Income, Estate & Gift Tax Analysis
An effective estate plan seeks to minimize estate, gift and income taxes in the context of your overall planning objectives. Complicating your ability to minimize tax exposure are constant revisions to tax laws and uncertainty about changes in tax rates, exemption amounts and whether planning opportunities we currently use will continue to be available.
The estate, gift and income tax rules are complex, and estate planning can be challenging under any circumstances given the multitude of factors to be considered. Our attorneys can assist you with understanding the complexities of the federal and state estate, gift and generation-skipping transfer (“GST”) taxes and help you create an estate plan that is right for you.
Federal Estate Tax
The federal estate tax regime underwent dramatic change in 2010, with an increase in the estate tax exemption, a decrease in the estate tax rate, and the introduction of a “portability” concept for spouses. With a few exceptions, the 2010 tax bill changes were made permanent by the tax legislation signed by the President on January 2, 2013. The federal estate tax exemption is $5,000,000, indexed for inflation since 2010. The exemption for 2015 as increased for inflation, is $5,430,000 ($10,860,000 for spouses). The tax rate is 40%, which higher than the 35% rate of recent years, but lower than the scheduled 55% rate that would have applied. A welcome new concept in the estate tax rules is “portability”, which provides the surviving spouse with the ability to use any unused exemption of his or her spouse. Consider the following:
- Estate planning has been challenging in the recent uncertain tax environment. Even though it appears we now will have greater certainty of the tax laws, a good estate plan should continue to provide flexibility for future potential changes in the tax laws. As we have experienced, if anything is constant, it is change, particularly given the open issues Congress has yet to address.
- The key to effective estate planning is to organize an estate plan that considers all the potential scenarios and provides the executor, trustee and beneficiaries with the authority and ability to make various elections and choices at the time of death, when we have better knowledge of the values and tax basis of the assets, the family and business circumstances and the tax rules that apply.
- A careful review of your current estate plan is important to make sure the plan addresses all the different scenarios that could be applicable, and provides your executor or other fiduciary with all the available options and opportunities for saving estate and income taxes.
New York Estate Tax
New York also imposes its own estate tax, using the federal gross estate as its starting point. An important distinction between the federal and New York estate tax is that New York does not conform to any post-2001 federal estate tax law changes. Consider the following:
- The New York exemption from estate tax is presently $3,125,500, and is scheduled to increase by slightly more than $1 million annually on April 1st of each year through 2017. Starting in 2019, the New York exemption is scheduled to match the federal estate tax exemption then in effect and increase annually based on inflation, so that the federal and New York exemption remain the same. As a result, prior to 2019, an estate with no federal estate tax liability may owe New York estate tax if it exceeds the New York exemption but is less than the federal exemption.
- The New York estate tax rate increases as the size of the estate increases, from a rate of 9.6% for estates over $3,125,500 up to a maximum rate of 16%.
- Unlike the federal tax system, New York does not impose a gift tax. This provides individuals willing to make significant lifetime gifts with the opportunity to reduce New York estate tax paid by their estates by giving away assets prior to death (however, prior to 2019, certain taxable gifts made by individuals within three years of death may be added back into New York taxable estate).
- Care must be taken in the selection and distribution of assets to be gifted, so consulting with an estate planning attorney is crucial.
Gifting assets to children, grandchildren or others reduces an individual’s gross estate, thereby saving estate taxes. To prevent someone from avoiding estate taxes completely by giving away all of his or her assets during his or her lifetime, the federal government imposes a gift tax at a current rate of 40% on any gifts not qualifying for the annual, lifetime, charitable or marital gifting exclusions. Consider the following:
- Spouses may make unlimited gifts to one another without incurring gift taxes. This gifting between spouses may be important to equalize assets owned by each spouse in planning for estate taxes. Even with portability of the federal estate tax exemption, in many situations, equalizing assets can achieve significant tax savings.
- Gifts to qualifying charities are exempt from gift taxes.
- Beyond gifts to spouses and charities, individuals may gift up to $14,000 per year per person in 2015 without incurring gift tax. The exclusion increases to $28,000 per year per person if a spouse joins in the gift.
- The annual exclusion is indexed for inflation, but only in increments of $1,000. Where an individual makes gifts exceeding the annual exclusion, the excess is known as a taxable gift and will reduce the lifetime exemption from gift taxes available to every individual to offset estate tax.
Generation-Skipping Transfer (GST) Tax
In addition to estate and gift taxes, there is a GST tax on certain transfers that skip a generation, either by outright transfer or through a trust. Consider the following:
- The GST tax exemption is the same amount as the federal estate tax exemption, as indexed for inflation. For 2015, the GST tax exemption is $5,430,000 and the GST tax rate is 40%.
- The ability of the surviving spouse to use any unused exemption of his or her predeceased spouse, known as portability, is available for estate and gift tax purposes, but not for GST tax purposes.