Estate and Elder Law

Hirschson and Glasgow on Transfer Tax Planning for New York Couples

The 2010 Tax Act changes the landscape of gift, estate and generation-skipping transfer tax planning, at least until the new law is due to sunset at the end of 2012. For New Yorkers, however, the application of state estate tax law has to be considered along with the federal transfer tax laws. As a result, for residents of New York, especially married couples, the 2010 Tax Act may be more complicated than first appears. In this Analysis, Linda Hirschson and Elizabeth Glasgow discuss transfer tax planning for New York couples. They write:

Transfer Tax Exemptions and Rates

     Two key aspects of the 2010 Tax Act are the lower tax rates and the higher federal transfer tax exemption for 2011 and 2012. Pursuant to the Act, the federal estate, gift, and generation-skipping transfer ("GST") tax rates are capped at 35% and the cumulative amount exempt from federal gift and estate taxes (the "applicable exclusion amount") is $5 million per person for 2011 and 2012. Similarly, the amount exempt from the federal GST tax is $5 million for 2011 and 2012. Since the combined federal gift tax and estate tax exemption is $5 million in 2011 and 2012, the two taxes once again are unified.  (As has been the case, to the extent that an individual uses her federal gift tax exemption during lifetime, it will reduce the exemption available for federal estate tax purposes). As a result, estate planners now can implement estate plans that maximize use of the unified $5 million gift and estate tax exemption ($10 million for a married couple), even for their New York clients, since New York does not levy a gift tax.

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     Another key aspect of the 2010 Tax Act is the so-called "portability" provision. For decedents dying in 2011 and 2012 survived by a spouse, the 2010 Tax Act permits a decedent to transfer her entire estate to the surviving spouse free of federal estate tax by operation of the marital deduction without wasting her federal estate tax exemption. To the extent the deceased spouse has not taken advantage of the applicable exclusion amount available to the deceased spouse's estate, it can be transferred to her surviving spouse, who then can use it to offset the federal gift tax otherwise payable on gifts made in 2011 or 2012 or the federal estate tax otherwise due upon his death in 2011 or 2012.

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Gifting Strategies for 2011 and 2012

     In light of the perhaps transient existence of the unified $5 million ($10 million for a married couple) gift, estate and generation-skipping transfer tax exemptions, those individuals who can afford to do so definitely should consider making lifetime transfers in 2011 and 2012 that take advantage of the exemptions. One long term benefit of such current gifts is that the future appreciation of and income earned on the transferred assets will be removed from the donor's estate along with the transferred property. Such transfers therefore can result in significant estate tax savings upon the donor's subsequent death. In addition, individuals with larger net worths can leverage the combination of the $5 million gift tax exemption and the current low interest rate environment  by making seed money gifts that can be used to fund the purchase of assets in exchange for promissory notes at low interest rates, again achieving the removal of future appreciation and income from the donor's estate, although in much larger amounts.

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