Saving Estate Taxes
We are often surprised at how few families (1) actually save the maximum estate taxes allowed by law, (2) protect the inheritances they are leaving from their children’s divorces, and (3) arrange to keep their assets in the bloodline for their grandchildren. Taking these issues in order, below please find our article on the current state of estate taxes showing what you can save. Following that is an article we have written about the planning technique of using trusts to reduce, and often eliminate New York and Federal estate taxes.
Secondly, please also have a look at our article explaining Ettinger Law Firm’s trademarked “Inheritance Protection Trust”, in use for over twenty-four years now. These trusts protect the inheritances you leave from your children’s divorces, lawsuits and creditors and, upon their death, guarantee whatever’s left goes back to your blood relatives instead of in-laws and their families.
The current exemption from New York estate taxes is $7.16 million, indexed for inflation. For example, last year it was 6.11 million. For the majority of our clients this presents no issue – their estates will never approach the exemption.
However, for the fortunate few who have assets, including life insurance, that may exceed roughly seven million dollars, there is a significant tax liability. Changes in New York estate tax law in the last few years introduced a “fiscal cliff”. Whereas formerly New York only taxed the amount over the exemption, if you exceed the limit today they tax the whole estate. You’re over the cliff!
The tax is surprisingly large. On a roughly seven and one-half million dollar estate, the taxes payable to New York exceed five hundred thousand dollars. An estate over ten million would owe close to a million in estate tax.
These New York estate taxes are avoidable if you have a spouse and you create an estate plan using two trusts – one for each spouse. By setting up two trusts, over which you and your spouse both have complete control, you may double the exemption and would not have to pay estate taxes unless you exceeded the two exemptions. This planning must be done before the first spouse dies. The technique is explained in detail in the following article “Disclaimer Trusts for Couples with Taxable Estates”.
While the Federal estate tax exemption of $13.99 million is “portable”, i.e. if the first spouse doesn’t use their exemption or any part of it, it passes to the surviving spouse, New York does not allow for portability. It’s use it or lose it.
The Federal exemption is expected to be reduced from the $13.92 million exemption passed by the Trump administration to the $7.16 million that New York uses at the end of 2025. For larger estates, there remains a planning opportunity by making gifts while the higher exemption is in place. You may use any of your estate tax exemptions to make gifts while you are living. These gifts are reported to the IRS and get subtracted from what you may give at death.
One added attraction to gifting is that New York does not tax gifts — so that gifts also avoid onerous estate taxes at death. There is a minor exception that gifts made within three years of the death of the donor are brought back into the donor’s estate for estate tax purposes.
For couples with taxable estates, disclaimer trusts are commonly used today to allow the surviving spouse greater flexibility in optimizing estate tax savings. These trusts are generally used in states that have a “state” estate tax that the client may be exposed to.
Here’s how they work. Each spouse sets up their revocable living trust. Husband and wife are co-trustees of his trust, using his social security number and, similarly, they are both co-trustees of her trust with her social security number. Let’s say husband dies first. His trust says “leave everything to my wife except that, whatever she disclaims, i.e. refuses to take, will remain in my trust”. The disclaimer is a legal document that lists the assets disclaimed and their value. Wife remains as trustee on husband’s trust after he dies and may use the funds in his trust for her health, maintenance and support. She may also remove 5% of the trust every year for any reason, or $5,000, whichever is greater.
The reason wife is limited to health, maintenance and support is that if she had the right to take whatever she wanted at any time for any reason, the taxing authority would say that she had complete control of the funds and would then seek to tax those funds in her estate. The access for health, maintenance and support, however, is sufficiently broad so as not to cause a problem for her. She may also continue to buy, sell and trade assets in the husband’s trust. This trust continues for her lifetime and pays out to the heirs at her death along with her own trust.
Husband’s social security number died with him so his trust took out a trust tax identification number when he died and reported as a separate taxpayer during her lifetime. It is not includable in her estate. Indeed, what has happened is that husband’s trust was settled on his death and left to his heirs, but subject to wife’s lifetime use and enjoyment of the trust assets.
