Estate and Gift Tax Planning: 2013 Update

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1 Estate and Gift Tax Planning: 2013 Update Moira S. Laidlaw, Esq. Two Depot Plaza, Suite 203 Bedford Hills, New York

2 Disclaimer This is an overview not a complete statement of the law and is not to be considered legal advice If you have any questions, contact Moira S. Laidlaw, Esq. at or mlaidlaw@laidlawfirm.com 2

3 IRS Circular 230 Disclosure To ensure compliance with requirements imposed by the IRS, I inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein. 3

4 Outline Review Tax Law Federal Estate Tax Law Discuss Ways to Reduce Gift & Estate Taxes Credit Shelter Trusts Federal Gift Tax Law Life Insurance Trusts New York Estate Tax Law Gifting Minority Interests New York Gift Tax Law (Repealed since 2000!) Lifetime Gifting 4

5 Federal Estate Tax Law An Era of Certainty? Recent Federal Estate Tax Statutes Taxpayer Relief Act of 1997 Economic Growth and Tax Relief Reconciliation Act of 2001 Expired on January 1, 2011 with reversion to 1997 law Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 Expired on January 1, 2013 with reversion to 1997 law The American Taxpayer Relief Act of 2012 No expiration date, but can be repealed at any time 5

6 2010 Tax Relief Act $5MM Unified Estate, GST and gift tax exemption for 2011 and 2012 Indexed for inflation 35% tax rate on assets above exemption amount Portability of estate tax exemption for surviving spouse but not GST exemption 6

7 Taxpayer Relief Act of 2012 Made permanent the $5MM Unified Estate, GST and gift tax exemption Still indexed for inflation: 2013 exemption is $5.25MM Increased tax rate from 35% to 40% Continued portability of estate tax exemption for surviving spouse but still no portability for GST exemption 7

8 New York Estate Tax Law $1MM exclusion No Portability 16% maximum tax rate 8

9 Federal and State Gift Tax Law Federal Allowed to gift $14,000 per year to any person annual exclusion Allowed to give in excess of annual exclusion, but must file gift tax return New York No gift tax Prior gift tax law repealed effective January 1, 2000 No gift taxes owed until gift > $5.25MM 9

10 Interplay between Gift & Estate Taxes Any gifting beyond the annual exclusion amount reduces your federal estate tax exemption Example: Mrs. Smith gifts $264,000 to her niece Mrs. Smith will need to file a gift tax return to report the amount in excess of the annual exclusion Mrs. Smith s federal estate tax exclusion amount will be reduced by $250,000 bringing her exclusion amount to $5MM assuming no other gifts made 10

11 Reduce New York Taxable Estate by Using Unified Federal Exemption New York No regulation of gifting Lower estate tax threshold than federal government: $1MM (state) vs. $5.25MM (federal) Use Lifetime Gift to Reduce New York Estate Tax No federal gift tax owed until gift over $5.25MM Every $1MM gifted in lifetime could equal $100K NYS estate tax savings (depends on assets owned at death) 11

12 Portability: Allows Surviving Spouse to Use a Deceased Spouse s Unused Exemption First Deceased Spouse Leaves $3MM outright to spouse Estate has $5.25MM in DSUEA Deceased Spousal Unused Exemption Amount Second Deceased Spouse Dies with $6MM in Assets $5.25MM exemption available as DSUEA (caution regarding remarriage!) Remaining $750K exempt using decedent s own $5.25MM exemption amount No Federal estate tax due NYS estate tax due on excess of $1MM 12

13 Credit Shelter Trust Prior to portability, spouses used credit shelter trusts on death of first spouse Preserves the first spouse s estate tax credit Prevents assets in the trust from being taxed upon the death of the second spouse, in essence allowing a married couple to double their estate tax exemption Allows first spouse to designate the ultimate beneficiaries or to delegate that decision to the second spouse 13

14 Credit Shelter Trusts Still Vital Non-Tax Benefits of Trusts Asset, creditor, divorce or remarriage protection Long term care trigger trust provisions to convert to supplemental needs trust Tax Benefits of Bypass Trusts Subsequent appreciation escapes tax NYS has no portability counterpart GST exemption not portable 14

15 Funding a Credit Shelter Trust Option 1: Up to maximum amount allowed by Federal law (i.e. $5.25 million) Option 2: Up to maximum amount without owing any State estate taxes (i.e. $1 million) Option 3: Disclaimer Trust: Most flexibility Allows for post-mortem tax planning Caveats: Assets need to be segregated immediately, could create higher Medicaid penalty 15

16 Credit Shelter Illustration of NY Estate Tax Savings H & W each own $1MM in assets With no credit shelter trust, estate of surviving spouse will owe approximately $100K in NY estate tax With a credit shelter trust funded on death of first spouse with full $1MM, no NY estate tax is owed on death of second spouse 16

17 Balance Assets Between Spouses Need to distribute assets evenly between spouses to allow full funding of credit shelter trust H has $1.8MM in assets and W has only $200K in assets If W were to predecease husband, credit shelter trust could only be funded with $200K, leaving $800K of unused credit in NYS that is not portable to surviving spouse Surviving spouse s estate could owe $80K in taxes, that otherwise would not have been owed had assets between evenly balanced between both spouses 17

18 Lifetime Gifting Lifetime gifting Annual exclusions $14,000 per gift recipient 529 plans allow 5 years of annual exclusion gifting Beware of Medicaid liability Unlimited contribution for direct payment of: qualified educational expenses medical expenses 18

19 Gift or Fund Irrevocable Trusts with Assets Set to Appreciate Transfer assets that stand to appreciate into a trust, such as: Life Insurance Real Property Interests in a start-up business GRITs, GRATs, QPRTs and ILITS 19

20 Gift Minority Interests Minority interests eligible for discounted valuation H owns business with fair market value (FMV) of $1MM H gifts equally to 4 children Each child has 25% minority interest (non-controlling interest) Due to additional restrictions on transferability, interest is appraised at discounted value (35%-44% less than FMV) Gift reported at discounted value 20

21 Utilize Tax Exempt Beneficiaries Spouses Charities IRA Donation: Up to $100K income tax free through 2013 (if donor over 70.5 years old) Charitable Lead Trusts Charitable Remainder Trusts 21

22 Update Advance Directives New Power of Attorney Statute Gifting powers need to be documented in a special Gift Rider Recent Power of Attorney Case Law Implied Best Interest Gifting to Reduce Estate Taxes Express Best Interest Save on Cost of Nursing Home Care needs to be affirmatively set forth in Gift Rider 22

23 Review Your Estate Planning Documents with an Attorney Current estate planning documents need to be reviewed for outdated formula trusts Consider disclaimer credit shelter trusts Review lifetime gifting options Review Advance Directives with legal counsel, especially Power of Attorney 23