Articles Posted in Estate Taxes

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 For example, Ohio repealed its estate tax in 2013, but Maryland has both estate and inheritance taxes up to sixteen percent on estates worth more than $1 million.

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.

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

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.

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.

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.

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

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.

This week we discussed the growing belief among policymakers that estate tax changes are on the way for New York. Governor Cuomo proposed changing the exclusion rate for the NY estate tax up to the federal level ($5.25 million now and pegged to rise with inflation). This would be accompanied by a lowering of the top tax rate from 16% to 10%. Altogether, this represents a positive step for those hoping for a simpler, smaller estate tax bite.

However, less discussed are other changes that the Governor propose be included with the tax overhaul. Specifically, as noted in a Wealth Management story from last week, taxation on gifts will be folded into these total estate calculations. The gift issue is important, because it may lead some New York resident to alter their long-term strategies immediately.

Gift Taxes in New York

The New York Times reported late last month on a growing trend across the country–discussions about lowering estate tax obligations on state residents. The estate tax is the bite the government takes out of an individual’s assets before they go to heirs. There are two layers of tax, at the federal and state level. Under current law, the federal tax kicks in on all assets over $5.34 million for individuals at a top rate of 40%.

But the federal tax is not the only concern of residents, because many individual states have their own tax, including New York. The New York tax starts far lower–at $1 million. This means that even those residents who have no concerns about the federal estate tax still must account for their obligation under state law.

Lower NY Estate Taxes

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