The benefit of the disclaimer is that it allows the wife to decide (or the husband if wife dies first) how much to leave in the deceased spouse’s trust based on her age, health and the tax laws at that future time. Formerly, attorneys would simply do their best to split the assets between the two trusts and simply say whatever was in the deceased spouse’s trust remained there for the surviving spouse’s lifetime. This yielded some unfortunate results.
Let’s say husband’s trust exceeds the tax exempt amount. Formerly, wife would be required to pay tens of thousands of dollars in state estate tax based on the amount over the exemption. With the disclaimer trust, wife may take the excess over the exemption out of his trust for herself and claim the unlimited marital deduction which avoids estate tax on assets left to a spouse. Perhaps her estate will be under the exemption and no taxes will ever have to be paid on that money, she may spend or gift it down, or the exemption may be raised during her lifetime. In any event, worst case scenario is that taxes on those monies are deferred until after she dies and, in the meantime, she has the use and enjoyment of monies that would have formerly gone to the government.
A word about the Federal estate tax exemption which today reaches almost thirteen million dollars. For couples over thirteen million, the Federal tax regime offers “portability” which means the surviving spouse is permitted to claim any unused portion of the deceased spouse’s exemption. Nevertheless, the disclaimer trust may still be used to “freeze” the growth of the deceased spouse’s share.
For example, let’s say husband’s trust has thirteen million dollars. If it goes to wife, she can claim his thirteen million plus exemption (adjusted for inflation) on her death. However, the thirteen million may have grown to twenty million or more by the time of her death which, together with her own assets, may put her estate over the combined twenty-six million plus exemption.
By leaving the thirteen million in husband’s trust at his death, all of the growth remains tax-free to the children at the wife’s death. The husband’s trust has passed the tax collector and is not looked at again upon the wife’s death.
At an estate tax rate of forty percent, millions of dollars may be saved at the Federal estate tax level by using disclaimer trusts.
With the size of estates having grown today to where middle class families are leaving substantial bequests to their children (depending, of course, on how many children they have), the trend is toward establishing trusts for the children to keep the inheritance in the bloodline. In the case of your children, there are a number of benefits to leaving assets to them in a trust. These are: (1) the assets will be protected from their spouse in the event of divorce (2) the assets may be protected from their creditors in the event of a lawsuit or other financial hardship, and (3) on your child’s death, the unused assets will go to your blood relatives (usually grandchildren) instead of to in-laws or others.
We call this “multi-generational planning.” With a will, your estate plan typically ends when you do. With an Inheritance Protection Trust (IPT), however, your wishes can continue for thirty, forty, or even fifty years — often lasting through two generations instead of just one.
During your children’s lifetimes, they have complete access to both the income and principal of their Inheritance Protection Trusts. This means you are not giving them a “gift with strings attached” or “ruling from the grave.”
When your child passes away, however, the trust assets — which may have grown substantially — are directed to your grandchildren.
If your grandchildren are under age thirty, we recommend that the trust continue until they reach that age. In the meantime, the trustee (often one of your other children) may use the assets as needed for the grandchildren’s health, education, maintenance, and support.
If one of your children passes away without children of their own, the trust funds instead pass to their surviving brothers and sisters.
Without an Inheritance Protection Trust, if your son or daughter dies, the inheritance you left could pass to a son-in-law or daughter-in-law. If that in-law remarries, your hard-earned assets could ultimately be shared with a complete stranger.
Of course, some clients do not wish to disinherit their sons- or daughters-in-law. In those cases, the Inheritance Protection Trust — or a portion of it — can be structured to provide “income only” to the in-law for their lifetime.
This ensures they benefit from ongoing income, but if they remarry or require nursing home care, the trust assets remain protected. Ultimately, the assets will still pass to your grandchildren after the in-law’s lifetime.
At Ettinger Law Firm, our elder law lawyers focus on the needs of older adults in New York when protecting their families, assets and future. We recognize that many of our clients have minimal or no experience working with attorneys — our low-pressure approach enables you to make these crucial life decisions at your own pace. Trust our team to educate you and make the information you need accessible throughout the process.
Contact us today to learn more or schedule a No-Cost Consultation for elder law estate planning.
