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 the minimization of taxes in all its forms. Lawyers and advisors push clients through legal and financial hurdles to avoid or delay paying taxes, be it on inheritance, capital gains, gifts, income, etc. It is imperative that clients know if their assets will be encumbered after their death so that they can seek the advice of their estate planning professional. This article provides an overview of inheritance taxes.
What is taxable?
In general, any property owned by a person at the time of death is taxable, including bank accounts, cash, securities, real estate, automobiles, etc. they are included in your gross equity. Contrary to popular belief, the death benefit from life insurance policies that a person owns is taxable unless properly structured. Joint ownership, including joint bank accounts, is 100% inclusive of the estate of the first joint owner to die, except to the extent that the other joint owner can show that they contributed to the property. Business, corporate and LLC interests can also be included in gross estate, as can general powers of appointment.
Deductions from gross equity:
To determine taxable equity, we need to reduce gross equity by the applicable deductions. The IRS allows the following deductions from gross estate that reduce gross estate:
1. Marriage deduction: One of the main deductions for the married deceased is the marriage deduction. Both jurisdictions allow an unlimited marriage deduction, which means that assets that pass directly to a citizen spouse will not be taxed in the event of the death of the first spouse. There are often very good financial, legal, and tax reasons not to leave everything to the surviving spouse, as will be discussed in the next article on derivation / credit protection trusts.
2. Charitable deduction: If the decedent leaves the property 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 inheritance.
Not one, but two:
Both the state of New York and the federal government impose separate inheritance taxes on deceased persons 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. The state of New York and the federal government tax inheritances at different levels and at different rates. Uncle Sam, however, gives taxpayers a deduction for the amount they paid in state taxes.
Federal Inheritance Tax:
Currently, the federal government taxes estates valued at more than $ 5.12 million at a rate of 35% in 2012. If Congress does not act, the federal inheritance tax is set to be 55% on gross inheritances of more than $ 1 million in 2013 and beyond.
New York State Inheritance Tax:
New York State taxes the properties of New York residents if they exceed $ 1,000,000. Nonresidents pay the tax only if their estate includes real property or tangible personal property located in New York and with a value greater 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 greater than $ 1,000,000 to file Form ET-706 along with a federal estate tax return, even if the IRS does not require one (because the estate is below the federal filing threshold ).
The tax thresholds mentioned above assume that the decedent made no taxable donations during his lifetime. A taxable gift is a gift made to an individual in excess of the annual gift tax exclusion amount, which is 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 estate tax sting (1) by fully utilizing each spouse’s estate tax exemption (2) by deferring taxes until the death of the second spouse (3) and completely avoiding taxes by donating appropriately during life and / or after. death. To speak with an estate planning attorney for an assessment of your financial situation and to see what options can minimize or eliminate your potential estate tax liability, contact us at (347) ROMAN-85