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 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 get clients to jump through legal and financial hoops to avoid or delay paying taxes, be it estates, capital gains, gifts, income, etc. It is imperative that clients know if their assets will be encumbered on their death so that they can seek appropriate advice from their estate planning professional. This article provides an overview of estate taxes.

What is taxable?

In general, any property a person owns at the time of death is taxable, including bank accounts, cash, securities, real estate, cars, etc. are included in his gross assets. Contrary to popular belief, the death benefit from life insurance policies owned by a person is taxable unless properly structured. Joint property, including joint bank accounts, may be included 100% in the estate of the first co-owner to die, 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 gross assets, as can general powers of appointment.

Deductions from Gross Equity:

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

1. Spousal Deduction – One of the main deductions for married decedents is the spousal deduction. Both jurisdictions allow an unlimited spousal deduction, which means that assets that pass directly to a citizen spouse will not be taxed on the death of the first spouse. Often, there are very good financial, legal, and tax reasons not to leave it all up to the surviving spouse, as will be discussed in the next article on safe haven/credit diversion trusts.

2. Charitable Deduction: If the decedent leaves assets 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 patrimony.

Not one, but two:

Both New York State and the federal government impose separate estate taxes on decedents who die with a certain amount of assets. The government calculates that death should be a taxable event because almost everything else you did in life was. New York State and the federal government tax assets 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 at more than $5.12 million at a rate of 35% in 2012. If Congress does not act, the federal property tax is scheduled to be 55% on gross properties over $1 million in 2013 and beyond.

New York State Estate Tax:

New York State taxes property owned by New York residents if it exceeds $1,000,000. Non-residents pay the tax only if their estate includes real property or tangible personal property located in New York and valued at 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). federal filing).

The tax thresholds mentioned above assume that the decedent made no taxable gifts during his 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 to the extent that gift tax was not paid.

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 avoiding taxes entirely by donating appropriately 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 can minimize or eliminate your potential estate tax liability, contact us at (347)ROMAN-85