Advanced Estate Tax Planning
Without careful planning, much of your life’s legacy could be lost to estate taxes. While a simple will can provide for the transfer your estate to your loved ones, it does not have special provisions for advanced estate tax planning.
The Federal Estate tax: Exemptions & Rate
Federal estate tax laws were updated in 2013 as part of the American Taxpayer Relief Act which provides for an exemption of $5.6 million. The federal estate tax exemption, also referred to as applicable exclusion amount is adjusted annually for inflation. In addition, Connecticut taxes estates in excess of $2.0 million, and New York taxes estates in excess of approximately $5.25 million (increasing to the same amount as the federal exemption by 2019).
The taxable value of the estate is calculated by adding up all the assets owned by the individual and subtracting from that total any of his or her liabilities. Additional deductions can be taken for qualified charitable deductions as well as administrative and legal costs involved in settling the deceased’s estate.
The federal estate tax rate for estates exceeding the exemption amount is 40%. The rate is applied to the taxable estate value that is in excess of the exemption amount. The estate tax rates for New York and Connecticut are graduated and range from 5% to 16%.
The Federal Estate tax: Understanding Portability
In addition to the individual exemption, married couples enjoy an unlimited deduction for transfers to one another. While this is great news for many couples who choose to leave their estate to each other, without proper planning it can result in a loss of some of the individual estate tax exemptions after the passing of the second spouse.
For example, this can occur when a husband leaves $3 million of his individually-owned assets to his surviving wife who already has $5 million herself, bringing her total net worth to $8M. The bequest to his wife is not subject to estate taxes because it qualifies for the unlimited marital deduction. After some time, the wife also passes away, leaving everything to the children. While her estate can take advantage of her individual exemption of $5 million (increased by inflation adjustments), the rest her estate it could be subject to estate taxes because her husband’s individual exemption was unutilized.
To address this issue, the current federal estate tax law allows for “portability” of individual exemptions between spouses. Stated another way, estate tax portability enables the surviving spouse to utilize the unused portion of the first-to-die spouse’s estate tax exemption. Portability is not automatic and in order to take advantage of it, an estate tax return must be filed with the IRS within 9 months of the passing of the first spouse, even if there are no taxes due at the time. It is important to note that neither Connecticut nor New York recognize portability. Therefore, portability cannot be relied upon by residents of either state.
An alternative to relying on portability is to utilize a special planning tool referred to as a credit shelter trust (also referred to as a bypass or A-B trust) combined with splitting the ownership of assets between spouses to maximize estate tax savings. If properly established, such trusts work much in the same way as portability, but also minimize state estate taxes and provide creditor and divorce protection.
Planning for Estates With Less Assets than the Estate Tax Exclusions
The federal estate tax is no longer relevant to many clients. If only state estate taxes are relevant, this results in a situation where the federal and state income tax rates are higher than the estate tax rate. Mr. Hendel takes this new paradigm into account when counseling his clients. He employs cutting edge techniques to help his clients minimize income taxes. He also helps clients escape from no longer useful estate planning transactions.
Special Planning for High Net Worth Individuals
Individuals and families with significant net worth still have taxable estates even if they take full advantage of their respective exemptions. For these individuals, there are a variety of advanced planning techniques that can be crafted to help reduce the estate tax burden, such as strategic gifting plans, family limited liability companies, life insurance trusts, personal residence trusts and grantor trusts.
Same-Sex Couples
The Supreme Court's ruling on the Defense of Marriage Act (DOMA) paves the way for same-sex couples married under state law to take advantage of all the federal privileges afforded to opposite-sex couples, including those related to federal gift and estate taxes.
Tax planning strategies are inherently complex but an experienced estate planning attorney with knowledge of estate and gift tax laws can help you establish a comprehensive plan that will allow you pass on as much of your hard-earned assets as possible to your loved ones and beneficiaries.
The Federal Estate tax: Exemptions & Rate
Federal estate tax laws were updated in 2013 as part of the American Taxpayer Relief Act which provides for an exemption of $5.6 million. The federal estate tax exemption, also referred to as applicable exclusion amount is adjusted annually for inflation. In addition, Connecticut taxes estates in excess of $2.0 million, and New York taxes estates in excess of approximately $5.25 million (increasing to the same amount as the federal exemption by 2019).
The taxable value of the estate is calculated by adding up all the assets owned by the individual and subtracting from that total any of his or her liabilities. Additional deductions can be taken for qualified charitable deductions as well as administrative and legal costs involved in settling the deceased’s estate.
The federal estate tax rate for estates exceeding the exemption amount is 40%. The rate is applied to the taxable estate value that is in excess of the exemption amount. The estate tax rates for New York and Connecticut are graduated and range from 5% to 16%.
The Federal Estate tax: Understanding Portability
In addition to the individual exemption, married couples enjoy an unlimited deduction for transfers to one another. While this is great news for many couples who choose to leave their estate to each other, without proper planning it can result in a loss of some of the individual estate tax exemptions after the passing of the second spouse.
For example, this can occur when a husband leaves $3 million of his individually-owned assets to his surviving wife who already has $5 million herself, bringing her total net worth to $8M. The bequest to his wife is not subject to estate taxes because it qualifies for the unlimited marital deduction. After some time, the wife also passes away, leaving everything to the children. While her estate can take advantage of her individual exemption of $5 million (increased by inflation adjustments), the rest her estate it could be subject to estate taxes because her husband’s individual exemption was unutilized.
To address this issue, the current federal estate tax law allows for “portability” of individual exemptions between spouses. Stated another way, estate tax portability enables the surviving spouse to utilize the unused portion of the first-to-die spouse’s estate tax exemption. Portability is not automatic and in order to take advantage of it, an estate tax return must be filed with the IRS within 9 months of the passing of the first spouse, even if there are no taxes due at the time. It is important to note that neither Connecticut nor New York recognize portability. Therefore, portability cannot be relied upon by residents of either state.
An alternative to relying on portability is to utilize a special planning tool referred to as a credit shelter trust (also referred to as a bypass or A-B trust) combined with splitting the ownership of assets between spouses to maximize estate tax savings. If properly established, such trusts work much in the same way as portability, but also minimize state estate taxes and provide creditor and divorce protection.
Planning for Estates With Less Assets than the Estate Tax Exclusions
The federal estate tax is no longer relevant to many clients. If only state estate taxes are relevant, this results in a situation where the federal and state income tax rates are higher than the estate tax rate. Mr. Hendel takes this new paradigm into account when counseling his clients. He employs cutting edge techniques to help his clients minimize income taxes. He also helps clients escape from no longer useful estate planning transactions.
Special Planning for High Net Worth Individuals
Individuals and families with significant net worth still have taxable estates even if they take full advantage of their respective exemptions. For these individuals, there are a variety of advanced planning techniques that can be crafted to help reduce the estate tax burden, such as strategic gifting plans, family limited liability companies, life insurance trusts, personal residence trusts and grantor trusts.
Same-Sex Couples
The Supreme Court's ruling on the Defense of Marriage Act (DOMA) paves the way for same-sex couples married under state law to take advantage of all the federal privileges afforded to opposite-sex couples, including those related to federal gift and estate taxes.
Tax planning strategies are inherently complex but an experienced estate planning attorney with knowledge of estate and gift tax laws can help you establish a comprehensive plan that will allow you pass on as much of your hard-earned assets as possible to your loved ones and beneficiaries.