All too often, the estate tax or “death tax” is overlooked since it is not a tax that affects us while we are alive. Proper estate tax planning is important and can help you to maximize the value of the assets that will pass to your heirs upon your death. The first step in devising a successful estate tax plan is to gain a general understanding of the estate tax and how it functions.
The estate tax is a tax imposed by the federal government and several state governments and it is based upon the assessed value of your estate on your date of death. Not all estates are affected by these taxes, however. Each of the governments that impose an estate tax has an exclusion amount and if the value of your estate falls below the exclusion amount then you are not required to file an estate tax return or pay any tax. For deaths occurring during 2015, the federal exclusion amount is $5,430,000. In New York State, for deaths occurring after April 1, 2015, 2016, and 2017, the applicable exclusion amounts are $3,125,000, $4,187,500, and $5,250,000, respectively.
In addition to the basic exclusions, there are several exclusions that exist relating to married couples. If one spouse dies and leaves any of his or her assets to the surviving spouse, the value of those assets is excluded from the value of the gross estate. This provides the surviving spouse with additional planning time which, for large estates, can be invaluable.
Another tool that married couples can utilize is something called “portability”. This allows the surviving spouse to make an election to carry over the unused portion of the deceased spouse’s exclusion for use on his or her own federal estate tax return. This is a relatively new concept and is only applicable for federal estate tax purposes for deaths that occurred on or after January 1, 2011. Essentially, if the first spouse to pass left all of his or her assets to the surviving spouse and the portability election is made on the estate tax return, the surviving spouse would be able to shield up to $10,860,000 from the federal estate tax (assuming a 2015 date of death for the first spouse).
The caveat that exists here, however, is that portability is not currently permitted for New York State estate tax purposes. This creates an interesting dilemma because if you take full advantage of the federal portability, you will lose out on the state exclusion. Another difference is that New York State has an estate tax “cliff”; once your estate’s value surpasses 105% of the exclusion amount, you lose the entire exclusion. This new cliff was part of the same legislation that is increasing the New York State exclusion amount over the course of the next few years.
Although many complex nuances exist in both the Federal and New York State estate tax law, it is possible to navigate them with the assistance of a tax professional. There are many different methods that you can use to minimize your taxable estate including gifts to charity, establishing trusts, and making gifts during your lifetime, to name a few. It is never too early to start planning for the future and your heirs will be very grateful for your efforts.
Jacob Lutz, CPA, MBA
Jacob joined Cerini & Associates in January of 2013 and has been actively providing tax, compliance, and business advisory services to a wide variety of both for-profit and non-profit clients.