How to Save Money on Estate Taxes in New York

In 2013, there is no federal estate tax on the first $5,250,000 of an estate, with the rest of the estate being taxed at the rates of up to 35%. Settling up an estate plan can help you save money on estate taxes and defer paying the estate tax for as long as possible.

Here are some of the ways in which our law firm can help families pass on the estate without exessive tax liability.

1. Leave Some Property to Your Spouse or to a Charity

Leaving property to your spouse or to charity is the simplest way to save on estate taxes.

Example:

If you have an estate worth $5.2 million, you can leave $100,000 to the charity of your choice and leave the other $ 100,000 to your spouse. You would not have to pay estate taxes on the total of $.2 million you left to charity and your spouse, and you will not have to pay estate taxes on the $5 million remaining estate because it would be covered by the estate tax exemption.

Estate Tax: 0

2. Lifetime Gifts

In the year 2013, you can give up to $5,250,000 estate and gift tax-free.

If you go over that exemption, you can gift $14,000 per person per year tax-free. A couple can gift twice as much. Let’s say you and your spouse have 3 children and 1 grandchild. You can gift them $112,000 a year tax-free. Any amount over this will be subject to the gift tax.

If your children are still young or are unable to manage money, you can still take advantage of the $14,000 per person per year gift tax exemption by leaving the money for your child in a Crummey Trust. The Crummey Trust is a sort of a limited gift that is substantially delayed until the date of your death.

As an added benefit, lifetime gifts remove future appreciation of money from your estate. For example, if you gift $14,000 to your child now (or place the money into a Crummey Trust for your child’s benefit), and the money is invested and grows to $35,000 by the time you die, you have effectively transferred $35,000 to your child without paying any estate tax.

3. Life Insurance Planning

If not planned correctly, the proceeds of your life insurance can be included in your taxable estate. If the IRS finds that your life insurance is payable to your estate, or you’ve retained some indicia of ownership of the policy during your lifetime, the proceeds of the life insurance can be taxed as part of your estate. For a $5 million policy, you can end up paying more then $1 million in federal taxes alone, and that’s if the policy is the only asset you have. If you have other assets that use up your $5 million estate tax exemption, you will pay more then $1 million in estate taxes for your insurance policy. An experienced estate attorney can avoid those consequences by reviewing a life insurance policy and making the appropriate changes.

An Irrevocable Life Insurance Trust (ILIT) can be set up to own the life insurance policy, so that when the insured person dies, the proceeds of the life insurance will not become a part of the taxable estate. The insured can still pay the premiums by a “Crummy gift” to the trust. The downside of the trust is that the trust cannot be changed since it is irrevocable. The upside – no estate taxes (if set up the right way).

A Life Insurance Trust is also an important estate planning tool. It holds your life insurance for the benefit of your beneficiaries. After three years the Trust would be deemed the owner of the policy, so as to minimize and chance that your estate will pay estate taxes on the proceeds. It also ensures that any appreciation of the life insurance policy is kept out of your estate. As a note of caution, a Life Insurance trust has to be carefully drafted by an experienced estate attorney to meet exacting IRS requirements.

Call the Law Offices of Albert Goodwin at (212) 233-1233 and make an appointment to discuss your estate planning needs.

Current Estate Tax Exemptions

Estate tax exemptions have changed substantially since this article was originally written. Current exemption amounts (subject to annual adjustment):

• Federal estate tax exemption: Approximately $13.61 million per individual in 2024. The exemption is scheduled to drop by approximately half after 2025 unless Congress acts.
• Federal annual gift exclusion: $18,000 per recipient in 2024.
• Federal lifetime gift exemption: Integrated with the estate tax exemption.
• New York estate tax exemption: Approximately $6.94 million per individual in 2024.
• New York gift tax: None, but gifts within three years of death come back into the estate for New York estate tax purposes.

These amounts are point-in-time and should be verified before planning. The dramatic upcoming reduction in federal exemption creates planning opportunities and pressures.

