Currently, the federal estate tax exemption is $11.7 million and the New York State estate tax exemption is $5.93 million. If no further action is taken by Congress, in 2025 the federal estate tax exemption will revert to the former $5 million, indexed for inflation. Accordingly, there is a unique planning opportunity now to transfer assets out of your estate, while the federal estate tax exemption is so high. This way, if you pass away in the future when the exemption is, for example only $5 million, the assets transferred will have used the old higher exemption thereby allowing for a greater transfer of wealth to your intended beneficiaries. This avoids the dreaded “death tax.”
If you were married, the tax code allows for portability, or the ability to share exemptions with your spouse. With a timely filed estate tax return after the death of the first spouse, you can effectively utilize your deceased spouse’s unused exemption amount. However, if you are single with no plans for marrying in the near future, the planning strategies require a bit more creativity.
One estate tax planning technique is to use irrevocable trusts to transfer wealth. There are different types of irrevocable trusts; some to hold investment accounts/properties, others to hold primary residences and even irrevocable life insurance trust to hold a life insurance policy.
To illustrate, assume you had an investment account worth $9 million, a house worth $1 million and a retirement account worth $2 million. You could transfer the investment account to an irrevocable trust for the benefit of your children now and file a gift tax return for the lifetime gift. The $9 million would not be subject to any gift tax because it is less than your $11.7 exemption. New York has no gift tax. If you survive this transfer by three years, the $9 million will be out of your estate for New York state level inheritance tax purposes, permanently. In addition, to the extent that $9 million grows in value during your life, that is more tax free money you are transferring to your children. Because these transfers are made in trust, it provides creditor and tax protection for your children, as the money inherited is not subject to their debts, divorces, disability or taxation.
While the potential estate tax savings on transfers to an irrevocable trust are great, there are some things to keep in mind. In order for the IRS to respect the irrevocable trust as truly out of your estate, you cannot be a beneficiary of the trust. The gift to the trust must be irrevocable and those assets can no longer be used for your benefit. This results in a total loss of control which may not be viable for everyone.
In addition, when you make a gift of assets during your life, the recipient of that gift takes the assets at your cost basis. In other words, if you bought the stock in your investment account when it was worth $2 million, and the value grew to $9 million, when your children sell the stock, there will be capital gains tax to pay on the increased value. This is different than when you leave assets to your children at your death. At death, there is a full step-up in cost basis so if your children sold the stock, there would be no capital gain. Given that the capital gains tax is currently a lower rate than the federal inheritance tax, making lifetime gifts is still a good idea for high value estates. Congress is also confronting whether to remove the step up in basis at death as early as 2022.
For those individuals who don’t have children, or other beneficiaries to whom they are comfortable relinquishing control, another tax strategy is to leave assets to charities. By leaving charitable donations at death, your estate receives a corresponding deduction which results in the charity receiving the inheritance tax free and reduces the amount of tax that any non-charitable beneficiaries would incur.
Estate tax planning can be complicated and must be custom tailored to each client’s individual assets and goals. If you are someone who is unsure of your estate tax liability, you should speak to an estate planning attorney about your options.
Kimberly Trueman is an attorney at Burner Law Group, P.C. She joined the firm in January 2012 as a legal intern while she was still in law school. After graduating and taking the bar exam, she was invited to join the firm.
Kimberly received her Bachelor’s degree in Hispanic Literature and Language from Stony Brook University in 2009 where she graduated summa cum laude, Phi Beta Kappa and was the valedictorian of her department. She then received her Juris Doctor from Hofstra University, School of Law in 2012. While attending law school, Kimberly was the recipient of the Honors Scholarship for academic excellence as well as the Linda Carmody-Roberts Scholarship for her commitment to pursuing a career in the Trust & Estates and Elder Law fields. Due to her excellence in dispute resolution and family law, Kimberly was invited to join Hofstra’s Mediation Clinic where she became a certified mediator and was awarded the Sari M. Friedman Endowed Scholarship award for excellence in family law.
In 2020, for the fourth consecutive year, Minneapolis-based Law & Politics publishers of Super Lawyers magazines announced that Kim had been named as a Rising Star Attorney. Super Lawyers, published in the New York Times Magazine is a listing of outstanding lawyers from more than 70 practice areas who have attained a high degree of peer recognition and professional achievement in their respective fields. Each year, no more than 5 percent of the lawyers in the state receive this honor.
Additionally in 2020, Kimberly was named as an “Outstanding Woman in Law" by Hofstra University School of Law Center for Children Families and the Law and Long Island Business News.
Kimberly is a member of the New York State Bar Association Elder Law and Special Needs Planning section, the Trusts and Estates section and the Suffolk County Bar Association. She is licensed to practice law in New York State. Kimberly lives in Stony Brook with her husband, daughter, dog and three cats.