The US has what’s known as a “unified” estate and gift tax system, which levies a tax on gifts you make while alive and assets you leave when you die, if they exceed the exemption. For 2023, the estate/gift tax exemption is $12,920,000 up from $12,060,000 in 2022. That’s an $860,000 “cost of living” increase!

While the estate tax rate is 40%, few estates actually pay it because of the large exemption, and exemptions for gifts to charities and spouses. For 2019, the IRS reports that only 6,409 estate tax returns were filed, and of them, only 2,570 (40%) owed taxes. These filings generated $13.2 billion in revenue, which is not much when you consider Elon Musk paid $44 billion for twitter. Although the estate tax is not a big revenue generator for the government, serious tax planning may be needed for those in the ballpark.

Married Couples. Married couples can generally make unlimited gifts to each other, in addition to availing themselves of the exemption amount. Under the doctrine of “portability,” one spouse can use the other’s “unused” exemption to shield assets from tax. The tandem use of the exemption and unlimited marital deduction enables families to transfer great wealth, with some important caveats:

Only spouses who are US citizens can receive unlimited assets and exempt gifts. If a recipient spouse is not a US citizen, tax-free gifts are limited to $175,000 for 2023, up from $164,000 in 2022. If gifted assets (or assets inherited from a spouse’s estate) exceed this amount, they will be taxed at 40%, unless they are paid into what’s known as a “qualified domestic trust (QDOT).” Complex tax rules govern these trusts which mandate estate taxes are paid when principal is ultimately paid out of the trust.

While “portability” greatly enables married couples to share $25,840,000 in exemptions, regardless of how assets are titled, this largesse doesn’t extend to NYS estate tax, where how assets are titled is essential to consider, to maximize the use of an available NYS exemption by both spouses.

The annual gift tax exemption is increased to $17,000 for 2023, up from $16,000 in 2022. You can make gifts up to this amount to an unlimited number of people and not file a gift tax return. If a gift exceeds this amount, a gift tax return must be filed, but taxes aren’t actually paid until the exemption amount is used up.

For example, if a mother gives her daughter $300,000 to purchase a home, $17,000 would be covered by the annual gift tax exclusion. A gift tax return reflecting a gift of $283,000 would be filed. If Mom has any of her exemption remaining ($12,920,000 in 2023), no gift tax would be due, but the amount of Mom’s available exemption would be reduced by $283,000.

“Annual exclusion gifts” are a valuable tool to reduce potentially taxable estates. Often wealthy families introduce gifting programs to children and grandchildren to gradually remove assets and appreciation from their estates. This can be especially important for those close to the taxable limit in NYS as well.

New York Estate Tax. The NY estate tax exemption is slated to increase to $6,540,000 for 2023, up from $6,110,000 in 2022. Tax rates on estates graduate to 16%, and the NY estate tax landscape is filled with unfortunate and unique challenges:

NY does not offer “portability”, so spouses must have enough property in their own name to soak up the exemption. For example, if Helen and Harry have combined assets worth $12,000,000, but everything is in Harry’s name, Harry’s estate will pay NYS estate tax and Helen’s won’t. With proper planning, where roughly $6,000,000 of the assets are held in each spouse’s name, the NYS estate tax can be avoided for both estates.

If an estate has taxable assets which are greater than 5% of the exemption amount, the entire estate is subject to tax – not just the amount above the exemption. This is politely called a “cliff” tax. Often the math isn’t done until a person passes away, when property is valued, and this aspect of NY estate tax can be problematic. With proper planning, gifts can be made to charities to zero out the “cliff tax” if a taxpayer’s estate would otherwise be fully taxable.

NY does not subject lifetime gifts to tax, but does “claw back” gifts made within three years of death, into the estate tax calculation.

NY Metro Estate Taxes. Beginning in 2023, the CT estate tax exemption will equal the federal exemption, up from $9,100,000 in 2022. NJ eliminated its estate tax on January 1, 2018, however, it still has an inheritance tax. Gifts to spouses, children and grandchildren are exempt, but gifts to others are not.

Bottom Line. For most Americans, estate tax planning is not an everyday concern. But for high-net-worth individuals, or NYS residents with assets above $6 million, careful planning is essential to reduce taxes. Income taxes also factor in if you are contemplating gifts of highly appreciated property while you are alive.

Contact us today to get estate planning in place for you and your loved ones.

Susan G. Parker is an attorney in Briarcliff Manor, NY. Please contact her at susan@susanparkerlaw.com or (914) 923-1600 to get started today!

