Death and taxes: will your estate be taxed upon death?

As the saying goes, “nothing is certain except 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 minimizing taxes in all its forms. Lawyers and advisors make clients jump through legal and financial hoops to avoid or delay the payment of taxes, be it estates, capital gains, gifts, income, etc. It is imperative that clients know whether their assets will be taxed upon their death, so that they can obtain proper advice from their estate planning professional. This article provides a general overview of estate taxes.

What is taxable?

Generally, any property that a person owns upon their death is taxable, including bank account, cash, securities, real estate, cars, etc. are included in their gross assets. Contrary to popular belief, the life insurance death benefits that an individual owns are taxable unless they are properly structured. Joint assets, including joint bank accounts, are 100% transferable to the estate of the first co-owner who dies, except to the extent that the other co-owner can prove that he contributed to the property. Business, corporate, and LLC interests are also included in the gross estate, as are general powers of appointment.

Deductions from gross assets:

To determine the taxable estate, we need to reduce the gross estate with the applicable deductions. The IRS allows the following gross estate deductions that reduce the gross estate:

1. Marriage Deduction: One of the most important deductions for married decedents is the marital deduction. Both jurisdictions allow an unlimited spousal deduction, meaning that assets that pass entirely to a spouse are not taxed upon the death of the first spouse. There are often very good financial, legal and tax reasons for not leaving everything to the surviving spouse, as will be discussed in the upcoming article on credit rescue/bypass trusts

2. Charitable Deduction: If the deceased bequeaths property to a qualifying charity, it is deductible from the gross estate.

3. Mortgages and debts in connection with the properties.

4. Administration costs of the estate, including executor/administrator, accountant’s and lawyer’s fees.

5. Losses during estate administration.

Not one, but two:

Both the state of New York and the federal government levy separate estate taxes on decedents who pass away with a certain amount of assets. The government believes that death should be a taxable event because almost everything you did in life was. The state of New York and the federal government tax estates at different levels and at different rates. However, Uncle Sam gives taxpayers a deduction for the amount they paid in state taxes.

Federal Wealth Tax:

The federal government currently taxes estates worth more than $5.12 million at a rate of 35% in 2012. If Congress does not act, the federal estate tax is slated to rise at 55% on gross estates over $1 million in 2013 and beyond.

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New York State Property Taxes:

New York State taxes the estates of New York residents if they exceed $1,000,000. Nonresidents pay the tax only if their estate includes real estate or tangible personal property located in New York that is valued more than $1 million. NY estate taxes 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 exceeding $1,000,000 to file Form ET-706 along with a federal tax return, even though it may not be required by the IRS (because the estate is below the federal filing threshold).

The tax thresholds listed above assume that the decedent made no taxable gifts during his lifetime. A taxable gift is a gift to an individual in excess of the annual gift tax exclusion amount, currently $13,000. If taxable gifts have been made, they reduce the amount of the estate tax exemption to the extent that no gift tax has been paid on them.

It is possible to avoid the sting of the estate tax by (1) taking full advantage of each spouse’s estate tax exemption (2) deferring tax until the death of the second spouse (3) and escaping taxes entirely by giving in the right way during life and/or after death. Contact us at (347)ROMAN-85 to speak with an estate planning attorney to evaluate your financial situation and see what options can minimize or eliminate your potential estate taxes