Bypass Trusts

FEDERAL ESTATE TAXES

The Estate and Gift Tax Laws have recently changed . This is a summary of the provisions of the new rules covering estate, gift and generation-skipping transfer taxes:

 ·         Estate, gift and generation-skipping transfer tax exemptions and rates set for two years. The bill sets the amount exempt from taxation at $5 million per person and $10 million per couple. In addition, a top tax rate of 35% is established for estate, gift, and generation skipping transfer taxes for 2011 and 2012, and a 0% generation-skipping transfer tax rate is established for 2010.The exempt amount is indexed for inflation beginning in 2012.

 ·         Portability of unused estate tax exemption. Under current law, couples must have complicated estate plans including trusts and other planning devices to utilize their entire tax exemption. The proposed new law allows the executor of a deceased spouse’s estate to transfer any of the $5 million tax exemption that was not used after the death of the first spouse to the surviving spouse without such planning. The proposal is effective for estates of decedents dying after December 31, 2010.

 ·         Estate and gift tax systems unified. The estate and gift tax systems would be unified under the proposed law, creating a single graduated rate schedule. As a result, the $5 million estate tax exemption could be used to offset taxes due on lifetime gifts and/or bequests. For example, if a “taxable” gift of $4 million dollars was made during a taxpayer’s lifetime, no taxes would be paid. Instead, the taxpayer would use the $5 million estate tax exemption to offset any gift taxes due, and the taxpayer would have $1 million remaining to offset estate taxes at death. There is no change in the annual exclusion amount for gifts, which is currently $13,000 a year per donee.

 ·         Retroactive application of the estate tax. Under present law, there is no estate tax in 2010, and “modified carry-over basis” rules replace the estate tax. (Under the “modified carry-over basis”rules, the value of property inherited by the heirs of decedents who die on or after January 1, 2010 is the lesser of the fair market value of the property on the date of death or the decedent’s original income tax basis in the property plus the value of certain improvements, subject to limitations.) The new bill reinstates the estate tax back to January 1, 2010,  with a $5 million exemption and 35% estate tax rate, but gives the heirs of decedents who die in 2010 the option to elect either the $5 million exemption and 35% rate or instead the modified carry-over basis rules.

For New York residents, an estate may be subject to the New York estate tax if the total of the federal gross estate, plus the federal adjusted taxable gifts and specific exemption, exceeds $1,000,000 so if all of your assets are under a million dollars there is no problem

If your total estate exceeds $1,000,000 then there is a New York estate tax that is imposed which starts at 41% of the amount over $1,000,000 and gradually goes down to approximately 19%.

For nonresident U.S. citizens, an estate may be subject to the New York estate tax if it includes real estate or tangible personal property having a situs within the state of New York and the gross estate, plus federal adjusted taxable gifts and specific exemption, exceeds $1,000,000.00. Below is a chart which enables you to see what the New York estate tax will be for you if your estate exceeds $1,000,000.

Fortunately if your entire estate passes to your surviving spouse then there is no estate tax since New York has an unlimited marital deduction, However, upon the death of the second spouse there could be a estate tax if the surviving spouses estate exceeds $1,000,000.

However with proper estate planning it is possible to avoid paying up to approximately $100,000 in New York estate taxes by creating two estates one for the husband and one for the wife and thereby getting two $1,000,000 exemptions.

There have been changes to the New York estate and gift tax law effective April 1, 2014.

 The estate tax exemption amount has been increased from $1,000,000 to $2,062,500 for persons dying on or after April 1, 2014.

The new New York estate tax exemption schedule (i.e. the basic exclusion amount) is as follows:

·     For deaths on or after April 1, 2014 and before April 1, 2015, the exemption is $2,062,500.

·     For deaths on or after April 1, 2015 and before April 1, 2016, the exemption is $3,125,000.

·     For deaths on or after April 1, 2016 and before April 1, 2017, the exemption is $4,187,500.

·     For deaths on or after April 1, 2017 and before January 1, 2019, the exemption is $5,250,000.

·     For decedents who die on or after January 1, 2019, the exemption amount shall be $5,000,000 dollars multiplied by one plus the cost of living adjustment.

The tax imposed under this new law is computed by first determining one's New York taxable estate which is the federal gross estate reduced by the value of real or tangible personal property located outside of New York and increased by any taxable gifts of real or tangible personal property having an actual situs in New York or gifts of intangible personal property employed in a business, trade or profession carried on in New York which were made: (i) within three (3) years of the decedent's death; (ii) on or after April 1, 2014 and before Jan. 1, 2019; and (iii) only if the decedent was a resident of New York when the gift was made.

After the decedent's New York taxable estate is determined, the tax is calculated based upon reference to the tax rate schedule (tax rates range from 3.06% for estates that are not over $500,000 to $1,082,800 plus 16% for estates over $10,000,000) and reduced by the applicable credit allowed. The calculation will vary year to year based on the basic exclusion amount but operates as follows:

1.   If a decedent's New York taxable estate (as defined above) is less than or equal to the basic exclusion amount, no tax is due.

2.   If a decedent's New York taxable estate is greater than the basic exclusion amount by an amount less than or equal to five (5%) percent of the basic exclusion amount then one determines the tax due on the New York taxable estate based on the tax rate schedule. The tax is then reduced by the applicable credit allowed. The applicable credit is that amount of tax that would be due if the amount on which the tax is to be computed were equal to one minus a fraction, the numerator of which is the decedent's New York taxable estate minus the basic exclusion amount and the denominator of which is five percent of the basic exclusion amount. In other words, if a decedent's taxable estate, for a death on or after April 1, 2014 and before April 1, 2015, is $2,083,125 (i.e. 1% greater than the basic exclusion amount), the tax computed is $105,703.13 and the applicable credit is $78,622.50. The formula provides that the applicable credit is determined by the tax due if the total New York taxable estate is, based on this example, 80% of the actual New York taxable estate or $1,666,500. Therefore, if the amount on which the tax is to be computed were $1,666,500, then the applicable credit would be $78,622.50 and the net tax is $27,080.62 or $105,703.13 reduced by $78,622.50.

3.   If a decedent's New York taxable estate exceeds five (5%) percent of the basic exclusion amount then no applicable credit shall be allowed. For example if the taxable estate of a decedent, for a death on or after April 1, 2014 and before April 1, 2015, is $2,167,687.50 (i.e. 105.1% greater than the basic exclusion amount) then there is no applicable credit available to the decedent's estate and the tax is $112,215.00 (as determined by reference to the tax rate schedule).

This alert sets forth the basic changes to the New York estate and gift tax law but it is important to note that it is not all inclusive. The new tax law also impacts many other areas, such as tax elections made by Executors and Trustees, income taxes payable by beneficiaries and grantors of trusts, business interests and estate planning options. The impact of this new law, regardless of one's residency, is widespread and it is recommended that one work with their tax and estate planning advisors to determine how the new New York estate and gift tax law impacts their estate plans, estate, gift and income tax strategies and New York business interests.