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• There are different legal standards of capacity that vary depending on the specific task at hand.

For example, you need a high level of legal capacity to sign a business document. But to sign a Will, it may be enough to know who your relatives are and have a general idea of what you own. A Will should not be signed when a person’s judgment is impaired or clouded by a medical condition or medication.

As people age, their mental capacity may be called into question. If there is concern as to whether the person is able to sign a Will, it’s important to meet with an attorney sooner rather than later. Even if a person has mild dementia, he or she may have sufficient capacity to sign a Will. An attorney can sign an affidavit at the time of a Will execution concerning a testator’s capacity, in case it is ever called into question.

• Check your state’s laws to determine how this is done in your state, and if you have questions or need any guidance, feel free to call Susan G. Parker Law Associates, P.C. at 914-923-1600 to schedule a consultation!

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My answer is that we don’t know what the future holds, so the scouting motto “be prepared” is a solid way to approach estate planning.

Click the link below to start planning today and make sure things go your way after you’re gone.

https://lnkd.in/d6kC583u

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• A young married couple may only want a Will to name a guardian for young children. When the children are in their twenties and thirties, the guardian won’t be needed but maybe planning for care of an elderly parent will be.
• If you win the lottery or file for bankruptcy, you may want to revisit your plans.
• Those on the doorstep of being “seniors” have a new perspective, and their health care needs and Medicaid planning may come into play.
• A divorce, re-marriage or other major life change will cause a change in plans.

It is never too early to do estate planning, but it can become too late. Put in a plan for yourself that implements your goals and know that the plan can be changed if your needs change. If you are ready to start making plans for the future or need to revisit old ones, look no further than the experienced professionals at Susan G. Parker Law Associates, P.C. Visit our website to learn more!

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For single people, planning can be more challenging because there are no special tax breaks, like an unlimited marital deduction. Also, if you fail to write a will, your property will pass to your blood relatives and not necessarily the people who are closest to you. There are also no federal law protections about the right to receive a spousal share of a pension, or continuation health care coverage.

If you have further questions about how the law applies to your unique situation, schedule a consultation by visiting our website or contacting our offices at (914) 923-1600.

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Presently, twelve states have estate taxes. These include:

• Connecticut
• Hawaii
• Illinois
• Maine
• Massachusetts
• Minnesota
• New York
• Oregon
• Rhode Island
• Vermont
• Washington
• District of Columbia

State tax exemption amounts are typically lower than the federal exemption amounts. For example, New York imposes a state estate tax on estates exceeding $6,020,000 for 2022, but with a caveat! If the estate exceeds the exemption amount by more than 5%, then the entire estate, and not just the amount above the exemption, is subject to tax.

Six states have an inheritance tax which requires those who inherit property to pay a portion to the state. These include:

• Iowa
• Kentucky
• Maryland
• Nebraska
• New Jersey
• Pennsylvania

Check your state to see if you should factor state death taxes into your plans.

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Many clients ask what the difference between a trustee and executor is. While they are often the same person, they don’t necessarily HAVE to be.

Here’s how it works:

– Often a trust is set up to own and manage assets, and to avoid probate. A “living trust” is managed by a trustee who is generally the person who created it, also called a “grantor” or “settlor”. When that person passes away, a successor trustee is appointed, and the trust gets its own tax I.D. The successor trustee is tasked to wrap things up, often paying bills and distributing trust assets to loved ones. In a sense, the trustee is the CEO of the trust.

– In a similar way, an executor is the CEO of a person’s estate. Assets which are not owned in trust, which do not name a beneficiary, and which are not jointly owned, will pass per instructions in a person’s will. “Probate” is the process to declare a will valid and appoint an executor who has authority to manage assets in the estate.

If you need help understanding present plans, or want to put new plans in place, feel free to contact me at susan@susanparkerlaw.com or 914-923-1600.

Thursday 10/6 Post:

Caption:

What else do you need to know about trustees versus executors? Can they be the same person?

Even if a living trust owns 99% of your assets, the estate is responsible to pay final bills, file final tax returns and pay income or estate taxes due. Often, if the estate has no assets, but the living trust does, the executor will need funds from the trust, to close out the estate. For that reason, coordination is needed between the two entities – your trust and your estate.

Clients often appoint the same “trusted” person as executor and trustee. This makes sense because coordination between the two is often required. While parents may agonize about which child to appoint in which role, or fears of “offending” a child by only appointing one among several, the rule of thumb is to appoint the child/children who are the most capable to make sure this work gets done efficiently, in a timely manner, and with the least distress for all those involved.

