Articles Posted in Estate Taxes

The State of New York’s estate tax does not mirror the federal estate tax regime in many ways. A lack of careful planning may result in a New York estate tax liability even where the estate is not taxed at the federal level.

New York’s Estate Tax

New York’s estate tax, like its federal counterpart, is a tax levied on the value of the decedent’s estate upon death, and before distribution. New York’s estate tax parallels the federal estate tax with some exceptions.

What is Taxable?

Persons owning real and tangible personal property located in New York are subject to New York’s estate tax. At a high level, the equation is straightforward, taking the gross estate, less deductions, then applicable credits and exemptions.

Your Gross Estate

Generally, your gross estate under New York law will mirror that under federal law, which includes all property, probate and nonprobate, owned at the time of death. If you are a resident of New York, your gross estate does not include real and tangible property outside the State of New York. If you are not a resident of New York, your gross estate includes real and tangible property located in New York. For nonresidents of New York, intangible property is only included in the gross estate if it is used in connection with a business in the state. Your gross estate is valued at the time of death, unless your personal representative elects the alternate valuation date, which is six months later.


Your taxable estate is determined by reducing the gross estate by allowable deductions. Common deductions include funeral and estate expenses, charitable donations, the marital deduction, Q-Tip trusts, and certain family-owned business interests. The estate tax is calculated based on the taxable estate. New York estate tax rates range from 3% to 16% based on the value of the estate.


At the federal level, no estate tax is due for estates below the exclusion amount, $5,430,000 in 2015. New York’s exclusions do not currently parallel the federal estate tax exclusion amounts. For 2015, the basic exclusion amount in New York is $3,125,000. If the taxable estate is less than the exclusion amount, no estate tax is due. It is important to note that unlike the federal estate tax, there is no portability of unused exclusion amounts. Generally, if your estate is valued at more than 105% of the basic exclusion amount, no exclusion applies.

Estate Tax Planning
With the help of a New York estate and trust attorney, you can effectively plan for the impact of New York’s estate tax. Common techniques aimed at reducing or eliminating an estate tax burden include a gifting strategy to reduce the taxable estate, implementing life insurance trusts, utilizing charitable deductions, and structuring trusts to capture the allowable exclusions.

Julius Schaller was a Hungarian-American immigrant was a wealthy grocery store owner who had acquired substantial assets that exceeded the threshold for paying estate taxes. In order to avoid the tax burden, he established a special scholarship foundation for Hungarian immigrants who pursue performing arts. He named it the Educational Assistance Foundation for Descendants of Hungarian Immigrants in the Performing Arts. Estate planning attorneys often create such organizations for wealthy individuals. However, it must be a legitimate nonprofit organization.

The foundation was established as a nonprofit organization and granted tax-exempt status under Section 501(c)(3) of the Internal Revenue Code. But there was a catch. The foundation was a rouse. It hardly advertised the scholarship, and during the first two years of operation, the scholarships were only awarded to his heirs – specifically a nephew, niece, and another member of the family. This is a problem.

The IRS does not take kindly to those who set up fake organizations under the guise of providing a legitimate scholarship or philanthropic service to the public. As such, the IRS revoked the foundation’s nonprofit status, and litigation ensued.

Why did Schaller set up the Foundation?

Back when Schaller set up the foundation, an estate could only have up to $1 million before the estate tax kicked in. In his case, he had about $2.5 million in excess of the $1 million limit. So, he placed $2,595,847 in his foundation, thereby entirely avoiding a single dollar in estate taxes. Today, a person may exempt up to $5.4 million from estate taxes. This makes it far less appealing for many Americans to try schemes this today.

What made the scholarship illegitimate?

There were two basic reasons why a federal court held that the foundation was not eligible for tax exemption. First, it was “organized and operated exclusively for the benefit of Julius Schaller’s will.” See the full-text of the decision here. Second, the organization misstated key facts in its application for tax-exempt status.

The law is clear that to qualify for tax-exempt status, it must be organized for the exclusive purpose of benefiting a “public interest” rather than a “private interest.” This means you cannot establish a tax-exempt organization that benefits only your own family members. In fact, the federal court went a step further and said that none of the nonprofit organization’s funds could be paid to family and heirs of the person who created the nonprofit organization.

