From new legislation, to important proposals, to instructive case law, 2017 saw some significant developments, lessons and reminders.

10. Trust and Estates, Matrimonial and Religious Law: Multi-Disciplinary Considerations Can Impact Divorce.

With the increasing overlap between the trust and estates and matrimonial practices, trusts and estates practitioners often become involved in premarital planning and should be cognizant of religious issues that can impact divorce.

A Get is a religious divorce under Jewish law that must be given voluntarily by a husband to a wife in order for her and any children of a subsequent marriage to marry freely within the Jewish faith. This has been problematic if, out of spite or as a manipulative tool, a husband refuses to give his wife a Get. There are a number of incentives that can be imposed by a secular court to facilitate the granting of the Get, however, since the Get must be given willingly to be valid, this raises the issue of whether the Get is truly “voluntary” if delivered under threat.

In Sharabani v. Sharabani, 54890/2010, NYLJ 1202798565597, at *1 (Sup., KI, decided Aug. 30, 2017), the court considered the implications of a husband's refusal to grant his wife a religious divorce, and relied on a New York statute (New York Domestic Relations Law (DRL) §253) with the unstated, but clear, purpose of solving a problem that is unique to Jewish marriages.

New York's Domestic Relations laws allow a court to consider the effect of a barrier to marriage when distributing marital assets and determining spousal support awards. DRL §§236(B)(5)(h) and 236(B)(6)(d). In Sharabani, the court found that Husband's refusal to give Wife a Get essentially limited her future financial circumstances in depriving her of the ability to remarry religiously and deprived her of emotional support. Husband's refusal to provide a religious divorce led the court to award Wife 100 percent of certain marital assets, if Husband continued to refuse.

To avoid a Get deviously being withheld, the Rabbinical Council of America has had some success in providing a form prenuptial agreement. In order to give the husband financial incentive to grant the Get, the agreement provides for a fixed sum of support to be paid to a spouse until the Get is delivered.

A preferred solution might be to negotiate a contractual promise to deliver a Get upon request and have that promise contained within a prenuptial agreement. A flurry of cases in New York in the 1970s all upheld provisions in parties' separation agreements with respect to the obligation to deliver a Get. See for example Waxstein v. Waxstein 90 Misc.2d 784 (Sup. Kings 1976). Against this statutory and decision framework, although applied to post-marriage agreements, it seems that such promises in prenuptial agreements should be enforced as well. Assuming that the promise to deliver the Get was made voluntarily before the marriage, the prospect of subsequent penalties for failure to honor the promise arguably should not detract from the voluntariness of the initial promise.

9. Estate Planning Documents Should Be Revisited in Event of Divorce or Separation.

New York's Estates, Powers and Trusts Law (EPTL) §5-1.4 provides that divorce revokes dispositions to, and fiduciary nominations of, former spouses. In McCauley v. New York State, 46 N.Y.S.3d 262 (N.Y. App. Div. 2017), the Appellate Division considered whether this statute revoked the designation of a former spouse as the beneficiary of her ex-husband's retirement plan. The court found that, according to the plain language of the EPTL and the legislative history, the statute applies to dispositions like the one made by the decedent and to persons who, like the decedent, died after the statute was amended to its present form because the disposition did not become effective until after death (when the amended statute was in effect). Further, the court found that the spouse had affirmatively waived any rights to death benefits under a separation agreement.

Although ultimately the statute worked to prevent a disposition that surely was not intended by the decedent, this case serves as key reminder of the significance of premarital planning, and the importance of avoiding reliance on state default law alone. Divorced spouses, spouses in the process of getting a divorce and unmarried couples who are separated should give immediate attention to their planning documents, to ensure they reflect their intent, and issues such as these should be clearly addressed in prenuptial agreements. (Subject to applicable laws and other legal restrictions, including elective shares rights and spousal rights in certain retirement plans.)

8. Property Discovered After New York Estate Tax Return Filed Didn't Require Filing of Amended Return or Payment of Additional Taxes, Penalties or Interest.

