On the heels of top Senate Republicans introducing legislation to fully repeal the federal estate tax, former Democratic presidential candidate Senator Bernie Sanders recently proposed to expand the estate tax on America’s wealthiest families. The proposal would create a 77 percent tax on the estates valued over $1 billion, a policy that would affect as little as 0.2 percent of Americans.
Senator Sanders’ proposal would levy a 45 percent tax on the value of estates between $3.5 million and $10 million, increasing gradually to 77 percent for estates valued at more than $1 billion. Under the current tax system, assets in estates valued over $11 million for individuals and $22 million for married couples are taxed at 40 percent.
The plan’s summary claims the measure would take in an estimated $2.2 trillion in revenue rom the families of all 588 billionaires in the country with a combined net worth of more than $3 trillion. Senator Sanders is one of many would be nominee for the Democrat ticket for the 2020 presidential election putting forth ideas on taxing America’s wealthiest families to bridge what the party sees as a growing economic equality gap in the country.
Comprehensive estate planning is a long-term process. It is not complete simply because the many pieces of your estate plan have been considered and put into place. Your estate plan must be reviewed periodically, and with so much at stake it must also be protected. In addition to taking important basic precautions to protect your estate plan, you may also benefit from an additional form of protection by enlisting a trust protector.
What is a trust protector?
For estate plans that have a trust in place, and especially for those with several different trusts in place, it is important to ensure that trusts are administered in a legal way that meets your goals for establishing the trust. When you establish a trust, you must also designate a trustee. Trustees are entrusted with administering a trust according to the terms of the trust and the goals you have established for that trust.
There are two main types of trusts: revocable and irrevocable. Basically, each trust is self-explanatory on the surface. For the most part, you have unfettered ability to revoke or amend a revocable trust. In contrast, it is extremely difficult and sometimes impossible to revoke or even amend an irrevocable trust. On the surface, it appears – and is true – that a revocable trust provides the creator of such trust with greater flexibility in modifying that trust to meet their comprehensive estate planning goals. However, irrevocable trusts still play an important role in estate planning and it is important to understand their benefits to make an informed choice about the type of trust that might be right for you.
While most trusts will avoid probate, irrevocable trusts established during your lifetime will definitely be able to avoid probate. This will ultimately save you and your loved ones time and money by allowing a trust to take effect immediately as it has been designed to do. Your loved ones will be able to access an irrevocable trust according to its structure without having to wait for the courts to approve a Will or other documents related to probate of the deceased person’s estate.
It is important to remember that whether your estate is subject to probate or not, you should make sure that you have designed a comprehensive estate planning strategy that effectively distributes all of your assets so that your family is not forced to rely on the state to make important decisions regarding the distribution of your estate. At the same time, smaller estate may be eligible for a process known as voluntary administration in New York. This process is also called disposition without administration or small estate proceeding, but regardless of what it is called it is important to understand the process especially if it may be applicable to you.
Basics of Voluntary Administration
Voluntary administration can take place whether or not the deceased person has left a Last Will & Testament. Typically, only personal property is eligible for distribution through voluntary administration. This means that if a deceased person solely owned real property such as a home that you plan to sell, then such property would not be eligible for voluntary administration and would presumably exceed the value of the small estate threshold. Currently, the New York small estate threshold is set at $30,000 which means that any estate valued over that amount will still be required to go through probate. Generally, any interested party may file to become the voluntary administrator of a deceased person’s estate that qualifies for voluntary administration.
STATE SPECIFIC PROTECTIONS
The current aggregate value of retirement assets in America is roughly $21 trillion, with individual retirement accounts (IRAs) amounting to the largest single investment asset. While many, if not most, types of retirement assets and accounts are protected against creditors, the IRA is not necessarily one of them. The various protections for IRA are dependent on the amount, how long ago you put the money into your account and the state or jurisdiction you live in. Employer sponsored plans are covered by protections found in federal law, so it is much easier to talk about what protections exist for such plans. The Employer Retirement Income Security Act of 1974 (ERISA) created a large host of protections for employees, including protections against creditors, except when the creditor is the Internal Revenue Service (IRS) or a spouse or former spouse for debt incurred through domestic relations.
The protections found under ERISA have expanded over time through both Congressional action and judicial interpretation of the law. ERISA plans must provide periodic updates to the employees, information about the plan features, creates fiduciary responsibilities for the plan administrators as well as things such as an appeal process for certain decisions that the employee disagrees with. One large collective group of accounts that are not protected, however, are IRAs. IRAs, as the name implies, are owned by an individual and thus do not fall under the protections of ERISA. Most protections for IRAs are found in state law.
VERY SIMPLE CONCEPT
This blog examined the dynasty trust in the past but it is time to reexamine certain aspects of the dynasty trust. The dynasty trust is a trust designed primarily to avoid the generation skipping transfer tax when a person wants to leave money to their grandchildren or great grandchildren (or even generations beyond that). Before getting into the nuts and bolts of what a dynasty trust is, it is best to outline some of the basic tax issues inherent in the generation skipping transfer tax.
Grandfather wants to leave an asset to his son, with the intention that he will leave it to his son and for him to leave it to his son and so on. Just to make the dollar figures simple, let us assume that it worth $10 million. For further simplicity, let us also assume that grandfather’s estate already went through the federal (and state) estate tax exemption. That means that son has to pay the current top estate tax rate of 40%, which means that the asset is no longer worth $10 million. Instead it is only worth $6 million. For further simplicity, father’s estate also passed through all of his estate tax exemption, so instead of the asset being worth $6 million when it passes to the grandson, it is now worth $3.6 million in light of the 40% estate tax. And the process goes on and on.
FURTHER CHANGES MAY BE NEEDED
When a person receives an asset via the probate process, the transaction must be reported to the IRS, even if it does not trigger any tax liability as to the estate or the recipient. This is because the IRS needs to track the basis of the asset to determine any net capital gains or other calculations for tax liability purposes. Price minus basis equals profit is the rough calculation to determine how much a person realized in a sale, which in turn determines the capital gain on the sale of the asset.
There is a tension built into the system whereby the executor wants to assign the lowest possible value to the asset, so as to keep the value of the estate low, while the beneficiary wants to have the highest possible value assigned so when they dispose of the asset in the future it will incur less tax liability. The IRS sought to address this tension when they lobbied Congress create 26 U.S.C. § 6035, which in turn enabled them to create the new IRS form 8971. Form 8971 requires an executor to notify the IRS which beneficiary receives what and the value of the asset. Part of the same legislation also created 26 U.S.C. § 1014 which requires beneficiaries to use the value of the asset at the date of death for purposes of reporting basis. This value cannot be greater than the amount that the executor reported on the estate tax return.
The Generation skipping transfer tax seems complicated to understand and it absolutely should only be dealt with by a seasoned professional, but there are some hallmarks that are present in each such transaction so that individual taxpayers know when the tax will apply and can follow a general conversation about the topic. To begin with, the name may seem a bit confusing at first. The skipping that the name refers to is the tax that would (should according to some lawmakers and IRS officials no doubt) be incurred when a second generation passes on the inherited asset.
The generation skipping transfer tax was first introduced in 1976 to avoid what Congress saw as an avoidance of the estate tax by wealthy families that could afford to hire attorneys to create complicated, long term trusts that avoided the estate tax. The net result was that less wealthy, middle class families were paying a disproportionate share of the estate taxes; in other words, those who could least afford it were paying more of the tax. The generation skipping transfer tax in its current incarnation creates tax liability anytime a transfer of an asset or money is transferred more than one generation from the grantor or to someone who is at least 37.5 years younger.
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.