Have more questions? Contact our offices at susan@susanparkerlaw.com or call 914-923-1600.

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The most onerous revisions to the estate tax landscape never made it into law at the end of last year. This is good news! The high federal estate tax exemption is still in place – $12,060,000 in 2022, up from $11,700,000 million in 2021. New York’s estate tax exemption is $5,930,000 for 2022, up from $5,850,000 for 2021.

With the federal exemption, a surviving spouse can use a deceased spouse’s unused exemption if a protective election is claimed on a Form 706 filed on the death of the first spouse. This means a couple can shield over $24 million of combined assets from estate tax. Note that even if the estate of the first spouse is not in a taxable position, a Form 706, Estate Tax Return, must be filed to claim the unused exemption. The claim for the unused exemption can be made until two years after the date of death.

Although the exemption level is high, the tax rate is 40% when it does apply. And the tax may apply to more than you realize. Under the U.S. estate/gift tax system, all taxable gifts you made during your life, as well as what you own at your death, are subject to tax, absent an exemption.

Certain gifts are exempt from tax and these include gifts to spouses, charities, and any number of people up to the amount of the annual gift tax exclusion. For 2022, the annual gift tax exclusion increases to $16,000, up from $15,000/per person, where it had remained for several years.

If you make gifts up to the annual exclusion amount, no gift tax return is required to be filed. Spouses can make gifts up to $32,000 per person for 2022. However, if you make a gift in excess of this amount, a gift tax return is required to be filed, even though no estate/gift tax is due. Consider the following example:

Husband and Wife give their son a $200,000 wedding present to put toward the purchase of a home. If the gift is made to both son and new wife, $64,000 will be exempt from tax because of the annual exclusion. ($16,000 from Husband and $16,000 from Wife, to both son and daughter-in-law).

Since the total gift exceeds the annual exclusion by $136,000 ($200,000 – $64,000 = $136,000) Husband and Wife will file a gift tax report which reflects a $136,000 gift. If Husband and Wife have an exemption amount remaining ($12,060,000 per person for 2022), no tax would be due. However, they will have eaten into their exemption to the tune of $136,000. This amount will reduce the available exemption at death.

Very few people pay federal estate tax. According to the IRS, just .2% of U.S. adults have owed estate tax in recent years, much lower than the 1-2% historical share. For 2019, believe it or not, there were only 2,570 taxable estate tax returns filed in the US.

Unlike the federal tax system, New York’s estate tax, graduated up to 16%, does not have a gift tax and no longer taxes gifts within three years of death. For New Yorkers whose assets are close to the exemption amount, planning is essential because the exemption is eliminated if your estate exceeds the exemption amount by more than 5% ($296,500). What does this mean? If your estate is valued at $6,226,500, the entire amount is subject to tax, not just the amount above the exemption.

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For the most part, I don’t clutter your inboxes with tax proposals that may not be enacted. Until legislation is passed, we don’t really know what will survive the political process. However, there are so many tax proposals afoot, it seems prudent to know what may be in the offing, so you can capitalize on planning opportunities that exist now.

Proposals Explained. The President’s budget proposal is known as the “Greenbook.” Proposed tax changes include:

• Biden’s proposal will increase tax capital gains at ordinary rates if the adjusted gross income exceeds $1 million.
• This prposal would cause a huge increase in tax (40% not 15/20%) on the sale of businesses, real estate or other assets.
• This rate may be increased by the 3.8% net investment incme tax, in addition to state and local tax.
• Prposed effective date is April 2021, when the possible change was announced.
• Normally property appreciation is not realized (or taxed) until a sale occurs. Biden’s proposal causes gain realization upon gift, death, termination of trusts and certain funding of partnerships, LLCs and other entities.
• As a result, instead f a step-up in income tax basis on death, all appreciation above an exclusion amount could be subject to capital gains tax.
• The capital gains tax would be in addition to any estate tax. though there may be a credit to offset potential double taxation that would otherwise occur.
• Prposal triggers recognition of gain when trusts terminate, even if assets continue in further sub-trusts.
• A decrease in the federal estate tax exemption can be expected from its present value of $11.7 million to somewhere closer to $6 million under Biden’s proposal.

