Court. His Will provided for several specific bequests to organizations, his long-time secretary, and several members of his family. While Koch’s generosity is certainly a topic of conversation among commentators on his estate, the topic that seems to be of greater interest is the question of why Koch elected to create a Will alone, rather than taking advantage of other viable estate planning options that could have greatly reduced the amount of expenses his estate will now owe in federal estate taxes, state estate taxes, and probate fees?
For example, the federal estate tax exemption this year is $5.25 million and the New York state estate tax exemption is $1 million. This means there is a tax on every dollar over each of those amounts. This will take a considerable bite out of the gifts that will be passed to his beneficiaries. Because Koch created a Will rather than a Living Trust his estate will pass through probate, and the national average for the cost of probate is around 7.4% of the estate. This is another large amount of money that will pass to the attorneys and the courts rather than going directly to his beneficiaries. This doesn’t even account for the considerable amount of time that it takes an estate to pass through the probate system.
While we may never know why Koch did what he did, his situation gives us a real-life scenario of what he might have done differently to lessen the effects of the tax and probate systems. Here are just a few examples:
- Living Trust: While a Living Trust does not shield a single individual from paying federal or state estate taxes, it can completely shield the estate from going through the cost and delay of probate. This means that the distribution of assets is done privately rather than the world knowing who your beneficiaries are and how much they are receiving. The distribution of assets can happen very quickly rather than months after the death of the Testator, which is common in a probate proceeding. Also, the assets that the beneficiaries receive during the probate process are typically given to them outright, rather than in a beneficiary trust, thus leaving the assets accessible to creditors, ex-spouses, and even bankruptcy proceedings.
- Lifetime Gifts: The IRS allows every person the ability to make lifetime gifts to anyone they want each year without having to file a gift tax return. This year the amount is $14,000 per person. Had Koch began making lifetime gifts to his various beneficiaries several years ago, the total amount that he gifted would not have been a part of his estate at his death and thus not counted toward the total used for taxes and for probate.
- Advanced Estate Planning Options: There are also more complex tools that someone with a large estate may be interested in using to help decrease the size of their taxable estate. Examples of these tools include an Irrevocable Life Insurance Trust (ILIT), a Qualified Personal Residence Trust (QPRT), and a Charitable Remainder Trust (CRT), just to name a few. Since a Living Trust would not have shielded Koch from paying a certain amount of federal and state estate taxes, these tools move determined amounts of money out of the trust creator’s estate thus decreasing the size of the taxable estate.
The moral of the story is that no matter the size of your estate, there are ways to make sure more of your money passes to your beneficiaries rather than being lost to taxes and/or probate. Please call us today at 888.222.1328 to schedule a free consultation to see how we can best help you with your estate.
What the Attorneys of Morris Hall Can Do For You:
The attorneys at Morris Hall have 100’s of years of combined experience ensuring that families’ assets are protected from probate, unnecessary taxes, creditors, ex-spouses and Medicaid spend-down. The attorneys also help those in Arizona to apply for and receive Medicaid assistance and Veterans Benefits. Our Arizona offices are located in Phoenix, Mesa, Scottsdale, Cave Creek, Tucson, Prescott, Flagstaff and Arrowhead. Contact us today at 888.222.1328 to schedule an appointment!
This blog should be used for informational purposes only. It does not create an attorney-client relationship with any reader and should not be construed as legal advice. If you need legal advice, please contact an attorney in your community who can assess the specifics of your situation.