ESTATE TAX OVERVIEW                   STEPPED UP BASIS                    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.

.For example, let's say a couple has two million in assets. Each spouse sets up a trust and we put one-half of the house and other assets into each trust. Both spouses are trustees of both trusts. Now, say the husband dies. Before, everything went to wife and while there is no tax on what you leave to your spouse, when she dies her estate has the whole two million and generates a $99,600.00 tax bill. Instead, with the two trusts, husband's assets stay in his trust, wife is in charge and can buy, sell, trade and spend. But when wife dies, husband's trust goes to the children and "bypasses" her estate. He passes one million tax-free. Her estate is also only one million and also passes tax-free. Savings = $99,600.00.

Remember, you don't get the two exemptions just because you have a spouse. You only get the two exemptions if you set up the two trusts before the first spouse other words, if your estate is over one million dollars and you have a spouse, it should be done now.



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