An Advisory Opinion (TSB-A-17(1)M) issued on Oct. 6, 2017 considered whether any additional New York estate tax was due when funds were discovered in the decedent's name more than 10 years after her death, following a search of the NYS Comptroller's Unclaimed Property records.

The Department of Taxation and Finance (the Department) concluded that, because the omitted asset was discovered more than three years after the timely filing of the original estate tax return, and the date of death value was less than 25 percent of the New York gross estate, the executor was not required to file an amended estate tax return or pay any additional estate taxes, penalties, or interest. A tax may be assessed at any time if a false or fraudulent return is filed with intent to evade tax, but the Department found no indication that was the case.

7. Grandson of Jewish Art Collector Has Standing to Sue on Behalf of Foreign Estate for Nazi-Confiscated Art.

In Maestracci v. Helly Nahmad Gallery, 63 N.Y.S.3d 376 (N.Y. App. Div. 2017), the Appellate Division, First Department, found that the grandson of a Jewish French art collector whose Modigliani painting was allegedly confiscated by the Nazis has standing to sue for the painting in New York. Defendants argued that Maestracci had no standing to bring the action, because, under EPTL 13-3.5, he had not established, as a foreigner, that he was a duly appointed representative of the nondomiciliary estate. Although the court agreed that merely asserting that one is a beneficiary of a foreign decedent does not confer standing to bring suit on behalf of the estate, it noted that it has construed EPTL 13-3.5 to permit certain representatives of estates in foreign countries to bring suit in New York without first obtaining New York letters of administration. The court found that Maestracci had followed the alternative procedure of filing an affidavit and supporting documents establishing his right to pursue claims on behalf of the estate under foreign law.

6. Commissions on Adjusted Income After Using Power to Adjust Recharacterized.

Under New York's power to adjust regime in EPTL §11-2.3(b)(5), a trustee is permitted to make adjustments between income and principal to be fair and reasonable to all beneficiaries. In order to effect consistency in how adjusted amounts are treated for purposes of computing commissions, Gov. Andrew M. Cuomo signed a new law into effect on Sept. 12, 2017 (New York A.1482/S.2079 (2017) [Eff. Jan 1. 2018] Amends EPTL§11-2.3b(G)), which treats an adjustment as a recharacterization of the adjusted amount from income to principal or principal to income, as the case may be, in order to calculate commissions.

5. When Disputing New York Domicile for Income Tax Purposes, Perhaps Love Is All You Need.

New York generally taxes residents on their worldwide income. There are two separate and independent bases on which an individual can be taxed as a resident: (1) the individual is domiciled in New York or (2) the individual is a nondomiciliary who satisfies the statutory residency test.

Domicile is the place a taxpayer intends to have as his permanent home; the place to which he intends to return to after being away. A New York domicile does not change until a taxpayer can demonstrate by clear and convincing evidence that he has abandoned his New York domicile and established a new permanent domicile.

In Matter of Patrick, taxpayer met his current wife Clara in high school in New York in 1965. He gave her a heart-shaped necklace inscribed with their names as a token of his love. After high school, taxpayer joined the army and Clara was sent to boarding school in Italy. When she married another man, taxpayer was so upset he destroyed the mementos he had from her, except for one photo that he kept for 40 years.

Taxpayer married his first wife, lived in Connecticut and worked in New York City, where he had a very demanding job. After a near-deadly health scare, taxpayer reevaluated his life and his marriage, with which he had been unhappy for years. He separated from his first wife, renting an apartment in New York City to be close to his job. His thoughts turned to Clara and he searched for her, eventually tracking her down in Paris. They spoke on the phone for the first time in 40 years and reunited shortly thereafter in New York City, where Clara revealed the heart necklace she had cherished for all those years. Love between them was immediately rekindled and the taxpayer asked her to marry him that very night. They were secretly married in New York City the following year after their divorces from their first spouses were final. Taxpayer claimed he changed his domicile when he moved to Paris in 2011 to be with Clara.

