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New York Estate Tax Reform: The Good, The Bad, and The Ugly

Apr 15, 2014 08:14 am | admin



New York may be a great place to live, but it can be an expensive place to die. Now, thanks to some significant revisions to some of New York’s outdated tax laws, the State has become a more attractive place to die – at least from an estate tax planning perspective.

On April 1, 2014, the Executive Budget of 2014-2015 was signed into law and significantly altered the estate tax structure in New York.

Only 19 states, and the District of Columbia, currently impose estate tax levies, and New York is one of them. Prior to the new law, the exemption amount in New York was $1,000,000. So if you died before the new law was enacted and your estate was valued at more than $1,000,000, then any amount exceeding the exemption would be subject to an estate tax at a gradual tax rate that topped off at 16%.

While $1,000,000 may seem like a lot of money, inflation and the increase in home values in New York have made $1,000,000 a lower number than you may think. It has become more common for many New Yorkers to accumulate at least this amount throughout their lifetimes. The low estate tax exemption combined with the net-worth of many residents has made New York an expensive place to die.

For years, many wealthy New Yorkers have successfully avoided the estate tax issue by either migrating to other states with more favorable tax laws in their later years, or by implementing sophisticated estate plans.

At first glance, the Executive Budget of 2014-2015 seems to provide an incentive for wealthy New Yorkers to remain in the state toward the end of their lives, and thereby thwart the migration and reduce the need for Estate Tax planning.  But if you take a closer look, the reform has some significant pitfalls.

 

The Good

The new law immediately increases the New York State estate tax exemption from $1,000,000 to $2,062,500, effective for those passing away on or after April 1, 2014. Thereafter, the exemption amount will increase gradually until January 1, 2019, when the New York exemption amount will equal the federal exemption amount, which is currently $5,340,000 (which will increase as well based on inflation).

Time Period

New York Basic Exclusion Amount from Estate Tax

 Prior to the 2014-2015 NYS Budget  $1,000,000
 April 1, 2014 – March 31, 2015  $2,062,500
 April 1, 2015 – March 31, 2016  $3,125,000
 April 1, 2016 – March 31, 2017  $4,187,500
 April 1, 2017 – December 31, 2018  $5,250,000
 On or after January 1, 2019  Same as federal exemption amount (currently  $5,340,000, but indexed for inflation)

 

These increases will certainly help reduce or eliminate the New York State estate tax liability for those under the exemption level at the time of death.

For example, if Tom died on April 2, 2014 leaving an estate worth $2,000,000, under previous tax laws, his estate would have been subject to a $99,600 New York State estate tax liability. However, under the new tax law his estate would be exempt from paying New York State estate taxes.

This increase means that New York now has the third highest estate tax exemption in the northeast, after New Hampshire (no estate tax – live free and die free), and Vermont ($2,750,000 estate tax exemption).

 

The Bad

Despite the immediate exemption increase and gradual increase that will ultimately align the State exemption amount with the Federal Unified Gift and Estate Tax Credit in 2019, there are some serious traps with the new law. The most significant disadvantage is that it entirely eliminates the use of the New York estate tax exemption for estates that are valued at more than 5% of the exemption amount (105% of the estate tax exemption level). So, if you die with just 5% more than the exemption amount, the entire amount of your estate will be subject to the estate tax, not just the amount exceeding the exemption.

For example, let’s assume that instead of leaving an estate worth $2,000,000, Tom died on April 2, 2014 with an estate worth $2,170,000, ($2,062,500 x 105% = $2,170,000) his estate will be subject to an estate tax liability of $112,400. Tom’s estate would effectively be subject to the same amount of tax liability that it would have been under the old tax law.

In addition to this 5% cliff, New York’s top estate tax rate of 16% still exists under the new law.

Another significant issue with the new law is that, unlike the federal law, there is no portability provision allowing a surviving spouse to shelter double the exemption. This lack of continuity with the federal law will undoubtedly create a pitfall for married couples and that will need to be resolved through the use of sophisticated estate tax plans.

 

The Ugly

New York does not currently have a gift tax. This means that New Yorkers can reduce the value of their taxable estates by gifting the bulk of their assets during their lifetime without fear of any gift tax at the state level. The new law significantly alters this estate planning strategy, by creating a three-year look-back period.

Now, any gifts that are made within three years of a decedent’s death must be added back to the New York gross estate. The increase of the gross estate creates the potential for a New York estate tax liability, assuming the value of the estate is higher than the exemption amount. In effect, we now have a reverse gift tax in New York.

The good news is that only gifts made between April 1, 2014 and December 31, 2018 are subject to this look back period.  Hence, if you intend to make gifts to reduce your potential estate tax liability now is the time to do it.