Additionally, Schaller’s application for 501(c)(3) status included a statement that there would be a 3-person committee made up of education professionals who would decide who received scholarships. In truth, during the first two years of operation, no such committee was formed, and only two people were involved in the decisions. Thus, the IRS viewed this as a “material misrepresentation” of the operation of the foundation. The federal court agreed, thereby retroactively revoking Schaller’s foundation and assessing hefty taxes on his estate.

This should serve as an enduring lesson that including philanthropic bequests in an estate plan can be an excellent way to reduce tax consequences; however, it must be legitimate and solely for the benefit of the public, not family and heirs.

The House of Representatives recently passed a bill that would eliminate the federal estate tax. The bill is expected to pass in the Senate but be vetoed by the President, thus most likely preventing it from becoming law. However, the bill does bring up an interesting aspect of the federal estate tax, namely, how small businesses and family farms need to estate plan in order to protect their assets.

Federal and State Estate Taxes

Currently, the federal estate tax applies to any estate that is over $5.43 million, and any assets over that amount in the estate can be taxed up to forty percent. State estate and inheritance taxes vary and must be checked on a state by state basis; however, some states can take a significant portion of the estate’s worth if the assets are not properly shielded by an estate plan. For example, Ohio repealed its estate tax in 2013, but Maryland has both estate and inheritance taxes up to sixteen percent on estates worth more than $1 million.

Effects of Federal Estate Taxes

While most people are not affected by the federal estate tax, people with small businesses or family farms can be hurt by the final tax bill from the Internal Revenue Service (IRS). This is because the majority of the estate’s assets are usually tied up in illiquid things. For example, a small business usually has most of its assets in the building and equipment and a farm has most of its money tied up in farmland, farming equipment, seed, livestock, and other things that cannot be quickly and easily converted into cash.

As a result, small businesses and farming operations can be stuck in a bind if they are hit with serious estate tax bills by the federal government. Oftentimes the heirs are forced to sell the business or farm simply to cover the federal estate taxes because they cannot convert the assets into cash and have enough left to properly run the operation. This is why it is important that the owners of small businesses and farms have the right estate plans in place to shield their assets from the federal estate taxes.

How to Protect Assets

One popular option for small businesses and farms is to purchase life insurance. The life insurance proceedings can be used to cover the federal estate tax without harming the operation. Another option is to transfer the ownership of the business or farm into a business entity. Partnership, corporation, or limited liability corporations are all possibilities for transferring ownership in order to minimize or avoid federal estate taxes on that aspect of the estate. The business or farm would be taxed separately as its own entity, and it would no longer be considered part of an individual person’s estate.

It’s not uncommon to turn on the television and see an advertisement for a state that is enticing visitors to vacation or move there permanently. However, more and more states across the nation are also trying to advertise that they are a great place to die. In 2015, four states are increasing their state-level estate tax exemption, reducing or eliminating altogether the amount of state estate tax that heirs will have to pay.

States Lowering Estate Taxes

As of January 1 next year, Tennessee’s estate tax exemption will jump to $5 million from $2 million this year. In addition, Maryland’s raised its estate tax exemption level from $1 million this year to $1.5 million next year. Minnesota is increasing to $1.5 million from $1.2 million, and in April 2015, New York’s exemption level will rise from $2.062 million to $3.125 million.

And that is not all – in 2016, Tennessee is eliminating its state-level estate taxes. Maryland and New York plan on continuing to increase their exemption levels through 2019, when they will match the federal estate tax exemption level. Minnesota plans on increasing its exemption for state estate taxes by $200,000 every year until it reaches $2 million in 2018.

Reasons Behind the Shift

Legislators in states that have enacted a state-level estate tax are concerned that wealthy retirees will simply move to another state to avoid the taxes, depriving the state of income taxes now. Taxes are the most common reason why retirees move from one state to another, and it is not hard to understand why that is the case.

Hawaii and Delaware have state-level estate tax exemptions that match the federal level. However, fourteen states and Washington, D.C. have lower exemption levels than the federal limit, and their tax rates range from twelve to nineteen percent. New Jersey’s estate tax exemption level is only $675,000, which affects heirs that inherit even relatively modest estates.

