All New York estates face tax issues. Federal tax laws are supreme, and override New York state laws. Tax planning needs to be considered in estate planning.
The federal estate tax is a tax due when somebody dies and property is transferred to heirs. Upon death, a person’s heirs will be subject to estate taxes. The estate tax accounts for everything the decedent had interests in or owned at the date of death. The estate tax does not change based on how the person transfers assets, whether by will, living trust, or New York state intestacy laws.
The federal gift tax prevents someone from avoiding the estate tax by giving away the estate before death. However, federal tax laws allow for some exceptions to the gift tax. For example, in 2009, estates with a value of $3.5 million could be left to other individuals without estate taxes. Obtain information on gift and estate taxes from www.irs.gov.
In estate planning, a married couple may structure a trust to save estate taxes when the second spouse dies. This trust uses the personal estate tax exemption of each spouse to maximize tax savings on the combined estate for heirs of the couple, such as their children. The trust structure uses a shared living trust for both spouses and two additional trusts for each spouse. When a spouse passes, the assets of the shared trust transfers into a new trust. The new trust becomes irrevocable and gives the surviving spouse a life interest in the trust assets. No trust assets are transferred on the death of the first spouse to the second spouse. They remain in the new irrevocable. The property of the surviving spouse transfers to another trust, a living trust for the second spouse, which stays revocable. The children of the couple are normally designated as second beneficiaries of the two trusts (both the irrevocable and revocable trusts). The beneficiaries receive the trust assets of both trusts. With respect to estate tax, the first transfer from the shared trust to the irrevocable trust is taxable if the personal estate tax threshold educes or nullifies estate taxes. When the children become the irrevocable trust beneficiaries, there is no estate tax to pay. Estate tax is applied on the assets of the revocable trust of the surviving spouse, but the personal estate tax threshold of the surviving spouse reduces or nullifies the estate tax.
Federal and New York tax laws may be complex, engage an experienced New York tax attorney to maximize tax savings.