Tax Uncertainty in New York

On December 16, 2010, The Wall Street Journal reported in “For Family-Run Small Businesses, Estate-Tax Uncertainty Adds Costs” that any solution to the estate tax debate will require small businesses to spend more money and time to keep up with changes on estate taxes every year.

The federal estate tax has increased and decreased between 55% and zero in the past 10 years. This has made New York small businesses, especially the family-owned, to pay for appraisals and evaluate their assets every year. Each time the federal and New York state tax code changes, people in New York need to review their property to see if their decisions on estate planning and business strategy comply with tax laws and conducive to market conditions.

There is uncertainty as to what the federal estate tax rate will be when people actually die so individuals with money to divide between their successors have to respond to the instability of how to lower estate tax by finding ways to meet exemption rates with gifting, or putting funds into tax savings tools like life insurance.

Life insurance is attractive to people with a substantial estate and wants to pass that estate undiminished by estate taxes. The individual needs disposable income to pay premiums on a life insurance policy without undermining regular spending. Life insurance is a wealth replacement device when an estate does not include insurance proceeds. Because the value of death benefit under a life insurance policy normally exceeds the cash value of a life insurance, gifts that pay premiums on life insurance may leverage the yearly gift tax exclusion amount.

For instance, Andy has a life insurance policy with a cash value of $60,000 and a death benefit of $20 million. If Andy gives the policy away, the value of his gift is the cash value, or $60,000. In making a gift Andy will use unified credit equal to the gift tax on a gift of $60,000. Andy will make more gifts when he pays premiums on life insurance. The future premiums can qualify for the annual gift tax exclusion and not reduce the credit shelter. If Andy gives away the policy, the proceeds will not be in a taxable estate. If Andy holds the insurance policy until death, the full $20 million will be in his taxable estate, and trigger an estate tax. If his children buy new insurance and he gives them the premium amounts annually, there will be more estate tax savings. To the extent the amount of each year’s gift to each child does not exceed the annual exclusion, there won’t be any gift tax consequences.

Federal and New York estate tax laws may be complicated, engage an experienced New York tax attorney to maximize tax savings.