New York Estate Planning Lawyer Blog

By Michael Ettinger, Esq.

In our experience, a majority of New Yorkers are unaware (blissfully?) that New York State levies an estate tax.

New York's estate tax starts on estates over one million dollars. What is your estate for tax purposes? All of your real and personal property, your bank accounts, investments, IRA's, etc. as well as any life insurance that you own. Add it all up and, if you're under a million, then no problem.

But, if you're over a million, the tax rate starts at 41% (yikes!) and gradually goes down to about 10%. Below is a New York Estate Tax schedule prepared by our firm to help you see where you stand.

Fortunately, if you have a spouse, you can avoid paying up to about $100,000 of these estate taxes by creating two estates, one for the husband and one for the wife, and get two one million dollar exemptions.

For example, let's say a couple has two million in assets. Essentially, what happens here is that each spouse sets up a trust and we put one-half of the house and other assets into each trust. Both spouses are trustees, or managers, of both trusts. Now, say 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, or preferably their inheritance trusts, 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. Why don't more people do this? In fact they do. Ettinger Law Firm has used this technique for over twenty years in more than 10,000 estate plans to save thousands of New York families many millions in estate taxes.

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 dies...in other words, if your estate is over one million dollars and you have a spouse, the time is now.

By Michael Ettinger, Attorney at Law

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Historically, estate planning consisted of setting up a will and leaving everything to one's children in equal shares, "per stirpes". The "per stirpes" is latin for "by the roots", meaning that if any of the children predecease their parents then their share goes to their children, if any.

Today, however, adolescence lasts much longer than it used to. Some say that "30 is the new 20" and, anecdotally, we see much evidence of this. Another recent phenomenon is children coming back home to live with their parents, for many reasons, but often having to do with their inability to deal with the vicissitudes of life.

In light of the foregoing, and the fact that trusts, which have become as common as wills today, may continue for many years after the death of the parent, new planning options are available to clients.

For example, one popular plan of distribution is 20% at age thirty, one-half of the remaining balance at thirty-five and the remainder at forty. The theory here is that the child can get the 20% and spend it all, but they have to wait five years before they get one-half of what's left and then, finally, ten years later, when they have hopefully made their mistakes and matured somewhat, they still have about one-half of the inheritance left. A twist on this plan is 20% on the death of the parent, one-half of the remaining balance five years after the parent's death and the remainder ten years after the parent's death. This latter formula is often accompanied by a "cap". For example, upon attaining the age of fifty, any undistributed amounts shall then be distributed outright to the adult child beneficiary.

Hopefully, this gives the reader some flavor of the versatility of using living trusts as an estate planning tool to continue the planning out for many years after the parents' death - perhaps enough time to give late blooming children time to fully develop.

by Michael Ettinger, Esq.
There have been numerous articles written on the wisdom of converting your IRA, or a portion of it, to a Roth IRA. In 2010, the income limit on converting, previously $100,000 per year, has been eliminated allowing many more taxpayers this option.

Traditional IRA's offer a tax deduction on the contribution but tax the distribution, required to start after age 70 1/2. Roths offer no deduction on contributions but the distributions are tax-free (after a five year holding period). Unlike a traditional IRA, with a Roth there is no mandatory age to take required minimum distributions.

Should you wish to convert, you will have to pay the taxes on the converted amount now. For 2010 conversions only, you may defer the taxes due as follows: 50% in 2011 (payable April 15, 2012, or until October 15, 2012, if on extension) and 50% in 2012 (payable as late as October 15, 2013). Your tax advisor can help you determine whether you should make quarterly estimated tax payments.

Kiplinger's says that "It's worthwhile to make the switch only if you don't have to tap the IRA for cash to pay the taxes." Not everyone agrees, as discussed below. But if you convert and don't have the funds to pay the taxes later, you are allowed to undo the conversion until October 15th of the following year. This is also important if your portfolio has fallen, since you may not want to pay tax on a $100,000 conversion if the value of the IRA has dropped to $75,000.

Many advisors feel that you should Rothify at least some of your IRA in the belief that tax rates today are lower than they will be in the future. Trillion dollar deficits tend to support this thinking.

On the other hand, you might be in a different situation if you are now an income earner and your tax bracket will fall when you retire.

Clients like the Roth for its flexibility. With no required minimum distribution, you do not have to pay taxes on money you may not need, but are required to take with a traditional IRA.

By setting up multiple Roth IRA's, or by converting in a series of steps, say $50,000 now and $50,000 in four months, you will be in a better position to undo some of your conversions should your portfolio fall or you are unable for any reason to pay all of the tax due.