The New York Estate Tax Cliff

New York's estate tax has a "cliff" feature that creates planning challenges:

• Estates exceeding the exemption by more than 5% lose the exemption entirely.
• An estate slightly over the cliff pays substantially more tax than one slightly under.
• This creates strong incentives to keep estates under the cliff through gifting or other planning.
• Charitable bequests can be calibrated to reduce the taxable estate just under the cliff.

For estates near the cliff threshold, precise planning can produce substantial tax savings. For example, an estate $1 million above the exemption could lose the entire exemption, paying tax on the full estate. Charitable giving or other reductions to bring the estate under the cliff could save hundreds of thousands of dollars.

Spousal Transfer Planning

The unlimited marital deduction allows unlimited transfers to a U.S. citizen spouse without estate or gift tax. Common strategies using this deduction:

• QTIP trusts. Provide for the surviving spouse while controlling ultimate disposition.
• Portability elections. The surviving spouse can use the deceased spouse's unused federal exemption.
• Credit shelter trusts. Use the deceased's exemption while providing benefit to the surviving spouse.
• Asset titling. Coordinating which assets are in which spouse's name to optimize exemption use.

The spousal deduction is particularly important for larger estates. Without planning, both spouses' exemptions may not be fully used; with planning, both exemptions can shelter assets.

Charitable Planning Strategies

Charitable giving offers estate tax benefits:

• Outright bequests. Direct gifts to charity at death qualify for the charitable deduction.
• Charitable remainder trusts. Provide income to non-charitable beneficiaries with the remainder to charity.
• Charitable lead trusts. Provide income to charity for a term with the remainder to family.
• Private foundations. Family-controlled charitable entities for ongoing philanthropy.
• Donor-advised funds. Charitable accounts managed by sponsoring organizations.
• Conservation easements. Charitable donations of property development rights.

Each strategy has specific requirements and trade-offs. The right strategy depends on the family's goals, the size of the estate, and the desired charitable impact.

Generation-Skipping Planning

For wealthy families, generation-skipping transfer (GST) tax planning is important:

• The GST tax applies in addition to gift and estate tax for transfers to grandchildren and more distant descendants.
• The GST exemption matches the estate tax exemption ($13.61M in 2024).
• Dynasty trusts can hold assets for multiple generations with proper GST allocation.
• The GST exemption is most valuable when allocated to high-appreciation assets in long-term trusts.

GST planning is complex but offers substantial benefits for families with multi-generational wealth.

Business Succession Planning

Family businesses face specific estate tax challenges:

• The business value may exceed estate tax exemptions.
• The business may be illiquid, making tax payment difficult.
• Successors may need to refinance or sell to pay taxes.
• Valuation disputes with the IRS are common for closely held businesses.

Common business succession planning strategies:

• Buy-sell agreements. Establish valuation and transition procedures.
• Family limited partnerships. Hold business interests in entities that may qualify for valuation discounts.
• Grantor retained annuity trusts (GRATs). Transfer appreciation while retaining annuity payments.
• Section 6166 installment payments. Spread estate tax payments over up to 15 years for closely held business interests.
• Life insurance. Provide liquidity for estate tax payment.

Real Estate Planning

Real estate-heavy estates face specific issues:

• Real estate appreciation can dramatically increase estate values.
• Real estate is illiquid, complicating tax payment.
• Different ownership structures have different tax implications.

Planning strategies for real estate:

• Qualified personal residence trusts (QPRTs). Transfer the residence with retained right to use for a term.
• Family limited partnerships. Hold real estate with valuation discount potential.
• Like-kind exchanges. Defer capital gains during life.
• Installment sales to family members. Transfer property with deferred payment.
• Gifting strategies. Annual gifts of fractional interests over time.

Lifetime Use of Exemption

The scheduled reduction in federal estate tax exemption after 2025 creates urgency around using exemption during life. Strategies include:

• Large lifetime gifts to use exemption before reduction.
• Grantor trusts that consume exemption while transferring appreciation.
• SLATs (spousal lifetime access trusts) preserving family access while using exemption.
• GST exemption allocation to long-term trusts.

The window for these strategies is closing. Wealthy families should consult counsel about using exemption before the scheduled reduction.