The auditor initially determined that the five primary domicile factors set out in the Nonresident Audit Guidelines issued by the Department—Home, Active Business Involvement, Items of Sentimental Value ('Near and Dear”), Family Connections, and Time Spent—“all appear to be in our favor,” and issued taxpayer a notice of deficiency for over $2 million. Indeed, taxpayer kept the New York City apartment after the move to Paris, spent substantial time there, received phone bills, credit card statements, W-2s, and 1099s there and remained registered to vote in New York. Time spent in Paris was low in comparison.

Nonetheless, the Administrative Law Judge focused on taxpayer's intent and found credible the taxpayer's testimony that he never considered New York his true home, that it was simply a place to sleep near work especially during the divorce, and to receive medical treatment. Taxpayer timely paid and filed all taxes due in France in 2011 and 2012 and for all years since. He obtained a French driver's license, a lengthy and difficult process. He also purchased and made extensive renovations to a home in Paris, where he moved the day after retiring early to be with Clara, despite forfeiting substantial benefits from his company.

4. Proposal to Clarify Taxation as New York Statutory Resident—“Gaied Legislation.”

Under New York's statutory residency test, a nondomiciliary will be taxed as a New York resident on his worldwide income if he (a) maintains a permanent place of abode (PPOA) in New York and (b) spends over 183 days in the state during the taxable year. N.Y. Tax Law §605(b)(1). The statutory residence test was at issue in the landmark decision of Gaied v. Tax Appeals Tribunal, 22 N.Y.3d 592 (N.Y. Ct. App. Feb. 18, 2014).

Gaied, a New Jersey domiciliary who worked in New York, purchased a three-unit apartment building in New York where his parents occupied one apartment, and he rented out the other two. He kept no clothing or personal belongings in the apartment and had no bed there, sleeping on a couch when he occasionally spent the night. Since Gaied did spend over 183 days in New York for business, the matter turned on whether the apartment could be considered a PPOA. The Tax Appeals Tribunal determined that he did maintain a PPOA, finding it significant that he maintained and owned the property, and had unfettered access to it (despite his actual infrequent use). The Appellate Division affirmed. However, the Court of Appeals concluded that there was no rational basis for the Tribunal's interpretation. According to that court, a mere ownership interest is not sufficient; there must be some basis to conclude that the residence was utilized as the taxpayer's residence.

Unfortunately, despite the groundbreaking Gaied decision, practitioners reported that the Department construed the Gaied case in a way that still classifies many vacation homes as PPOA, subjecting their owners to New York income tax. A proposal introduced in both Houses (New York A. 8610/S.6860 (2017)) would enact the spirit of the Gaied holding by excluding a dwelling from the definition of PPOA if:

• The dwelling is not used as the taxpayer's principal residence,

• The dwelling is located more than 50 miles from the individual's place of employment in New York; and

• The taxpayer did not stay overnight at the dwelling more than 90 nights during the taxable year.

3. Including Decanting Provisions in Trust Instruments May Maximize Flexibility.

EPTL 10-6.6 permits “decanting,” which allows the trustee of an otherwise irrevocable trust to transfer trust assets into a new trust with different terms. The statute requires notice to interested parties and has restrictions on the power, including if a trustee has limited discretion to invade principal. Decanting can be a tremendous tool for dealing with changed circumstances, correcting mistakes, facilitating tax benefits or optimizing a trust's administration.

Including decanting provisions in trust instruments may maximize flexibility without resort to EPTL 10-6.6. In In re Hoppenstein, 2015-2918/ANYLJ 1202784244139 (Sur. Ct. N.Y. Co, March 31, 2017), 2017 NY Slip Op 30940(U), the trustees successfully relied on their powers under a trust document to distribute a life insurance policy on the settlor's life to a new trust that excluded an estranged daughter of the settlor and her issue. Dismissing an objection that the transfer did not satisfy the requirements of the decanting statute, court held that the New York decanting statute had no bearing on the case since the trustees relied on their powers under the document to effectuate the transfer.

