Estate Tax

Tuesday, January 6, 2015

Increases in the Federal Estate Tax and Portability for 2015

The American Taxpayer Relief Act of 2012 brought significant changes to the federal estate tax system, including the concept of portability. In 2015, there will be a $5,430,000 federal estate tax exemption, increased from $5,340,000, and a top federal estate tax rate of 40%.

What is portability?

Portability is a concept that allows a deceased spouse’s unused estate and gift tax exemption to be used by the surviving spouse. In effect, this mechanism is intended to prevent families from having to pay costly gift and estate taxes that could have otherwise been avoided.

How does portability work?

Portability is best illustrated by understanding how the federal estate tax system would work without portability. For example, assume a hypothetical marriage between Spouse X and Spouse Y. Spouse X owns $6 million of assets and Spouse Y has $4 million. Spouse X passes away, leaving the entire $6 million to Spouse Y. Because passing the property to Spouse Y would qualify for the unlimited federal estate tax marital deduction, the deceased spouse, Spouse X, has effectively wasted his unused federal estate tax exemption. When Spouse Y passes with an estate worth $10 million, Spouse Y would only be allowed to exempt $5,340,000, assuming they pass away in 2014.  Thus, the remaining $4,660,000 would be subject to a 40% taxation, a significant portion of the estate.

If portability applied upon Spouse X’s death, the $5.34 million of unused estate tax exemption could have been passed to Spouse Y to use. Now, Spouse Y would be able to use her own $5.34 million of federal estate tax exemption, as well as the $5.34 million of federal estate tax exemption that passed from Spouse X, for a total federal estate tax exemption of $10.68 million. Since the estate is worth $10 million, Spouse Y can apply the entire $10.68 million federal estate tax exemption to insulate the entire estate from federal estate taxes. Thus, portability saves the heirs nearly $2 million in federal estate taxes.

For more information about estate planning techniques or how the federal estate and gift taxation laws are applicable to you and your loved ones, contact an experienced Trust and Estate attorney.  To set up a consultation with the attorneys at Maroney Associates, PLLC, please call us at 866-994-2025. 

Tuesday, November 4, 2014

To Gift or Not To Gift?

During the course of estate planning, many families consider passing their homes onto their children as gifts. While this seems like a reasonable consideration, there may be potential tax ramifications for such a transaction.

Under current federal law, when you give anyone property worth more than $14,000 in any one year, you are required to file a gift tax form.  Additionally, the law stipulates you can gift or “give away” a total of $5.34 million over your lifetime without incurring a gift tax. This means that, if your residence is worth less than $5.34 million, you likely won't have to pay any gift taxes. However, you still must file a gift tax form, assuming it's worth over $14,000.

Here is the issue: While you may not have to pay gift taxes on the gift (a house), if your children sell the house right away, they may incur a steep tax penalty. When you give away your property, the tax basis (or the original cost) of the property for the giver becomes the tax basis for the recipient. Any profit from the sale can then be taxed. Therefore, they may lose a significant amount after the sale of the property.

For example, suppose you bought the house many years ago for $200,000 and it is now worth $450,000. If you give your house to your children, the tax basis will be $200,000. This means that if your children decide to sell the house, they will have to pay capital gains taxes on the difference between $200,000 and the selling price. The one exception to this capital gains tax liability is that, if your children live in the house for at least two out of the five years before selling it, they can exclude up to $250,000 ($500,000 for a married couple) of their capital gains from their taxes.

However, property that is inherited is not subject to the same taxes as property that is gifted. If your children were to inherit the property, the property’s tax basis would be "stepped up." This essentially means that the tax basis would be the present value of the property as of the date of death of the decedent, leaving the house through his or her estate. Therefore, by keeping your house as part of your estate rather than gifting it or selling it, your children will inherit the property at its current market value as of the date of your death, without incurring a capital gains tax liability which can reach up to 28% of the fair market value of the property.  Assuming that your estate is valued below the allotted $5.34 million federal estate exemption mark, such a method could prove to be a valuable planning strategy to consider. 

Trust and estate attorneys can guide families through the difficult process of creating a will.  For more information about estate planning strategies, contact our experienced New York estate attorneys at Maroney Associates, PLLC.

Thursday, October 30, 2014

Artwork Valuation and the Estate Tax

Many wealthy families with art collections are faced with costly decisions when determining how to address their art collections for estate tax purposes. Questions such as these often prompt families to consult a trust and estate attorney who can advise and fight on behalf of their clients.

The conundrum that art collectors face is when to sell their collections. If a collector sells the artworks while they are alive, they are subject to a 28% (currently) capital gains tax on any appreciation in the value of the art. However, if the art owner retains the art until death, up to 40% of the entire market value of the artwork could potentially be taxed under the estate tax (which currently provides a $5.34 million exemption).

