This is a follow up to my November 5, 2018 blog, in which a described a Surrogate Court’s decision that QTIP assets from a 2010 estate are not subject to New York estate tax upon the death of the surviving spouse. The Budget bill would amend New York tax law so that QTIP assets from a 2010 estate are subject to New York estate tax upon the death of the surviving spouse for deaths after April 1, 2019.
Also, the bill would extend the New York three-year gift add back until January 1, 2026. This would apply to the estates of individuals dying on or after January 1, 2019.
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February 1, 2019. Sen. Bernie Sanders of Vermont has introduced legislation that would reform the federal estate tax. Currently, an individual is entitled to a combined lifetime gift and estate tax exemption of $11,400,000. The federal tax is 40% on gifts and estates that exceed this threshold.
Sen. Sanders’ bill would reduce the combined lifetime gift and estate tax exemption to $3,500,000. It would impose a 45% tax on the value of an estate between $3,500,000 and $10,000,000, a 50% tax on the value of an estate between $10,000,000 and $50,000,000; a 55% tax on the value of an estate between $50,000,000 and $1,000,000,000, and a 77% tax on the value of an estate above $1,000,000,000. Representative Nita Lowey, a New York Democrat, recently introduced The Securing Access to Lower Taxes by ensuring Deductibility Act. The Act would repeal the limitations on the deductibility of state and local income and property taxes.
The 2017 tax act increased the federal combined estate and gift tax exmption to
$10,000,000, adjusted for inflation. With inflationary adjustment, the exemption for 2019 will be $11,400,000. On January 1, 2026, the exemption will revert back to $5,000,000, adjusted for inflation. The proposed regulations would provide that taxpayers who take advantage of the increased exemption will not be adversely affected by this decrease in the exemption. This means that a taxpayer who makes pre-2016 gifts to take advantage of the increased exemption will not be forced to pay estate tax on these gifts if the taxpayer dies after January 1, 2026. New York has announced that the estate tax exemption for deaths in 2019 will be $5,740,000.
Source: Estate Tax page from Department of Taxation and Finance in New York State New York aggressively enforces its residency audit program. New York residents must pay income tax on all income, and estate tax on all assets. A non-New York resident pays income tax only on New York source income and pays New York estate tax only on New York situs assets. A typical audit case might involve a person who is domiciled in Florida but maintains an apartment in New York and travels to New York for work and/or pleasure.
The test for residency is different for income and estate tax purposes. For income tax purposes, a person is a New York resident if he meets one of two tests. According to the IRS in 2016, 5,219 families paid federal estate tax. The average size of an estate that paid tax was over $20,000,000. The average tax paid was approximately $3,500,000.
Now that the federal estate tax exclusion has been increased to $11,400,000 per person for deaths occurring in 2019, we can expect far fewer families to pay estate tax. The Tax Policy Center estimated that in 2018, only 1,700 families would owe estate tax. Of course, many more families pay New York and Connecticut estate taxes. The New York estate tax exemption for deaths in 2018 is $5,250,000; the Connecticut estate tax exemption is $2,600,000. Sources: "Only 1,700 Estates Would Owe Estate Tax in 2018 Under the TCJA" by Howard Gleckman "SOI Tax Stats - Estate Tax Statistics" by the IRS On November 15, the IRS issued annual inflation adjustments that cover over 60 items. The standard deduction for married taxpayers filing jointly will be $24,400.
The top income tax rate is 37 percent for individual single taxpayers with incomes greater than $510,300 ($612,350 for married couples filing jointly). The other rates are: 35 percent, for incomes over $204,100 ($408,200 for married couples filing jointly); 32 percent for incomes over $160,725 ($321,450 for married couples filing jointly); 24 percent for incomes over $84,200 ($168,400 for married couples filing jointly); 22 percent for incomes over $39,475 ($78,950 for married couples filing jointly); 12 percent for incomes over $9,700 ($19,400 for married couples filing jointly). The lowest rate is 10 percent for incomes of single individuals with incomes of $9,700 or less ($19,400 for married couples filing jointly). The annual exclusion for gifts will be $15,000. The combined estate and gift lifetime exemption will be $11,400,000 per person. Source Links: Rev. Proc. 2018-57 There was no federal estate tax on the estates of decedents who died in 2010 ("2010 estates"); however, New York imposed an estate tax. Many 2010 estates elected to place property held for the surviving spouse into a so-called QTIP marital trust in order to avoid New York estate tax. Assets placed into a QTIP trust are subject to federal estate tax upon the death of the surviving spouse. New York tax authorities took the position that QTIP assets from a 2010 estate were subject to New York estate tax upon the death of the surviving spouse. In a recent ruling, a New York Surrogates Court ruled that the New York tax authorities were wrong. QTIP assets from a 2010 estate are not subject to New York estate tax upon the death of the surviving spouse.
New York phases out its estate tax exemption for taxable estates that are between 100% and 105% of the estate tax exemption. The New York estate tax exemption is $5,250,000 for estates of decedents who die in 2018. This means that an estate of a decedent who dies in 2018 that is over $5,512,500 loses the benefits of the $5,250,000 exemption. As a result, beneficiaries of an estate between $5,250,001 and $5,728,101 actually inherit less than an estate of $5,250,000. The New York State Bar Association has proposed phasing out the New York estate tax exemption for taxable estates that are between 100% and 150% of the exemption amount.
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AuthorMr. Hendel has been practicing wealth preservation planning for over forty years. Archives
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