Sanders’ proposal would reduce the estate tax exemption to $3.5 million, with only $1 million for lifetime gifts. Under the current law, lifetime gifts and estates left at death are eligible for the $11.7 million exclusion. Other changes introduced by Sanders’s proposal:

• Transfer tax rates could increase from 40% to 65%.
• The annual gift tax exemption of $15,000 per person to whom a gift is made (“donee”) will be limited on gifts to trusts to $30,000 total/per year.
• New limit of 50 years that dynastic trusts can avoid estate and/or generation skipping transfer taxation. In short, in year 50, the trust would no longer be GST exempt. This could reduce the desirability of dynasty trusts in estate planning.
• Discounts when valuing intra-family gifts could be reduced or eliminated. This might make it advantageous to complete transfers out of your estate before the law changes.

Other Proposals:

• Imposition of capital gains tax on unrealized gains upon transfer by gift, at death or every 21 years for assets held in trust. Proposed effective date is January 1, 2021.

Planning Based on Proposals. When it comes to taxes, planning for what might be is more involved than bringing an umbrella in case of rain or even putting up hurricane shutters. With tax legislation, the long-standing issue is when will a law change take effect.

Proposals are rarely enacted retroactively, but sometimes they date back to when the concept was initially introduced as part of the legislative process. For example, the taxing of capital gains at ordinary rates reared its ugly head in April, so there is talk any law change on rates could date to transactions after this date. Time will tell.

The new proposals introduce concepts that would dramatically affect tax planning. These affect what is considered a taxable event and what transfers are subject to estate and gift tax. Specifically:

• Historically, gain/loss on property is only realized when the property is sold. Under the proposals, a tax “recognition” event could occur on a transfer via a gift, death, termination of trusts and funding of LLCs and other entities. This is a very new game-changer.
• As a result of the high estate/gift tax exemption (now $11.7 million), few estates pay estate tax. The number in recent years was about 1900 people. If the estate tax exemption returns to a $3.5 million level, or the exemption is limited to $1 million in lifetime gifts, there would be big tax consequences for even middle-class taxpayers.

Planning to Consider. For any client who anticipates combined gift/estate assets may exceed $11.7 million, it makes sense to transfer assets now in a way to use the high exemption before the rate drops. The IRS issued final regulations that there will be no clawback for gifts /estates taking advantage of the high exemption.

The tax gurus offer some other recommendations which may benefit you:
1. Use borrowed funds to fund trusts, instead of transfer of appreciated assets; this may avoid triggering capital gains tax.

2. Include protective language in new trust documents that permit the trustee to “unwind” receipt of gifts or other transfers if the law change would result in to avoid adverse tax consequences, especially with a retroactive change on capital gains transactions. This may or may not work, but it can’t hurt.

3. Consider contributing trust assets, and even many non-trust assets, to partnerships or limited liability companies now in an attempt to avoid a tax that might be triggered on that type of transfer under a Biden proposal.

4. Assets held in an irrevocable trust (other than a QTIP’ed trust) do not qualify for basis step-up on death. Yet, with good planning, you may be able to swap out appreciated assets so that they will be included in the settlor’s estate to gain a basis step-up on death. This language should be in an irrevocable trust.

5. If you fund life insurance trusts with annual exclusion gifts ($15,000 per done), you may be better off making gifts now to fund insurance trusts.

Please contact us at susan@susanparkerlaw.com or (914) 923-1600, if you would like to review your plans and consider changes.

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A durable power of attorney form enables someone to take the reins of your life and manage your affairs, while you are alive. It’s essential if you lose mental capacity, and can avoid the need for a court appointed guardian. You are the “principal” appointing an agent.

Your agent’s authority ends at your death, when an executor, trustee or estate administrator would take over. New York’s new form took effect on June 13, 2021. We’ve had two weeks of office signings and this new form is much easier.

Although the new form is simplified, it is still a complicated matter and is best explained to you by a lawyer. The form now requires two witnesses who can attest that the principal has the mental capacity to sign it. In the past, a principal could sign before a notary, and there was rampant fraud in obtaining and using these forms, often by unscrupulous family members.

The form has been streamlined and sections which have no application to a particular individual can be eliminated. Further, the “statutory gift rider”, an add-on to the main form which was confusing to many, has been eliminated. You can authorize your agent to make gifts in a less confusing way. The new form also authorizes your agent to make certain health care decisions concerning nursing home admission.

A power of attorney is often more important than a will, as we get older. Why? Even without a will, you can leave property to others via joint ownership or a beneficiary designation. However, if you don’t have a power of attorney in place, and you lose mental capacity, a court proceeding is needed to appoint someone to manage your affairs. This can be costly and you won’t control who is appointed as your agent.

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