As the saying goes, “nothing is certain but death and taxes.” In the context of estate planning, this reality drives the estate planner’s desire to minimize taxes upon death as much as possible. In fact, the world of estate planning is consumed with the minimization of taxes in all of its forms. Attorneys and advisers have clients jump through legal and financial hoops in order to avoid or delay the payment of taxes, whether estate, capital gains, gift, income, etc. It is imperative that clients know if their assets will be taxed upon their death so that they can properly seek advice from their estate planning professional. This article provides a general overview of estate taxes.

What Is Taxable?

Very generally, any property that a person owns at his passing is taxable including bank account, cash, securities, real estate, cars, etc. are includable in his gross estate. Contrary to popular belief, the death benefit of life insurance policies a person owns are taxable unless properly structured. Joint property, including joint bank accounts, is 100% includable in the estate of the first joint property owner to die except to the extent that the other joint owner can show that he contributed to the property. Business, corporate, and LLC interests are also includable in the gross estate as are general powers of appointment.

Deductions from the Gross Estate:

To determine the taxable estate, we need to reduce the gross estate by the applicable deductions. The IRS allows the following deductions from the gross estate which reduce the gross estate:

1. Marital Deduction: One of the primary deductions for married decedents is the Marital Deduction. Both jurisdictions allow for an unlimited marital deduction which means that assets passing outright to a citizen spouse will not be taxed at the death of the first spouse. There are often very good financial, legal, and tax reasons not to leave everything to the surviving spouse as will be discussed in the upcoming article dealing with credit shelter/bypass trusts

2. Charitable Deduction: If the decedent leaves property to a qualifying charity, it is deductible from the gross estate.

3. Mortgages and Debt associated with the properties.

4. Administration expenses of the estate including executor/administrator, accountant’s and attorney’s fees.

5. Losses during estate administration.

Not One, But Two:

Both New York State and the federal government impose separate estate taxes on decedents who pass away with a certain amount assets. The government figures that death should be a taxable event because almost everything else you did in life was. New York State and the federal government tax estates at different levels and at different rates. Uncle Sam does, however, give taxpayers a deduction for the amount they paid in state taxes.

Federal Estate Taxation:

The federal government currently taxes estates valued at 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 estates of over $1 million in 2013 and beyond.

New York State Estate Taxation:

New York State taxes the estates of New York residents if they are over $1,000,000. Non residents pay the tax only if their estate includes real property or tangible personal property located in New York and worth over $1 million. NY 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 over $1,000,000 to file form ET-706 along with a federal estate tax return, even though one may not be required by the IRS (because the estate is under the federal filing threshold).

The tax thresholds mentioned above assume that the decedent did not make taxable gifts during his lifetime. A taxable gift is a gift made to a person above the annual gift tax exclusion amount, currently at $13,000. If taxable gifts were made, they reduce estate tax exemption amount to the extent that gift tax was not paid on them.

It is possible to avoid the sting of the estate tax by (1) fully utilizing each spouse’s estate tax exemption (2) deferring taxes until the death of the second spouse (3) and completely escaping taxes by gifting properly during life and/or after death. To speak to an estate planning attorney for an evaluation of your financial situation and to see which options can minimize or eliminate your potential estate tax liability, contact us at (347)ROMAN-85