 

Conclusion

According to the New York State Tax Reform and Fairness Commission’s Final Report,  the new law was intended to make New York a more competitive place to live in the later years of life, and hopefully thwart the migration of older residents. Time will tell how successful this reform is in meeting the State’s objectives.

With the increase in the New York estate tax exemption comes a real concern that there will be a significantly lower demand for sophisticated estate tax planning. Although the demand will certainly decrease given the higher exemption amount being phased in over the next few years, when you consider the 5% cliff, the lack of portability, the maximum tax rate of 16%, and the three-year look back period for gifts, it becomes apparent that many New York residents will continue to have their estates subject to New York State estate tax.  Many will go without planning due to a lack of understanding the traps in this New York State estate tax reform. This is a mistake.

By Eric J. Einhart – Guest Blogger

The post New York Estate Tax Reform: The Good, The Bad, and The Ugly appeared first on Russo.

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Trusts and Problems to Avoid (Part 1)

Apr 11, 2014 08:25 pm | admin



9 Problems To Avoid with Your Trust

It has been several years since you signed and funded your Living Trust to avoid probate.  All seems ok but is it really?

#1 Have you funded your trust properly?

If you do not re-title or assign your assets to the Trust, then you have not funded your Trust.  If there is no funding asset, then that beautiful trust instrument does nothing for you.  In fact, your Pour-Over Will may be rendered invalid.  This means that you should review your list of assets and make sure you have taken steps to transfer the ownership to your Trust.  One asset in your name alone with no beneficiary may cause Probate which you were trying to avoid.

#2 Who are the beneficiaries of your retirement plans and other investments?

If your trust to control who receives your assets upon your demise, then it is very important that you review all assets that have a beneficiary designation.

Often clients spend hours with their attorneys crafting an estate plan to match their goals and them circumvent it through naming individuals as beneficiaries of retirement plans and investment accounts. Make sure these are all coordinated.

#3 Does your trust have provisions providing for maximum tax deferral if it is named the beneficiary of a retirement plan? While you may choose to have your retirement plans go directly to your heirs — and often this is the simplest approach — if they are going to your trust, there are significant tax consequences.  It is important that if you name your Trust that the IRA or 401K distributions can be stretched out over the lifetime of the beneficiary. The IRS has some special requirements in order to qualify for the stretch pay-out.

#4 Is your trust up-to-date for estate tax purposes? Congress and many states have changed the estate tax laws several times in recent years. If your trust is more than five years old, or if you lived in a different state when it was drafted, it should be reviewed by an estate planning attorney to make certain it is still current. No one wants to pay taxes unnecessarily.

I also suggest that your Trust and over-all Estate Plan should be reviewed annually. Personal Circumstances Change, Laws Change.  The Settlor and Trustee of your Trust should meet with an experienced estate planner to make sure your Trust is doing what you want it to.

The post Trusts and Problems to Avoid (Part 1) appeared first on Russo.

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Hospice: The Right Care at the Right Time

Apr 09, 2014 10:33 am | admin



Photo John Diaz-Chermack-140402MWC

John Diaz-Chermack- Assistant Administrator of Hospice of New York

Vincent J. Russo & Associates, P.C., sponsored a Health Care Professionals Seminar entitled, Hospice: The Right Care at the Right Time. The guest speaker was John Diaz-Chermack, the Assistant Administrator of Hospice of New York.

John explained that the purpose of hospice care is to bring help, hope, comfort, and dignity to terminally ill patients and their families. Everyone enjoyed listening to John’s heart- warming anecdotes about his hospice patients.

We learned that in addition to cancer, there are many other qualifying diagnoses such as end stage heart, liver, and renal disease, pulmonary disease, stroke, coma, Alzheimer’s/dementia, end stage HIV/AIDS, and neurological disorders (MS, ALS, and Parkinson’s.) We also learned about the many services provided by hospice care which focus on the quality of life for the patients and their families. The care and support provided by hospice care ranges from a hospice team/medical care (pain management, physical and occupational therapy) to music therapy to spiritual and bereavement counseling.

These hospice services are covered by Medicare Part A, Medicaid, and most major health insurance companies, including HMOs. With most health insurance plans, there are no copayments, exclusions, or deductibles. Also, since the patient’s treating doctor is a critical component of the hospice team, the patient can continue with his/her treating doctor even if the doctor is not part of the hospice program.

Whether the patient is receiving hospice services at home or in a facility, the hospice team will design and implement a “plan of care” that supports the patient’s right to live as fully as possible and the right to die with dignity.

For more information about Hospice of New York, please visit: www.hospiceny.com

By Marie Elena Puma, Esq.- Guest Blogger

 

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