Thus, for families who are nearing the estate tax exemption mark or are currently over it, the choice of whether to sell, gift, or donate the artwork can have huge financial implications, as assets above the exemption mark are taxed at a top rate of 40%.

Recently, the Fifth Circuit issued a decision which weighed in on how some families may be able to lower the rate at which artwork can be taxed.  The court granted a prominent family a $14.4 million estate tax refund and affirmed the use of fractional interest discounts for works of art.  This allows some families to creatively reduce estate taxes. The case involved 64 pieces of art whose worth, based on their full fair market value, totaled $24.6 million.

Anticipating future estate and gift tax issues, the family executed various planning techniques to divide ownership interest in the artwork. These techniques included a Grantor Retained Income Trust, a co-tenancy agreement, a lease, and a disclaimer. Essentially, by the time the grantor passed away, he held a 50% interest in three of the works and a 73% interest in the other 61 works. His three children held the remaining interests.

However, the IRS maintained that a tax discount for such fractional interests was unallowable. Thus, for tax purposes, the art would be valued based on the fair market value with no regard to the fact that the works were, in effect, owned by more than one individual.  

While the Tax Court disagreed with the IRS’ position that such fractional ownership discounts for artwork were unallowable, the court wrongly applied its own arbitrary 10% discount. In overruling the Tax Court’s decision, the Fifth Circuit held that the family’s personal valuation of the discount was applicable. 

As the Fifth Circuit held, “…in the absence of any evidentiary basis whatsoever, there is no viable factual or legal support for the court’s own nominal 10% discount,” and: “The Estate, as taxpayer, presented all of the evidence and a surfeit at that, further eschewing the propriety of a nominal discount.”

This simply means that, because the estate provided support for its valuation based on the fractional interest in the works of art, it was up to the IRS to rebut the estate’s evidence. Furthermore, the Tax Court erred in deciding that the discount should amount to 10% without any evidence.

Strategic planning can help families prepare for unexpected estate tax burdens. If you have any questions about how art and other collectibles may be valued for the purposes of taxation, contact the experienced estate attorneys at Maroney Associates, PLLC. 

Tuesday, August 19, 2014

Changes in the New York Estate Tax Exemption Amount and New Gift Tax Legislation

The New York estate tax exemption refers to the amount an individual may gift to others free of New York estate tax. Previously, this amount, in New York, was capped at $1,000,000 per individual. However, legislation passed earlier this year has increased the amount to $2,062,500 for individuals dying on or after April 1, 2014. Furthermore, this amount is scheduled to increase annually over the next five years at which point it will be equal to the federal estate tax, which is currently $5,340,000 per individual and indexed for inflation, for estates of individuals dying on or after January 1, 2019.

Essentially, the New York estate tax exemption is “phased out” for taxable estates valued above the exemption amount, and no exemption is available for taxable estates valued above 105 percent of the exemption amount. This means that the new increased exemption amount will effectively decrease estate tax burden for individuals whose taxable estate falls below the 105 percent mark. Individuals who will have a taxable estate valued above that threshold will not receive the benefit of the new exemption amount.  However, some speculate that because of the way the estate tax is calculated these individuals are likely to pay the same amount of New York estate tax as under the prior law.

In addition to the aforementioned changes, the new legislation also provides that gifts (other than to a spouse or a charity) in excess of the annual exclusion amount ($14,000 per donor per recipient per year), are now subject to a New York State estate tax, if the gifts were made within the three years prior to death. However, this rule applies to only to gifts made between April 1, 2014, and January 1, 2019, by an individual who was a resident of New York at the time of the gift. In addition, annual exclusion gifts and qualified gifts, such as those for medical or educational purposes, would not be affected by this new rule.

Careful planning and the implementation of a sound strategy can often times help alleviate unexpected estate tax burdens. If you have questions about estate planning, tax exemptions, or how the recent changes in the law will affect you or a loved one, contact the experienced estate attorneys at Maroney & Associates, PLLC. 

Tuesday, June 28, 2011

Five Reasons to have a Last Will and Testament

In previous blogs, we have discussed a number of aspects of a last Will and Testament.  Below is a quick summary of those discussions and why, if you haven’t established a Last Will and Testament, you should do so without delay: 

  1. Establishes your beneficiaries to inherit your estate after death.
  2. Establishes who will act as the fiduciary to settle your estate after death.
  3. Establishes the guardian for your minor children in the event of an untimely death.
  4. Create Trusts in your Will so as to avoid estate taxes, care for a special needs individual without jeopardizing his or her government benefits, and to avoid a minor from having access to an inheritance at 18 years of age.

