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- 1. the Sidebar S T R AT E G I E S F O R K E E P I N G T H E L A W O N Y O U R S I D E SPRING 2006 VOLUME 11 ISSUE 1 THIS ISSUE > “ESTATE PLANNING REPORT: THE EMERGENCE OF NEW YORK’S ESTATE TAX SYSTEM” Page 1 By Constantine Intzeyiannis, Esq. Estate Planning Report THE FEDERAL ESTATE TAX The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) was intended to alleviate the burden of paying Federal estate taxes for a majority of decedents’ estates. For the most part, EGTRRA has accomplished this purpose. However, EGTRRA has had no effect on an Page 2/ 3 independent estate tax system that affects a large number of estates, namely, New York’s estate License to Kill tax system. For those of you who think your estates will be shielded from all estate taxes, your families will be in for a big surprise. Under EGTRRA, for individuals dying in 2005, the first $1,500,000 of assets are exempt from Page 4 Federal estate tax with a top tax rate of 47%. The exemption will gradually increase until it reaches Side Briefs $3,500,000 in 2009, and the top tax rate will decrease until it reaches 45% in the year 2007. There will be no Federal estate tax for individuals dying in 2010. However, these changes will be temporary as the Federal exemption will revert back to $1,000,000 (the same amount prior to the enactment of EGTRRA) in 2011, assuming there is no further legislation passed by Congress prior to that time. NEW YORK’S ESTATE TAX Even though the Federal estate tax exemption is gradually increasing as indicated above, New York’s estate tax exemption remains at $1,000,000. New York’s current estate tax system is based on laws which became effective on January 1, 1998 with a top tax rate of 16%. From January 1, 1998 until the passage of EGTRRA on June 7, 2001, New York’s estate tax system basically mirrored the Federal estate tax system, which created a system where an estate that was subject to estate taxes would have to pay both Federal and New York estate taxes and estates that did not meet certain threshold requirements would pay neither Federal nor New York estate taxes. The passage of EGTRRA therefore required New York to enact new legislation to conform to the new system. Unfortunately for residents (and non-residents in certain cases), New York has not enacted legislation to conform its estate tax system with the provisions of EGTRRA. Thus, an estate can now be non-taxable for Federal estate tax purposes while being taxable for New York State estate tax purposes if it exceeds $1,000,000. ESTATE PLANNING AND NEW YORK’S ESTATE TAX LAWS The good news is that the estate taxes that would be due to New York State can either be avoided or diminished significantly with proper estate planning. While it is uncertain at this time whether New York will eventually conform its estate tax system with the provisions of EGTRRA, what is certain is that you should review your estate plans with your estate planning professionals and make the necessary adjustments and revisions in light of New York’s estate tax system. If you have any questions concerning this important subject, please feel free to contact the attorneys in our estate planning department. s
- 2. > LICENSE TO KILL - O'BRIEN'S IMPACT As always, however, theories in a vacuum and without TO A DEGREE: room for exception generally lead to problems. THE INEQUITY OF EQUITABLE Perhaps more problems than the original theory sought to remedy. The significance of the decision is DISTRIBUTION that based on the concept of enhanced earning capacity, the court was going to project future income based on the economic capacity resulting from By Joseph Trotti, Esq. acquiring a professional license. (Incidentally, the O’Brien decision and the enhanced earning capacity Alright, perhaps the title is a bit dramatic considering was thereafter expanded by the courts to include not the fact that the topic is one area of the New York only licenses but post-marital education, certain State Equitable Distribution Law. However, if your certifications, and degrees earned during the name is Dr. Holterman, you might agree. Dr. marriage.) Essentially, the court was now going to Holterman is a licensed medical doctor. Although he deal, at least in some respect, with dividing up had an annual gross income of $182,000, he wound potential future income. An income, that in some up taking home approximately $16,389 a year based cases, may never be fully realized and in other cases, on a marital award issued by the Court of Appeals. completely fiction. For example, what would happen The decision in this problematic case is the natural (or to an individual who possessed the so-called perhaps supernatural) progression of a theory that “enhanced earning capacity,” and then loses that was based in fairness and originally designed to capacity and license at some point before the marital remedy a specific inequity. What has taken place in award is extinguished? What happens to the value of the courts since then appears to be anything but fair. a license if, at some time in the future, it no longer is worth what the experts valued it at the time of trial or THE O'BRIEN DECISION if an individual decides to pursue some other avenue Some background concerning the theory is required. of employment other than that which correlates to a Approximately twenty years ago, the New York State degree that was earned? Court of Appeals created the notion of an “enhanced earning capacity.” In 1985, the Court of Appeals in ENTER DR. HOLTERMAN the O’Brien decision held that a person’s professional The legacy of O’Brien becomes more complicated license, if acquired during the marriage, is marital when other variables are added to the mix. For property. The significance of that decision is that example, the crux of the problem in Holterman since the license was now classified as marital involved not only the enhanced earning capacity property, it fell within the meaning of the Domestic theory, but also the application of the Child Support Relations Law and more importantly, became subject Standards Act. If the court was to calculate child to valuation and distribution between the parties. support and maintenance based on a payor spouse's Although that case has not been followed nationally, income, should the payor spouse’s available income New York’s highest court addressed and remedied a be reduced by the amount that the court attributed to situation it perceived to be unfair. O’Brien involved the professional license? In several decisions issued what was then called “The Classic Student Spouse, Working Spouse Syndrome.” In that case, the wife between 1995 and 2000 (e.g., McSparron and sacrificed to put her husband through medical school Grunfield), the Court of Appeals essentially warned only to have the husband walk out of the marriage against double counting the income of a payor soon after graduation. The O’Brien decision spouse when making an award of maintenance. appeared to be a responsible assessment and More specifically, it cautioned against calculating equitable response to the situation. different payments from the same income stream. 2 CAPELL VISHNICK LLP Spring 2006