2. Loss of SALT Deductions Heightens Importance of State Income Tax Planning.

On Dec. 22, 2017, President Trump signed into law new tax legislation (the Act). Beginning in 2018, the Act will repeal all deductions for state and local taxes (SALT deductions) in excess of $10,000. Additionally, the home mortgage interest deduction is limited to debt of $750,000, instead of the previous $1 million. These changes may detrimentally affect home values in New York.

The loss of the SALT deductions heightens the importance of state income tax planning. Against the backdrop of the tremendous planning opportunities presented with the Act's doubled gift tax exemptions, setting up trusts in jurisdictions like Delaware becomes particularly attractive since those trusts may not pay state income taxes on accumulated income and capital gains. With the other advantages of Delaware law, including the ability to create a directed trust and control the trust's investments, the ability to create a self-settled trust that is protected from creditors, and the ability to create perpetual trusts, creating Delaware trusts can serve multiple goals.

If some seek to change their residence to a state that does not impose an income tax, it will be important to carefully demonstrate a change in domicile, and ensure they are not taxable as statutory residents.

1. All Estate Planning Documents Need to Be Reviewed in Light of New Tax Laws.

The Act doubles the federal estate and gift exemption to $11.2 million per person ($22.4 million per married couple), beginning on Jan. 1, 2018, and sunsetting after 2025 to $5.6 million (plus inflation adjustments).

The New York estate tax exemption amount is $5.25 million for those dying on or after April 1, 2017 and on or before Dec. 31, 2018. For those dying on or after Jan. 1, 2019, state and federal exemption amounts will be linked to the 2010 federal exemption amount of $5 million, as indexed for inflation, so the doubling of the federal amount will not apply to the New York exemption amount. N.Y. Tax Law §952(c)(2)(A).

The gap between state and federal exemption amounts could have potentially significant consequences from both tax and dispositive standpoints. In terms of tax impact, care must be taken with formula bequests linked to the full federal exemption amount, particularly because an estate that exceeds 5 percent of the New York exemption faces a cliff, causing the estate to be taxable from dollar one. In 2018, if a credit shelter disposition was tied to a federal exemption amount of $11.2 million, that would generate a state estate tax of over $1.25 million. This tax bite might be further compounded with an interrelated tax computation if the tax is payable from a marital or charitable residuary.

To avoid this result, wills can define a formula credit shelter bequest to mean the maximum amount that can pass free of both federal and state taxes, or avoid formulaic dispositions and rely instead on techniques that maximize flexibility after death, including partial qualified terminable interest property (QTIP) elections, Clayton trusts (property passes into a QTIP marital trust, only if the executor makes a QTIP election, and the balance typically passes into a credit shelter trust) and disclaimer trusts (one spouse leaves everything outright to the other, who can disclaim an appropriate amount into a disclaimer marital and/or credit shelter trust, considering the tax laws and specific needs), potentially preserving some unused federal exemption for the surviving spouse through federal portability. Since New York does not impose a current gift tax, utilizing the increased federal exemption through lifetime gifting might be very attractive: Individuals could leverage the full federal exemption while reducing their New York estate tax since the gifted assets will be excluded from the New York estate. (New York has an add back for gifts made within three years of death for individuals who die prior to Jan. 1, 2019—N.Y. Tax Law §954(a)(3).) Given that the doubled gift tax exemption is slated to disappear after 2025, this also presents a limited window of opportunity.

A bequest pegged to the federal exemption amount may also produce dispositive distortions. An estate plan designed to leave an amount equal to federal exemption to children, for example, with the balance of the estate passing to a spouse would have resulted in a bequest to children in 2017 of $5.49 million and a bequest of $11.2 million in 2018, possibly leaving much less to the surviving spouse and much more to the children than was intended.

The bottom line is that practitioners should consider reaching out to their clients to discuss whether they should sign new wills and revocable trusts or make changes to otherwise irrevocable documents through a decanting or other revision process to take advantage of new planning opportunities and ensure their existing plans still accord with their intent.

Sharon L. Klein is the Tri State Region President at Wilmington Trust, N.A. Colleague Alex Waxenberg, Private Client Advisor, provided valuable assistance in the preparation of this article. This article includes developments through Jan. 1, 2018.