Tax Law

Transfer Tax Planning for New York Married Couples In Light of the 2010 Tax Act

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:

     An estate of a decedent who was domiciled in New York at her death is subject to the separate New York State estate tax, which therefore must be taken into account for estate planning purposes. Pursuant to New York State Tax Law Sections 951(a) and 952(a), the estate of a decedent domiciled in New York (a "New York Estate") pays a New York State estate tax based on the state death credit available pursuant to Section 2011(b) of the Internal Revenue Code of 1986, as amended, as in effect in 1998; that is, before the credit was phased out by the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"). In addition, in determining whether a New York Estate owes state estate taxes, the applicable exclusion amount is deemed to be $1 million. Accordingly, regardless of the increase in the federal estate and gift tax exemption or the reduction in the federal estate tax rate, a New York Estate will owe state estate taxes if the taxable estate exceeds $1 million; the state estate tax payable is based upon the rate schedule for the state death tax credit set forth in IRC Section 2011, which is capped at 16% for adjusted taxable estates in excess of $10,040,000 (a taxable estate of $10,100,000 reduced by $60,000).


      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.

      Section 303(a) of the 2010 Tax Act amends IRC Section 2010(c)(2) to define a surviving spouse's applicable exclusion amount as equaling the sum of (i) the "basic exclusion amount" and (ii) the "deceased spousal unused exclusion amount" (referred to herein as the "DSUEA"), if any. IRC Section 2010(c)(3) defines the basic exclusion amount as $5,000,000, adjusted for inflation after 2011. The DSUEA, as defined by IRC Section 2010(c)(4)(B), is the lesser of (i) the basic exclusion amount (e.g. $5 million in 2011) of the "last deceased spouse" and (ii) the excess of the basic exclusion amount of such last deceased spouse over "the amount with respect to which the tentative tax is determined under IRC Section 2001(b)(1) on the estate of such deceased spouse" (in effect, the unused basic exclusion amount of the last deceased spouse). By limiting the portable exemption to that of a surviving spouse's last deceased spouse's unused exemption amount, the provision precludes the surviving spouse from accumulating unused exemption amounts from a series of predeceased spouses. Similarly, by limiting the DSUEA to the last deceased spouse's unused basic exclusion amount rather than the last deceased spouse's total available applicable exclusion amount, which might include the DSUEA of a spouse that died prior to the now deceased spouse, the provision prevents the stacking of unused exemptions through a chain of marriages. Note that "portability" does not apply to the $5 million GST tax exemption.

(footnotes omitted)

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