For New Yorkers, if you are moving in the foreseeable future to a state with no income tax, such as Florida, you may want to wait until you move to convert. If you are collecting Social Security you may want to ask your tax advisor whether the conversion will cause more of it to become taxable. Remember, taxes on Social Security, as well as your Medicare premium rates, are calculated on your income. If you are older than 70 1/2, you must take your required minimum distribution before converting, which may also affect your tax bracket.

Whereas Kiplinger's says don't convert if you have to pay the taxes from your IRA, the Wall Street Journal disagrees. They found, after running the numbers, that it may pay to convert even if you have to pay the taxes with money inside the IRA. The reasoning is that even though the Roth will be smaller after the taxes are paid, by not having to take withdrawals, some clients will be able to keep more of their Social Security tax-free. By keeping more of their Social Security, they will have to take less from their Roth, allowing it to grow more. In one example using this strategy, the odds against a couple outliving their savings fell from 50% to 12%.

To get a initial answer on whether converting to a Roth makes sense to you, try Morningstar's or Vanguard's online calculator.

As you can see, converting to a Roth is a mind bending calculation that requires the input of your financial advisor, your accountant and your own wisdom of Solomon.

For more information on Roth conversions and IRA's in general, please see retiresecure.com and irahelp.com.

by Michael Ettinger, Esq.
The political struggle between the two major parties over the Federal estate tax, or "death tax" as its opponents prefer to call it, continued with the expiration of the estate tax on January 1, 2010 for one year. On January 1, 2011, the estate tax is scheduled to reappear but not for estates over 3.5 million at a tax rate of 45%, as in 2009 when the tax expired. Under the Bush era tax cuts, enacted in 2001, the estate tax in 2011 and beyond will be imposed on estates over one million, at a tax rate of 55%. Where do these latter figures come from? Those were the exemptions and tax rates in 2001 when the new law took effect. It was assumed that Congress would pass amending legislation some time over the intervening nine years to correct the problem.

Politics being what it is, the parties could not agree. A proposal to extend the 3.5 million exemption of 2009 for an additional year, giving Congress an additional year to negotiate a new estate tax regime, died in the Senate.

The irony of it all is this. Dick Patten, President of The American Family Business Foundation, a Washington lobbying group campaigning for repeal of the estate tax gleefully reported that "for the first time since 1916, there will be no estate tax." You have to wonder, however, who his constituency really is. If the 2009 rule had been extended for one year, the estate tax would have affected about 6,000 families. But because the repeal of the estate tax brings back the capital gains tax (which the estate tax eliminated on assets passed at death), over 70,000 families will now face new capital gains taxes. According to the Center of Budget and Policy Priorities, "a t least 62,500 of these are estates that would not owe any estate tax if the 2009 rules were continued and that thus would be adversely affected by estate repeal. Farms and businesses would constitute a disproportionately large share of the group."

For couples with estates over one million dollars, it is essential that they review their estate plans for unintended consequences should one spouse die in 2010, the year of no estate tax. If there is no tax planning then tax language should be added to avoid the potential 55% Federal estate tax on estates over one million starting in 2011. For couples with tax language in their plans, you must look for disclaimer language (typically used by Ettinger Law Firm since 2006), which allows the surviving spouse to determine the amount, if any, to leave in the deceased spouse's trust on the first death. These plans have the flexibility to "roll with the punches" no matter what Congress ultimately decides.

Couples who have old trust language that has not been updated are most at risk. Typically, these old trusts (and wills) provided that the amount that was exempt from the Federal estate tax remained in the deceased spouse's trust. If a spouse with the old "formula" language dies in 2010, then nothing stays in their trust, since there is no estate tax, and it all comes out to the surviving spouse. Not only may this create a huge tax in the estate of the surviving spouse (potentially $550,000 on the one million that could have been left in the deceased spouse's trust) but you may also lose $99,600 in New York State estate tax savings by not having the choice of leaving the million in that deceased spouse's trust.

Tax professionals, commentators, Congressmen and Senators are all predicting that some sort of settlement will be reached early in 2010 to alleviate these and other problems arising out of the failure to pass amending legislation on time.

We say, don't bet on it.

These are the same professionals who said the problem would be settled long before the December 31, 2009 expiration date. The parties couldn't even agree to a simple extension of the 2009 rule one year, buying time to reach a compromise solution. With the impending retirement of two democratic Senators, and the likely loss of a democratic super majority in the Senate, there is a very real possibility of gridlock resulting in no agreement being reached and the estate tax exemption dropping down to one million at the end of 2010. In other words, the great estate tax chess match may end up in a stalemate.