Credits and Exclusions
Personal exemption equivalent amount or unified credit or credit equivalent amount=$1 million
Annual Gift Tax Exclusion=$11,000 per year per person
Must establish domicile to prevent double taxation
Can have full-time or part-time residence; does not determine domicile – determined by IRS Filings 10 years prior, primary residence, where you move tangibles, file certificate of domicile, voting, licenses, counting days, bank accounts, credit card addresses
Domicile triggers all laws of probate in that state
Also determines where will probated, spousal election, disclaimer law
Reasons for Estate Planning:
To save estate taxes.
To avoid intestacy
Figure out if extensions are available
establish guardians for children
pick the executors and trustees.
Nominate 1 or 2 successors for any fiduciary.
Avoid family disputes.
Ensure liquidity at death
Determine charity donations
Corporate law with closely held business and dissolution, Rights of refusal and the next generation.
Ensure your will is valid
Avoid administration expense by waiving posting bond.
Account for awful contingencies.
What to ask: Citizenship, first marriage, children, children from prior marriage, who gets the estate, prior wills, bring old wills, trust agreements, divorce decrees, prenuptial, postnuptial, 3 years of tax returns, dates of birth, dates of death, liabilities, small business information,Occupation, important homes (severance issues)
Must also get: family history and personal data, determine fiduciaries, distributees, need for financial planner & accountant, Explain unlimited marital deduction, right of election
Determine the following: Pension, insurance, Options for job, if decedent is key person in closely held business, Kids going to college, retirement, major inheritance expected, major litigation involvement, employment bonuses, copyright interests, Ancillary probate proceeding over property in another state, power of attorney, living will, health care proxy
Imposed on the transfer of wealth
Taxable estate inlcudes probate and non-probate assets.
Probate vs. Non-Probate
Probate is everything named in the will
Non-Probate assets pass by operation of law. Includes jointly-owned property, totten trusts, POD accounts, life insurance, pensions (usually), revocable trusts
The proceeds and premiums of life insurance are in your estate.
There is no inheritance tax in NY because of the SOP Tax Credit
Form 706: federal Estate tax form filed at time of death; due with payment 9 months from DOD
Alternate valuation date (AVD)
6 months exactly after date of death.
Everything transferred is valued according to its value at date of disposition (rather than DOD)
Executor has choice to elect either DOD or AVD
Must be uniform throughout the entire tax return.
Can use AVD only if it reduces both the gross estate and estate tax.
Whatever you use, that is your distributees’ step-up in basis.
Irrevocable and applies to everything you transfer
Flower bonds: anticipating death, reduces federal estate tax without income tax. Bond is at significant discount and can be redeemed for face value if used to pay estate tax
The unified credit is triggered on the date of death.
This $1 Million is the maximum to keep in your estate at time of death – free and clear of tax liability
$1,000,000 is also the filing threshold, so under that, you don’t need to file.
Unified credit can be used during your life or at death or any combination thereof.
Due 9 months from DOD with payment.
6-month extension to file usually available, but extension to pay NOT available.
schedule of assets calculates your gross estate LESS reasonable funeral expenses, estate administration expenses, claims against the estate, unpaid mortgage.
Then deduct unlimited deductions — Marital and charitable = net taxable estate.
Make adjustments to Unified Credit for taxable gifts made during life that exceed the annual gift amount = adjusted net taxable estate.
Take out rates of estate tax determined by bracket
Consider your credits.
Unified Credit exemption amount – 1 million.
State tax credit – estate pays nothing extra –NY gets its share of Federal.
Foreign death taxes.
Gifts made under old tax law – prior to 1976.
Prior transfer credit (§2013) – when 2 decedents die within short time, children don’t pay estate taxes twice on same money
within 2 years you get 100% credit,
8-10 years 20% credit
more than 10 years 0% credit.
Executor: manages estate, collects assets, paying taxes, and distributes and follows the instructions left by Testator; fiduciary limited function—once all assets are distributed, duties terminate.
Trustee: Collects, Collects, supervises, monitors assets in the trust.
Testamentary Trust: Trust under a will/incorporated into will. It is set up after death. The executor funds the trust. This trust can be a life- time trust. Have no effect until death. You can rip up the will 2 minutes before you die.
Inter vivos: Trust established during life-time. An irrevocable trust avoids estate taxes but the testator parts with the money during life. Inter vivos trusts can be both revocable and irrevocable. Typically, they are irrevocable and if drafted correctly will typically avoid tax consequences.
Life time trust:
Guardian: Person responsible for minor children.
Will Drafting and Practice
Keep separate burial instructions even if you put it in will
Don’t be overly creative or overly generous (ie: debt forgiveness)
Will can say who pays estate taxes;—usually don’t want people who inherit to pay. EPTL 2-1.8—who pays estate tax
$11,000 Gift tax exemption is for a present interest. Future interests are all subject to gift tax.
husband and wife can split a gift to a 3rdparty.
One can write the check from a single held account.
File 709(a) form that both made a gift of $11,000, $22,000 total
Gifts must be irrevocable
both spouses must sign the gift tax return.
Every gift that year is split or none are split.
Must both be US citizens to do this.
Does not reduce your $ Million unified credit; every dollar above reduces your FCEA
Must use it during the year because doesn’t carry over.
Fantastic tool to get money out of your gross estate. .
Unlimited between US Citizen spouses and $110,000 annually for non-citizen spouses,.
If person dies during the same year of the gift, file 709 no later than when 706 is due.
If the gift is made to a qualifying charity there is no need to file gift tax.
Separate tax imposed on transfer to someone more than one generation below decedent
gift is subject to the highest estate tax rate—50%
GST exemption–$.1.1 million
If grandfather sets up trust for son, and grandson only gets when son dies, still subject to tax
If son dies, grandson moves in his spot but the great-grandson will be taxed if money left to him
Types of Generation Skips
direct skip: making transfers to 2ndgeneration; taxed at time of transfer
taxable termination: when trust terminates, tax imposed at death of child
taxable distribution: from trust to skipped person that is not #1 or #2 (catch-all provision)
If within 12 ½ years of grandfather–>grandfather’s generation
Within 37 ½ years–> son’s generation
More than 37 ½ years–>grandchild generation
If recipient is married to transferor, considered in same generation despite age differences
Keep appreciable assets out of your gross estate
Give an appreciable asset above the annual gift exclusion, use up your unified credit for the value THEN. The proceeds thereafter are excluded from your gross estate
Step up in basis §1014
If you die and own the asset, the inheritor gets a step up in basis to the FMV at the DOD.
If given away or sold before death, no step up