And the most important reason:

       5.  Avoid the government making decisions “1 through 4” above for you.


Thursday, January 13, 2011

The Federal Estate Tax Yesterday, Today and Tomorrow

The Federal Estate Tax has been the subject of political turmoil for some time.  After much wrangling, the tax has been “re-set,” but again, only in temporary fashion.  This gives the wealthy and their planners some peace of mind for the near future, but leaves uncertainty going forward.  Thus, we believe a brief summary of the recent past, present condition, and future predictions, warrants a blog from us to you.

A short visit to the recent history of the federal estate tax will show how much it has changed in such a short time.

In 2009 the annual exclusion was $3,500,000. The provisions of the tax law called for the federal estate tax exclusion to be repealed, and to that end, in 2010 there was no federal estate tax.

After the mid-term elections of 2010, Congress revived the estate tax, at least temporarily.   For 2011 and 2012, the estate tax exclusion amount and tax rates have been set at a $5 million applicable exclusion, with assets exceeding that amount being subject to a 35% tax.   

We report that this is a “temporary estate tax,” because under current law, the applicable estate tax exclusion will only be in place for 2011 and 2012.  Thereafter, there is a “Sunset Provision,” which means that on December 31, 2012, the estate tax provisions in effect for 2011 and 2012 will expire, and on January 1, 2013, the estate tax exclusion will revert back to a $1 million exclusion with all assets exceeding $1 million being subject to a 55% tax.
Whether this reversion will actually happen is unknown, because the present Congress has stated that it will re-visit what will actually happen to the estate tax in 2013.  We at Maroney Associates believe that one of four things will happen on or before January 1, 2013:
  1. The Sunset Provision will apply and the estate tax will revert to a $1 million exclusion with assets exceeding the excluded amount being taxed at 55%;
  2. The 2011 and 2012 limits will be extended, meaning that the exclusion will remain at $5 million with assets exceeding that amount being subject to a 35% tax;
  3. A political compromise may be had, with the exclusion amount being lowered to approximately $3.5 million but the tax rate being set at approximately 45%; or
  4. There may be a total repeal of the Federal Estate Tax.
Many political pundits predict that if the Republicans maintain the present majority position they took in Congress during the 2010 mid-term elections, and if they also take a majority control over the U.S. Senate and possibly the U.S. Presidency in the 2012 elections, there is a significant likelihood of there being a total repeal of the federal estate tax in 2013.  This means that as of January 1, 2013, there would be no federal estate tax.
For the present time, there is a major tax benefit relative to the use of the unlimited marital deduction.  There is also a benefit for those whose assets exceed $5 million and/or couples whose assets exceed $10 million, to use the marital/credit shelter trust rules.
The federal estate tax exclusion is the amount a person can have in their estate without having the estate owe a federal estate tax.  Critical for any married couple is the knowledge that an unlimited amount of property may be left to a surviving spouse without him or her incurring any federal estate tax.  This is certainly a good financial argument for marriage,  however, without proper planning, the property left in the surviving spouse’s estate will be subject to federal estate and gift taxation upon the surviving spouse’s death.
For example, without proper planning through the use of the marital/credit shelter trust, the surviving spouse who receives an inheritance in an amount in excess of $5 million,  will have lost the opportunity to shield the $5 million from the estate of the deceased spouse and may cause the estate to become taxable upon his or her own death.
With proper planning, namely the use of a credit shelter trust, each spouse can enjoy his or her own $5 million exclusion, thus leaving up to $10 million without paying an estate tax.

Sunday, December 5, 2010

The Federal Estate Tax as of January 1, 2011

As of January 1, 2011 the Federal Estate Tax is scheduled to tax any estate in excess of one million dollars at 55% of that excess. 

Through the use of trusts, both living and testamentary, an individual can plan to mitigate their estate tax liability.  For example, an individual worth $2 million can use estate planning techniques to transfer the entire $2 million without paying a Federal Estate Tax.  Without using such techniques, $1 million of the estate would be subject to a 55% Federal Tax, in addition to any applicable state estate tax.
If you would like further explanation or have any questions/concerns regarding the Federal Estate Tax, please feel free to contact us.

Matthew J. Maroney, Esq
Cristina Prieto-Maroney, Esq
Maroney Associates, PLLC
Phone: 631-881-0877
Fax: 631-881-0874

Based in Melville and Garden City, New York, the attorneys at the Law Offices of Maroney Associates, PLLC assist clients throughout Nassau County, Suffolk County, Queens, and the cities of Mineola, Hempstead, New Hyde Park, Franklin Square, Williston Park, Queens Village, Melville, Huntington, Farmingdale, Patchogue and Uniondale, NY.

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