By Jason Stern
Many wealthy people have so much money they literally do not know what to do with it. However, while most of us may never amass a billion dollars we can still learn an awful lot from the NY estate law mistakes of the super wealthy.
Thinking about putting your wealth into artwork, exotic cars or rare coins, think again. Although nearly all wealthy individuals have teams of NY estate lawyers, accountants and financial professionals guiding them in the planning of their estates, they make mistakes too. While these fortunate individuals can afford the consequences of a catastrophic NY estate law mistep most cannot.
Beauty is in the eye of the beholder: Estate of Sonnabend
Artwork, exotic cars and rare coins all have one thing in common, they are all terrible estate investments. Any good NY estate lawyer will tell you when planning your estate you want to look for assets that afford your heirs something called a “STEPPED UP BASIS”. A stepped up basis is advantageous to your estate, and includes assets such as your primary residence, stocks and negotiable securities. Assets that are afforded a stepped up basis are valued as of the decedent’s date of death rather than date of purchase. Trust me when I tell you as a NY estate lawyer with extensive experience probating estates in NY, this is a HUGE estate planning tool. Stepped up basis spares heirs billions of dollars in Capital Gains Tax every single year. Whether your estate’s value is a billion dollars or a hundred thousand dollars, this estate concept will benefit your heirs. Here’s how it works:
A has one child, named C. A bought $30,000.00 of a stock 20 years ago. A passed away this year leaving C all of their stock which is currently valued at $6,000,000.00. Ordinarily assets that appreciate are subject to the Capital Gains tax, usually 20% of any and all appreciation between the date the asset was purchased and the date the decedent past away. However in the cases of primary residence, stocks and various other types of securities, these assets are afforded the stepped up basis, eliminating any and all Capital Gains tax liability in the asset.
As such, without the stepped up basis, C in the above scenario would have to pay 20% of the appreciation amount of the inherited stock, roughly a $1,194,000.00 tax bill. However since stocks are afforded a stepped up bases C is in luck, inheriting a $6,000,000.00 asset without any Capital Gains tax liability.
Collectibles have their own special estate tax they are subject to coincidentally called the “collectible tax”. And unlike the Capital Gains tax that starts out at 15% and goes up to 20%, the “collectible tax” is assessed at 28%.
If you want to know just how bad an investment that painting is for your estate, just look at the NY estate of Ileana Sonnabend. Ileana Sonnabend passed away in 2007 leaving various pieces of artwork but none more notable than “Canyon”. “Canyon” is a coveted sculpture by the artist Rauchenberg. “Canyon” features a stuffed bald eagle, a species that is both endangered and Federally protected by stringent laws. While “Canyon’s” appraised value would be $65 million, the sculputure’s actual value is $0. As a NY estate lawyer I say actual value because as a Federally Protected species, the sale of this $65 million dollar stuffed eagle is illegal. Rendering the practical value of this piece worthless.
However, this fact did not stop the I.R.S. from extracting $29 million from the Sonnabend heirs for their portion of “Collectible Capital Gains Tax” as indicated above. This $29 million collectible capital gains tax amounts to insult to injury. You do not have to be a NY estate lawyer to see it is bad enough Sonnabend’s heirs are not afforded a stepped up basis for the above-mentioned reasons but are also being penalized by paying taxes on a collectible’s value whose worth they will never realize.
While as an individual it is hard to feel sorry for the heirs of the $1 billion Sonnabend estate, I do feel sorry for them as a NY estate lawyer. From this NY estate we can all come away with two important NY estate law lessons. Firstly, a stepped up basis is invaluable to each and every individual regardless of the size of your NY estate. Secondly, collectibles are not meant to be utilized for NY estate purposes as it is clear from this application of the Federal Estate Tax Code. Make no mistake these collectibles are luxury items and will be taxed accordingly in your NY estate.
If you or a loved one are thinking about planning their estate, feel free to speak with a NY estate lawyer for a free consultation at the Law Offices of Jason W. Stern & Associates, (718) 261-2444. Our NY estate lawyers have 35 combined years of experience planning and probating estates for New Yorkers in the counties of Queens, Manhattan, Brooklyn, Bronx, Nassau, Westchester, Orange, Dutchess and Putnam.