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What is the NY estate tax? NY estate planning for blended marriages

20
May

By Jason Stern

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What is the NY estate tax?  NY estate planning for blended marriages

Not so long ago if you asked any NY estate lawyer what the NYS estate tax was they would be able to tell you.  Today, very few if any NY estate lawyers would even be able to give you a general description of one of the last state estate death taxes in existence.  This is because the NY tax exemptions have skyrocketed in the last two decades, the amount you can pass without incurring any estate tax liability.  More or less, if you are concerning yourself with NY estate tax liability we would say that falls under the term good problems but good problems are problems none the less. 

As of the date of this article only thirteen states in the union still have a tax on estate proceeds.  Historically, two estate taxes loomed heavily on assets of individuals who passed away both at the federal and state levels.  However estate taxes, or death taxes as they are called, have progressively been seen as a distasteful form of double taxation, overreaching on the part of big government and a harsh penalty for working class families to endure.  Traditionally NY estates of more affluent people rarely paid NY estate taxes while the working and middle class who lacked the degree of sophistication and resources to retain high powered tax attorneys to circumvent the levy bore the brunt of the NY estate tax burden.  Put in perspective, in the year 2000 a family with over $675,000.00 of inheritance in New York would have been liable for up to 16% NY estate tax liability at the state level and another 40% of federal estate tax liability.  That is an incredible 56% estate tax exposure on any and all inheritance within the year 2000.  

As you could see both federal and NY state estate tax policies inflicted a lot of harm on working class families in prior years. Whereby individuals who succeeded to scratch and save for their families had the product of their hard work stripped away from their families through taxation.   Legislatures at both levels took note creating the American Taxpayer Relief Act of 2013, which raised the federal tax exemption on inheritance to $10,500,000.00 for married couples and $5,250,000.00 for individuals.  Most states have since followed suit by abolishing their onerous and outdated state estate tax laws completely, all except 13. 

Unfortunately NYS is still one of the thirteen states left in the union that imposes an estate tax on inheritance.  Currently NY estate tax exemptions are $5,740,000.00 per individual and up to $11,480,000.00  for married couples.  These are the amounts residents of NYS can have in their NY estates without incurring the 16% New York estate tax.  And as a NY estate lawyer I say up to $11,480,000.00, because unlike the federal estate tax exemption which is currently $22,800,000.00, for married couples and provides for portability of estate assets, New York State does not.

They say the devil is in the details and when it comes to the NYS estate tax exemption for married couples this is definitely true. In other words, at the federal level when you die all your executor has to do is elect to use your estate tax deduction and your surviving spouse can now pass the full $22,800,000.00 through their estate at the time of their demise without incurring any federal estate tax liability. However it’s not so easy in NYS where portability does not exist.  

In NYS the only way for a married couple to take full advantage of the  $11,480,000.00 exemption amount is if spouse number 1 passes with $5,740,000.00 in their NYS estate and instead of leaving their estate directly to their surviving spouse, Spouse 1 places that amount into a Qualified Terminable Interest Property Trust (QTIP) or other similar vehicle.  So instead of leaving their $5,740,000.00 estate to their surviving spouse, Spouse 1 places their estate in trust, whereby their surviving spouse can only receive its income for life but can never control or touch the principal.   In fact, the most important aspect of such a NY estate strategy is for Spouse 1 to create a trust that continues to maintain exclusive control on behalf of its beneficiaries and not their surviving spouse, otherwise the trust fails and the entire estate could be subject to NY estate tax liability. 

For example, Spouse 1 and Spouse 2 each have $5,740.000.00 within their respective NY estates.  Spouse 1 dies first, rather than leaving their inheritance outright to surviving Spouse 2, Spouse 1 creates a trust and deposits $5,740,000.00 into this trust.  Spouse 1 then names his or her children as beneficiaries of said trust with the income going to surviving Spouse 2 for the remainder of Spouse 2’s life.  This is the most important part of the trust because unless Spouse 1 maintains control of said principal, even in death, the trust will not qualify for the tax exemption. As such, while Spouse 2 is alive they can enjoy the interest created from said trust but can never receive, control or designate who is to receive the balance upon their death.  Thereby the proceeds of Spouse 1’s $5,740,000.00 estate is never in Spouse 2’s estate and does not become part of their taxable NY estate when Spouse 2 passes.  This allows a married couple to pass up to $11 million outside of the NY estate tax with some clever NY estate planning as of the date of this article.

These types of trusts are not only great for making large transfers of wealth from one generation to the next free of NY estate tax liability but also in allowing members of blended families to take care of their biological children from prior relationships.  As a NY estate lawyer, one of the leading causes of NY estate litigation we see is when individuals remarry later in life whereby both husband and wife are entering the relationship with children from prior marriages.  The problem lies wherein most NY wills lawyers draft NY wills prioritizing the testator’s current spouse as the primary beneficiary over their children from the testator’s previous marriages.  The result is the surviving spouse inherits the lion share of the decedent’s NY estate when the first spouse passes and then leaves everything to their own biological children in their NY estate plan later on.   Thereby children of their predeceased spouse, step children, are bypassed completely and effectually disinherited from their parent’s NY estate.  Since the children from their parent’s prior relationship are not blood relatives of their step parent, they often have no standing or right of inheritance under the NY estate law to even contest.  As such, when NY estate planning for blended families a Qualified Terminal Interest Property Trust (QTIP) can also be advantageous.  

As a NY estate lawyer with more than two decades of drafting NY wills for New Yorkers I have several priorities, make sure the inheritance of my clients passes the way they intend, as effortlessly as possible, and that their NY estates do not become taxable events.  If you or a loved one are concerned about your NY estate and in need of legal counseling from an experienced New York wills lawyer, please call one of our NY estate lawyers at the Law Offices of Jason W. Stern & Associates at (718) 261-2444 for a free consultation.  Our Queens estate lawyers have over 60 years of combined NY estate law experience handling NY estate cases for families like yours in the counties of Queens, New York, Kings, Bronx, Westchester, Rockland, Nassau, Richmond, Orange, Dutchess as well as in the State of New Jersey.

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