- 3. The Court warned that this would be an impermissible treated as a deduction from income under the double dipping. Therefore, the Court, in effect, stated provisions of the Child Support Standards Act. The that once it considered the license holder's future result was that Dr. Holterman would now have to pay income and distributed that income in the form of a child support based on monies never realized and distributive award or other asset, then that stream of already distributed to his wife in the form of income was not to be considered again in the equitable distribution. calculation of a maintenance award. THE INEQUITY OF HOLTERMAN THE COMPLICATIONS OF HOLTERMAN The dissent argued that the “unjust or inappropriate” The parties in the Holterman case had been married language in the Child Support Standards Act should for nineteen years and had two children. The case have been considered by the majority in order to involved the valuation and distribution of the avoid the financial burden to Dr. Holterman and to husband’s medical license and therefore the amount further avoid the perils and injustice of double of enhanced earning capacity attributable to his dipping. The dissent also argued that the majority of license. More importantly, however, the court in the Court of Appeals did not exam or evaluate the Holterman now had to also address the issue of child totality of the circumstances. Further, in analyzing the support and whether the double dipping analysis O’Brien decision, the dissent argued that O’Brien was previously used in maintenance cases would apply. devised almost exclusively for the “Classic Student Spouse, Working Spouse Syndrome.” The dissent's The wife was awarded approximately 35% of the arguments have merit. Since the Child Support husband’s enhanced earning capacity. That award Standards Act allows the courts to deviate from the was calculated at approximately $21,000 per year mandate of that Act where a result would be unjust or for a 15-year period. The wife was also granted inappropriate, then it would appear that Dr. Holterman maintenance at $35,000 per year for the first five would fit in that category as a result of being left with years after divorce, and a smaller amount less than $17,000 per year. In addition, in Holterman, thereafter. The remaining issue involved the the parties were married for nineteen years. Clearly calculation of child support. not the same fact pattern as O’Brien. Here the parties were married for nineteen years before the divorce Dr. Holterman argued that in order to avoid the action was brought and therefore the dissent stated double dipping problem that the same Court had that the party’s achievements and benefits had warned against in its earlier decisions, then the already been enjoyed by both of them for some time distributive award base payment of $21,000 should and were therefore already reflected in the husband’s be deducted from his gross income for purposes of current income. calculating child support. The Court of Appeals then revisited the theory of the O’Brien case and analyzed It appears that the Court of Appeals missed an the double dipping problem as it pertained to child opportunity to add a dose of reality to the O’Brien support. The majority of the Court of Appeals legacy. Perhaps doing away with the entire theory of rejected Dr. Holterman’s argument by holding that an enhanced earning capacity is drastic or premature. the statutory language of the Child Support However, there is little doubt that the result in Standards Act does not allow for such a deduction. Holterman was clearly not intended by the O’Brien Further, the Court stated that a distributive award is court. In any event, recent lower court decisions and purposely not deemed deductible to the payor, nor discussions among various matrimonial attorneys income to the recipient under the Internal Revenue suggest that changes to the O'Brien theory of Code. Therefore, the majority held it should not be enhanced earning capacity are indeed on the horizon. s Spring 2006 CAPELL VISHNICK LLP 3
- 4. > SIDEBRIEFS We are proud to announce that on April 2, 2006, Joseph Trotti and Theresa DeStasio celebrated their 5th anniversary with Capell Vishnick. Andrew A. Kimler spoke at the Flushing Lawyer’s Association on February 15, 2006. The topic of the lecture was “How to Avoid Discrimination Lawsuits”. It’s a Girl! Robert Bommarito and his wife, Ann Marie have an addition to their family. Their second daughter, Gianna, was born on March 25, 2006. All the best! Oh Boy! Bernard Vishnick and his wife, Sheri, welcomed their second grandson into the world! Justin Ryan was born on April 7, 2006. Congratulations! Bernard McGovern has been elected Treasurer of the Blackstone Lawyers Club of Ridgewood, one of New York’s oldest fraternal legal societies. Erica Bekoff is involved in Casino Royale 2006, the main fundraising event for the American Foundation for Suicide Prevention (AFSP). The event will take place on Thursday, May 18, 2006 at the Chateau Briand. Capell Vishnick was a proud sponsor of the American Heart Association’s’ 5th Annual “Go Red For Women Luncheon” which was held on February 8, 2006 at the Crest Hollow Country Club. Our managing partner, Christopher J.L.Deziel participated on the Sponsorship Committee. Erik Ortmann spoke on Wednesday, March 29, 2006 on behalf of NARI at a public hearing before the Environmental Protection Agency concerning NARI’s official position with respect to the EPA’s new proposed regulations governing lead safe work practices. Bernard McGovern’s daughter, Kristen, was named Managing Editor of the St. John’s Journal of Legal Commentary. Kristen is in her second year of law school at St. John’s and we wish her continued success. 3000 Marcus Avenue, Suite 1E9 Lake Success, NY 11042 t 516.437.4385 f 516.437.4395 www.CapellVishnick.com