As you may or not be aware , as of April 1st 2014, New York State more than doubled its estate tax exemption, and it’s set to rise gradually through 2019 to eventually match the generous federal exemption, projected to be $5.9 million by 2019. In plain English, this means that the estates of New York residents who die between April 1, 2014 and March 31, 2015 may only have to pay a NY estate tax if the total assets exceed $2,062,500. (Keep in mind that outright transfers to a surviving spouse are not taxable).
Although the increased state exemption amounts (beginning at $2,062,500) seem to make estate planning much easier for a lot of people, there are still big traps in the new law to watch out for.
For people whose estates will be taxable at the state and/or federal level, there are several options/techniques that can be used to reduce their estate tax bill. The options include spending their assets, directly gifting assets to family members or not-for-profit organizations, creating a foundational estate plan, getting married, using advanced estate planning techniques, or move to another state that does not have a state estate tax.
Spending Your Assets
This is the quickest and easiest way to reduce the value of an estate. The obvious problem with this approach is that no one knows how long they will live and how much money they will need. Thus, drastic spending is only an option for people who have accumulated a significant amount of wealth and aren’t afraid of running out of money before they die.
Gifting Your Assets Directly to Family Members or Not-For-Profit Organizations
This option will only work well for those who feel comfortable giving away part of their estate while they’re still alive. As mentioned above, often times people are resistant to give anything away because they’re afraid they’ll run out of money before they die and once they decide to give it away, they can’t easily get it back. As with spending it, gifting directly to family members or charitable or other not-for-profit organizations will only work well for those who aren’t afraid of running out of money.
Creating a Foundational Estate Plan
For married couples, including same sex married couples, the use of basic AB Trusts or ABC Trusts in their estate plan (also known as credit shelter bypass trusts or the use of a disclaimer) can significantly reduce or even eliminate both federal and state estate taxes assessed against their estates. (Note: Beginning in 2011, the federal estate tax exemption has been made “portable” between married couples, which has eliminated the need for AB Trust or ABC Trust planning for many couples. See more on this below in #4 below.) For both married couples and individuals, the use of an Irrevocable Life Insurance Trust (“ILIT” for short) to hold and own life insurance offers two benefits: (1) life insurance owned by an ILIT will remove the value of the insurance proceeds from the insured’s taxable estate; and (2) the insurance proceeds can provide immediate cash to pay bills, expenses and taxes.
Getting Married
As mentioned above, beginning in 2011 the federal estate tax exemption has been made “portable” between married couples, which now includes same sex married couples. This means that if one spouse dies in 2011 or a later year and his or her federal estate tax exemption isn’t entirely needed to avoid estate taxes, then the unused portion can be added to the surviving spouse’s exemption. This, in essence, will allow married couples to pass on up to $10,000,000+ free from federal estate taxes. So, if you’re in a committed relationship but not legally married, then consider marriage as a way to minimize estate taxes. But some couples need to be cautious about eliminating AB Trust or ABC Trust planning from their estate plans. For example, if you and your spouse have different final beneficiaries (in other words, you each have your own children or other beneficiaries who you want to inherit your separate estates), then you and your spouse cannot rely on portability to minimize federal estate taxes in both estates. In addition, to date Hawaii is the only state that collects a state estate tax that has adopted portability, so AB Trust or ABC Trust planning may still be required to plan for state estate taxes in some states.
Using Advanced Estate Planning Techniques
There are a variety of advanced planning options that are designed to reduce estate taxes and yet allow you to maintain an income stream for life, which should alleviate the fear of running out of money before you die. Gifting through a Family Limited Liability Company offers both estate tax reduction and asset protection. Married couples can take advantage of annual exclusion gifts and their lifetime gift tax exemptions by creating Spousal Lifetime Access Trusts, or “SLATs,” for the benefit of each other. Creating a charitable trust, such as a Charitable Remainder Trust, gives you a charitable income tax deduction when the trust is funded and gives your estate a charitable estate tax deduction after you die. A Qualified Personal Residence Trust allows you to live in your home for a period of years and then the home will pass to your heirs at a reduced value for estate and gift tax purposes after the period ends.
Move to a New State
If you currently live in one of the following states that collects a state estate tax and/or an inheritance tax – Connecticut, Delaware, District of Columbia, Hawaii, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Nebraska, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, Tennessee, Vermont or Washington – then consider moving to a state that doesn’t collect an estate and/or inheritance tax. While this may seem to be an extreme option, the bottom line is that even for a modest estate it can mean saving thousands of dollars in death taxes that will stay in the family instead of going to the government.
Conclusion
Many people spend more time planning for their vacations than planning for their estates. This is probably because the vacation will happen sooner and because it’s much more fun to plan. However, estate planning is much more important, but requires more time and effort. Without a comprehensive estate plan, a significant part of the work you’ve done throughout your life, both at your job and with your investments, can be lost or given to unintended beneficiaries.
Don’t let the legal terminology fool you. Estate planning is simply the process of getting your affairs in order so that you make things easier for your surviving family members when the time comes. It doesn’t have to be difficult, expensive, or depressing. All you need to do is take a few simple steps: take a look at what you own, make a will and a few other documents, and review the beneficiary designations on your retirement accounts. Estate planning is something you do for your family. Get it done, and you’ll feel better knowing that you’ve taken care of them. May we all merit living long, healthy and happy lives – amen!
The attorneys in the Trust & Estates Practice Group at Yedid & Zeitoune have a combined 16 years of legal experience and are ready to assist you with all your estate planning needs.
Isaac Yedid, Esq. and Raymond Zeitoune, Esq.
Yedid & Zeitoune, PLLC
1172 Coney Island Avenue Brooklyn, New York 11230
Phone: (347) 461-9800 Fax: (718) 421-1695 Email: [email protected]
NYC Office – By Appointment Only:
152 Madison Avenue, Suite 1105 New York, New York 10016
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One Response
The amount at which you pay estate tax is quite high. If you have enough money to worry about estate taxes, you probably should be giving more tsadakah (better to tsadakah than to Andy and Barack).