Death and taxes: Will your estate be taxed when you die?
As the saying goes, “nothing is certain except death and taxes.” In the context of estate planning, this reality drives the estate planner’s desire to minimize death taxes as much as possible. In fact, the world of estate planning is consumed with tax minimization in all its forms. Lawyers and advisors make clients jump legal and financial hoops to avoid or delay paying taxes, whether on estates, capital gains, gifts, income, etc. It is imperative that clients know if their assets will be encumbered upon death so that they can seek appropriate advice from their estate planning professional. This article provides an overview of estate taxes.
What is taxable?
Generally, any property a person owns at the time of their death is subject to tax, including bank accounts, cash, securities, real estate, cars, etc. are included in his gross estate. Contrary to popular belief, the death benefit of life insurance policies that a person owns is taxable unless it is properly structured. Joint property, including joint bank accounts, may be included 100% in the estate of the first co-owner who dies, except to the extent that the other co-owner can show that they contributed to the property. Business, corporate, and LLC interests can also be included in the gross estate, as can general powers of appointment.
Gross Estate Deductions:
To determine the taxable estate, we need to reduce the gross estate by the applicable deductions. The IRS allows the following deductions from gross estate that reduce gross estate:
1. Marital deduction: One of the main deductions for married decedents is the marital deduction. Both jurisdictions allow an unlimited marital deduction, meaning that assets that pass directly to a citizen spouse will not be taxed upon the death of the first spouse. There are often very good financial, legal, and tax reasons not to leave everything in the hands of the surviving spouse, as will be discussed in the next article on credit bypass/shelter trusts.
2. Charitable Deduction: If the decedent leaves property to a qualified charity, it is deductible from the gross estate.
3. Mortgages and Debts associated with real estate.
4. Estate administration expenses, including executor/administrator, accountant, and attorney fees.
5. Losses during the administration of the estate.
Not one, but two:
Both the state of New York and the federal government impose separate estate taxes on decedents who pass away with a certain amount of assets. The government figures that death should be a taxable event because almost everything else he did in life was. The state of New York and the federal government tax property at different levels and at different rates. Uncle Sam, however, gives the taxpayer a deduction for the amount he paid in state taxes.
Federal estate taxes:
The federal government currently taxes properties valued over $5.12 million at a rate of 35% in 2012. If Congress does not act, the federal estate tax is scheduled to be 55% on gross properties over $1 million in 2013 and beyond.
New York State Estate Tax:
The state of New York taxes the property of New York residents if they exceed $1,000,000. Nonresidents pay the tax only if their estate includes real property or tangible personal property located in New York and worth more than $1 million. New York estate tax rates range from 5.6% to 16% for estates over $10 million and are expected to remain the same for the foreseeable future. New York requires estates with a gross estate of more than $1,000,000 to file Form ET-706 along with a federal estate tax return, although the IRS may not require it (because the estate is below the threshold of federal filing).
The tax thresholds listed above assume that the decedent made no taxable donations during his or her lifetime. A taxable gift is a gift made to an individual in excess of the annual gift tax exclusion amount, currently $13,000. If taxable gifts were made, they reduce the amount of the estate tax exemption by the extent that the gift tax was not paid.
It is possible to avoid the estate tax sting by (1) fully utilizing each spouse’s estate tax exemption (2) deferring taxes until the death of the second spouse (3) and avoiding taxes altogether by properly donating during life and/or after death. To speak with an estate planning attorney for an evaluation of your financial situation and to see what options may minimize or eliminate your potential estate tax liability, contact us at (347)ROMAN-85