In addition, seven states have an inheritance tax, which differs from an estate tax. Unlike an estate tax, which is made against an estate before the assets have been distributed, an inheritance tax is paid by the beneficiaries. Maryland and New Jersey have both estate and inheritance taxes with maximum rates ranging from 9.5% to 18%.

What You Should Do

If you live in a state that has an estate or inheritance tax, you can consider moving to a state that does not or that has a high exemption level. If you live in a state that has an estate or inheritance tax and you do not want to move, you should speak with an experienced estate planning attorney about other tax saving strategies for your estate plan. For example, you can take advantage of making gifts during your lifetime to reduce the size of your estate.

In addition, if you already have an estate plan in order, make sure that it is regularly updated to reflect any changes in your state’s estate or inheritance tax laws. As more states try to keep or lure more retirees, more changes to the state-level estate tax should be expected.

We often discuss the importance for local families to account for the New York estate tax. Far more media coverage is given to the federal tax, and some local residents are under the mistaken assumption that the state law mirrors the federal. It currently does not. Even families who do not have asset to trigger the federal tax may still need to plan appropriately for the New York tax on estates.

However, if current plans are carried out, in a few years .there may be much more congruence between the state and federal rules. That is because earlier this month New York changed exemption levels for the estate tax. Previously, assets over $1 million were exposed to the tax at a 16% top rate. Now, however, the exemption level is raised to slightly more than $2 million ($2,062,500). Not only that, but that level is set to steadily increase or five years until, in 2019, the exemption level matches the federal exemption amount at that time (projected to be $5.9 million).

Important Provisions in the Estate Tax Law
There are other aspects to the new state rules that must be understood by local residents seeking to minimize their obligations and legally save on taxes. Some items to keep in mind:

***There is no “portability” as there is with the federal tax. This means that surviving spouses cannot use unused portions of their partner’s exemption amount to lower their burden.

***Under the law, all gifts made within a three year window will likely be included in the estate to calculate the tax burden (at least for gifts made starting this April and extending to 2019). Naturally, this means that one must act early to move assets in ways that take them out of the estate and lower its value.

***There is a risk of falling of the estate tax “cliff” during the phase-in which could mean those with assets just slightly over the exemption amount may face a tax on the full value of their estate. This issue is complex, but in a helpful comment letter the New York State Society of CPAs provides a more detailed analysis of how this may come about.

***The new law repeals the state’s generation-skipping transfer tax while also providing more relief for some surviving non-citizen spouses.

Contact our NY estate planning lawyers today for tailored guidance on how these rule changes affect your financial future.

The idea of “portability” is an important part of many estate plans. Portability is technically an informal word referring to a federal tax-saving option using the deceased spouse’s unused exemption (DSUE). Essentially, portability is a tool for married couples that, when used prudently, can shave millions of dollars off an estate tax bill.

Under the current law, assets under $5.34 million are exempt from the federal estate tax (though the New York tax kicks in far lower at $1 million). Importantly, there are unlimited tax-free transfers allowed between spouses. That means that if one spouse dies and leaves everything to the other, then there will not be a federal estate tax burden, regardless of how many assets are passed on.

However, when the surviving spouse passes away and transfers those assets to others–perhaps adult children–then the tax would apply to assets over the individual exemption level of $5.34 million. But portability changes that. Instead of using only an individual exemption, a surviving couple may be able to use any unused exemption from their former spouse in addition to their own. This means that up to $10.68 million may be exempt from the tax. In short, portability can save an estate millions of dollars in taxes.

Importantly, portability must be “elected,” meaning that failing to file the appropriate paperwork upon the first spouse’s death may result in the extra exemption being lost.

Should You Always Take Advantage of Portability?
Considering the benefit of portability, it is critical to determine how it may fit into your plan. One potential downside, as discussed in a recent Wealth Strategies Journal article, is that there may be a mistaken reliance on portability. Because of the advantages couples may believe that it always makes sense to simply leave everything to a spouse and then taking more sophisticated planning steps for the second spouse.

Also, the majority of families will not have estate nearing the level where the tax may come into play, and so serious thought needs to be given regarding whether the election is even worth it in their case. In addition, there is a New York estate tax which may require use of other shelter trusts, even when portability would solve the problem at the federal level. Re-marriage may also add complexity, as the rules regarding portability with multiple spouses can be confusing, depending on how much of an exemption was used by a former spouse.

