Q. WHAT KIND OF TAXES WILL I HAVE TO PAY WHEN I DIE?
A. New York residents are responsible for the payment of both State and Federal gift and estate taxes. Estate and gift taxes are separate and above the taxes paid on income. No Federal estate or gift tax is due unless or until the total of lifetime gifts combined with the assets remaining in the individual's estate exceeds certain levels. An estate in excess of $1 million is taxable in New York. An estate of over $3.5 million is subject to federal estate tax.
Q. WHAT ASSETS ARE INCLUDED AS PART OF MY TAXABLE ESTATE?
A. All assets that you own at the date of your death are part of your taxable estate. This means that your home, even if jointly owned, IRAs, 401Ks, insurance policies and jointly owned bank accounts and brokerage accounts are all part of your taxable estate.
Q. SHOULD I BE PLANNING TO AVOID GIFT AND ESTATE TAX?
A. Under the Federal tax code, gifts and estates over the applicable credit amount (see above), are taxed at a steeply graduated rate. If you are a New York resident and own assets in excess of $1 million, you should give serious thought to planning your estate to avoid or reduce gift and estate taxes.
Q. ARE THERE ANY TRANSFERS (GIFT OR INHERITANCE) THAT ARE TAX FREE?
A. Yes, there are certain exclusions from gift tax. Each individual has the right to gift $13,000 (2009 figure) in any calendar year to any number of persons. For example, if you have two children who are married and each one of those children has a spouse and three children, you could gift $13,000 to each of the ten family members per year. In this way, you could gift $130,000 per year with no gift tax consequences and reduce your taxable estate. Often family members who have total assets that exceed the Federal applicable credit amount make these tax free gifts for the purpose of reducing the amount of assets in their estates, thereby reducing their eventual estate tax liability.
Other gifts excluded from gift tax are unlimited payments on behalf of another person made directly to a provider of educational services for tuition or to a provider of medical services. An individual can reduce his total assets and eventual tax liability by paying a grandchild's college tuition, or nursery school bills directly to the educational institution. Hospital or doctor bills paid by the individual directly to a hospital or doctor on behalf of another person also carry no gift tax consequences.
The most significant exception to gift and estate tax is the marital deduction. The marital deduction allows each spouse the right to give an unlimited amount of assets during life or after death to the other spouse who is a U.S. citizen without any estate or gift tax consequences. Although this is often of great benefit, it is not always the best plan to take full advantage of the marital deduction. It may leave the surviving spouse with a very large taxable estate. Significant estate tax savings can be achieved by married couples with the right estate plan.
Q. IF I'M MARRIED, WHAT TAX PLANNING CAN I DO TO SAVE ON TAXES?
A. For married couples, credit shelter trusts, also known as bypass trusts, can be very helpful. Even though married couples have a right to an unlimited marital deduction, a couple's assets are not necessarily protected from hefty estate taxes when the second spouse dies. Married couples with total assets over the applicable credit amount should consider the use of a credit shelter trust to avoid Federal estate taxes. A credit shelter trust is generally included in the Will or revocable trust of each spouse. At the death of the first spouse, a sum equivalent to the applicable credit at the date of death can fund this trust. This sum does not go to the surviving spouse, but to the trust and therefore, passes tax free in the estate of the first to die spouse. The trust can be structured so that the surviving spouse receives income from the trust and can access trust principal at the discretion of the trustees. The provisions of the trust can vary, within limits. The credit shelter trust is complex. Before implementation of such a plan, or other available tax saving devices, you should have a thorough discussion of the available strategies with a knowledgeable attorney.
Q. I AM SINGLE. ISN'T THERE ANYTHING I CAN DO TO SAVE ON TAXES?
A. There are numerous opportunities to save on gift and estate taxes such as insurance trusts, qualified personal residence trusts, family limited partnerships or gifting programs. A consultation with a knowledgeable attorney will allow you to explore your own unique options. And don't forget the non-taxable gifts as discussed above.