For help on these very complex legal issues, seek out an experienced estate planning attorney as soon as feasible.

Politicians are engaged in a seemingly endless debate about tax rates, “loopholes,” spending cuts and similar issues. That is because a new budget must be passed every year, and each proposal undoubtedly comes with suggested changes to various tax and spend rules and regulations. For example, President Obama recently released his proposed 2015 budget. Even a cursory glance at the document reveals that, if passed, it would have clear implications on wealth transfers and estate planning for New York residents.

Estate Tax Proposal
Most notably, the proposed budget calls for the estate tax provisions to revert back to where they were in 2009–an exemption level of only $3.5 million and a top tax rate of 45%. This is in contrast to the current $5.34 million exemption level and 40% top rate. The current tax is pegged to inflation, and so the exemption level will rise slightly each year. Per the terms of the proposed budget, this new tax level and rate would not go into effect until 2018.

Even with this presidential proposal, many do not expect federal officials to actually change the estate tax details, especially considering a high profile compromise was just reach a year and a half ago. The current estate tax rules were only codified at the beginning of 2013 as part of the compromise plan known as the American Taxpayer Relief Act.

Many Other Possibilities
As a helpful Forbes article discusses, beyond the estate tax issue, the President’s budget also suggests changes to various estate planning tools. These include limits on annual tax-free gifts to trusts, changes to the use of grantor retained annuity trusts (GRATs), and eliminating “dynasty trusts.”

As always, it is critical to re-iterate that these are mere proposals. With a divided Congress, it is likely that any final budget would look far different than the one proposed by the President. In most cases, the executive’s first proposal is strategically written in order to position it for debate and negotiation. That said, however, the fact that some of these options were specifically included in the proposal means that they are on the radar screens of officials seeking to limit resident rights to transfer assets freely.

It is impossible to predict what policymakers in the future might do. However, an experienced estate planning attorney can ensure that you are best positioned to take advantage of all legal options to lower tax burdens when passing on assets. An attorney can also update and review your plan on a regular basis to determine if changes in the law necessitate altering any provisions of the plan.

A somewhat “high brow” economic working paper has been making the rounds among estate planning attorneys, economists, financial planners, and policymakers in recent weeks. The article, viewable online in full, is entitled “Taxing More (Large) Family Bequests: Why, When, Where?”

While the paper is quite dense, the central themes are those often faced by current policymakers and affecting families as they plan their estate.

Essentially, the paper discusses a well-known taxation “puzzle.” Over the past few decades tax revenues from wealth transfers (i.e. estate taxes) have decreased. This is true both in the United States and elsewhere. At the same time, tax revenues based on lifetime gains have grown in recent years with no sign of stopping.

What is bringing about this change?

The article authors first discount some common arguments regarding a general “anti-tax” movements, the lobbying efforts of the wealthy, and similar claims. These arguments fail, they suggest, because they do not explain why tax revenues from lifetime wealth did not similarly decrease with wealth transfers. Put another way, those arguments may explain why global tax levels would have fallen but not necessarily why the one tax dropped and not the other.

Instead, the authors suggest that taxes on estates being passed from one generation to the next have decreased, in part, because of the unique role of the family in these issues. They argue that other scholars are have overlooked the fact that “the distinct character of inheritance taxation where family values, intergenerational links, and relationships to (one’s own) death play a crucial role” in policy determinations.

Pushing the idea further, the authors suggest that there is growing conflict between family values and social justice. Lifetime taxes speak to the idea of “social justice” with the wealthy asked to provide for the well-being of those with less means. Alternatively, inheritance taxes seem to impinge upon families and their ability to transfer property internally. In this conflict policymakers in recent years have protected the family and placed less emphasis on so-called “social justice.”

In the end, the authors suggest that the best solution is to actually increase the tax burden on the largest family inheritances while, at the same time, decreasing the tax burden on lifetime transfers to family members or charity. They summarize that this approach “is the only workable measure that endeavors to reconcile arguments of family values with principles of social justice, while also taking due consideration of the sharp increase in life expectancy in most developed countries.”

Naturally, all of these ideas are somewhat theoretical and philosophical. However, they do offer a good primer on many of the themes common in tax policy debates, including those that affect New York estate planning.

Discussion about the estate and trust tax issues usually centers on political debate about the rates and exemption levels or case-studies of the tax burden for famous or wealthy individuals. Far less often discussed is general information about the tax, including how much was actually collected, the total number of individuals affected, and similar details.

Fortunately, to fill in that gap, every year the IRS releases statistics, including those affected trusts and estates. A rather detailed list of information can be found in various spreadsheet on the IRS website. Also provided is a handy sheet offering a “snapshot” of many interesting trust and estate tax details. The most recent year’s tally was just released, providing a helpful primer for those interested in how these federal taxes actually affect residents.

The Data
All statistics are culled from submitted returns on Form 1041. This is the form used is the “U.S. Income Tax Return for Estates and Trusts.” The snapshot explains that the form is “used to report the income, deductions, gains, and losses of estate and trusts, as well as distributions to beneficiaries and income tax liability.”

All told, in the most recent data released (from 2010), a total of 3 million such forms were filed totaling $91 billion in income–the majority of that income was from capital gains ($32 billion). That accounts for about $72 billion in deductions. About 75% of those filing listed some deductions.

However, these forms were not filed just by high-income earners, as the vast majority were from those listed incomes of $100,000 or less–more than fifty percent lists less than $10,000 in income. In fact, of the 3 million filings in 2010, only 532,000 of those owed any tax burden at all. There was a clear trend year over year in regard to these income filings. In 2009, about 661,000 Form 1041 filings resulted in some tax liability. Keep in mind that these stats are from several years ago, when the country was in a far more dire economic straits.

There are many interesting takeaways from this data. At the most basic level, this is a reminder of the complex tax issues that may attach to an estate well after an individual passes. This is one of many reasons that estate planning attorneys and financial advisors can play a critical role with these matters both with preparing the plan as well as administering it. For example, it is not uncommon for attorneys to work as a trustee to help ensure all of the legal details are handled appropriately.

For help understanding these issues as they may relate to you and your family, contact an estate planning lawyer today.

When most hear the phrase “estate battle” the mind immediately jumps to fighting between families. Sadly, in the tumult of a passing, it is not uncommon for even close relatives to disagree sharply over how an assets should be divided. However, estate fights can also refer to legal problems related to taxes and the IRS. Tax matters are intricately woven into estate matters, and when problems arise, you can be sure that the IRS will be ready to defend their position in court.

How Much Was Jackson’s Estate Worth?
To understand how these IRS estate battles often play out, one need look no further than continued wrangling over perhaps one of the largest estates in recent memory. Famed entertainer Michael Jackson died in 2009. However, the estate is still fighting with the Internal Revenue Service regarding how many taxes need to be paid.

As discussed in an LA Times story this weekend, the IRS and Jackson’s executors are miles apart on what is owed. The executors claimed that Jackson’s net worth at the time of his death was $7 million. The IRS, on the other hand, valued the estate and exponentially higher–$1.25 billion.

As most know, one’s estate tax burden is based on the total value of assets. Obviously then, the executors and the IRS have staggeringly different ideas about how much tax is owed. For their part the IRS claims that the total estate tax was $505 million. Not only that, but they claim that errors with the tax return trigger double penalties, adding an addition $197 million in penalties to a total tax obligation of $702 million. Keep in mind, this tax bill alone is 100x larger than the executors claimed the entire estate was worth.

How could the two sides be so far off? Apparently, the main dispute surrounds the value of Jackson’s “image” and his rights to a valuable trust which holds rights to legendary songs (including almost the entire Beatles collection). The executors argued his likeness was worth $2,105 and that Jackson had no interest in the song collection because he had borrowed hundreds of millions of dollars against it.

Unique Assets & Appraisals
When it comes to intangible assets that do not necessarily have an obvious value, then disputes often arise between the IRS and an estate. While very few will leave an estate or assets as large (or unique) as Jackson, the issue of proper appraisals and subsequent tax burden is not uncommon among New York residents. As always, the best approach is to structure an estate so that these assets are not included at all and not factored into possible estate taxes.

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