Estate Planning Attorney
To be the master of your own destiny, one ought to take matters in his own hands. An extensive estate plan can cater to all the plausible financial and/or healthcare concerns that you or your family might come to face. As your Estate Administration Attorney, I aim to assist you in the drafting of an all-inclusive estate plan whilst guiding you throughout the probate process. Every year there are a myriad of policy changes that take place in New York affecting the federal and state estate taxation. I help you in protecting your assets against unwarranted taxation. We understand that each client is different, so all our plans are customizable to best suit your needs.
Accounting for Federal Estate Taxation
The federal estate tax is an excise tax imposed upon the transfer of a decedent’s estate to his or her beneficiaries. The amount of tax is determined by the value of the estate and is paid by the estate. It is different from an inheritance tax, which is imposed upon each beneficiary of the estate and is determined by the amount received by the beneficiary.
The federal estate tax is “unified” with the federal gift tax under a single rate structure, which cumulatively taxes all taxable transfers of property made by the decedent since January 1, 1977. The estate and gift taxes were not completely unified, however, from the enactment of EGTRRA through 2011. During that period, the estate tax applicable exclusion amount gradually increased while the gift tax exclusion amount was set at an unchanging $1,000,000. One of the changes to the EGTRRA regime made by the 2010 legislation and continued by the Taxpayer Relief Act of 2012 was to once again make the gift tax and estate tax applicable exclusion amounts (and the generation-skipping transfer tax exemption) the same.
Determining the Federal Estate Tax
The calculation of the federal estate tax generally involves six steps. The first step in calculating the federal estate tax is to determine the value of the decedent’s “gross estate,” which generally includes the value at the time of the decedent’s death of all property, real or personal, tangible or intangible, in which the decedent had an interest on the date of death. The gross estate also includes certain interests in property which the decedent transferred during life, but the decedent either retained or possessed some form of control over the property until death or transferred the retained interest within three years of date of death.
It is important to note that a decedent’s gross estate for federal estate tax purposes is much broader than the decedent’s New York probate estate. The federal gross estate includes all of the decedent’s property,
regardless of whether it passes by will, intestacy, pursuant to a contract or by operation of law. Examples of items which are includable in a decedent’s federal gross estate but not in the New York probate estate are annuity and retirement benefits receivable by a beneficiary by reason of surviving the decedent, property held jointly by the decedent with others with a right of survivorship, property over which the decedent held a general power of appointment and proceeds from certain insurance policies over which the decedent possessed incidents of ownership.
The second step in calculating the federal estate tax is to determine the value of the decedent’s “taxable estate.” The value of the taxable estate is determined by deducting the following from the value of the gross estate: (1) funeral and administration expenses, (2) the debts of the decedent, (3) claims against the estate, (4) losses incurred during the administration of the estate, (5) charitable and marital bequests, and (6) state death taxes.
The third step in calculating the federal estate tax is to add the decedent’s “adjusted taxable gifts” to the taxable estate to arrive at the “adjusted taxable estate.” A decedent’s adjusted taxable gifts are the total
amount of the taxable gifts made by the decedent after December 31, 1976, other than gifts otherwise included in the decedent’s gross estate.
The fourth step in calculating the federal estate tax is to determine the “tentative tax” by applying the applicable estate tax rates to the decedent’s adjusted taxable estate.
The fifth step in calculating the federal estate tax is to determine the “gross estate tax.” The gross estate tax is the tentative tax reduced by the aggregate amount of federal gift taxes which would have been payable with respect to taxable gifts made by the decedent after December 31, 1976, under the unified tax rates in effect at the decedent’s date of death.
The sixth and final step in calculating the federal estate tax is to determine the “net estate tax” by subtracting from the gross estate tax certain credits against the estate tax. Under certain conditions and limitations, an estate is allowed a unified credit equal to the basic applicable credit amount plus the DSUE amount, if any, a credit for state death taxes actually paid (but only in estates of decedents dying before 2004), a credit for certain federal gift taxes paid on property which is required to be included in the gross estate, a credit for certain federal estate taxes on prior transfers and a credit for certain foreign death taxes actually paid. The net estate tax is the federal estate tax obligation of the decedent’s estate. This net estate tax, plus any generation-skipping transfer taxes owed by the decedent’s estate,18 equals the total federal transfer tax obligation of the decedent’s estate.
Liability for the Estate Tax
The estate is primarily liable for the payment of the federal estate tax, and the executor is responsible and liable for using estate assets to pay the estate tax to the I.R.S. The executor is liable for the entire estate tax regardless of the fact that the gross estate consists of nonprobate property which does not come within the possession of the executor. Note that the executor may request a prompt determination of the amount of the estate tax and a discharge from personal liability. If no person is acting as executor, any person in actual or constructive possession of any property of the decedent is liable to pay the entire estate tax to the extent of the date of death value of the property in the person’s possession.
The ultimate liability for estate taxes is apportioned among the various estate beneficiaries under local law, unless the decedent otherwise provides in his will.
Generally, with regard to tenancies in common, the decedent’s gross estate includes only his or her fractional interest in the real property. Fractional ownership of property can result in a discounted valuation of the decedent’s fractional share of the fair market value if it can be shown that the interest cannot be sold without a discount.
If the decedent’s gross estate contains any stocks or bonds, Schedule B must be completed and filed with Form 706. All stocks and bonds included in the decedent’s gross estate should be listed. Bonds that are
exempt from federal income taxes are generally not exempt from the federal estate tax. If a decedent owns stocks or bonds as a tenant in common, the decedent’s fractional interest is reportable on Form 706, Schedule B. However, if the decedent owns an account holding stocks or bonds as a joint tenant with the right of survivorship, the decedent’s interest is reported on Form 706, Schedule E—Jointly Owned Property.
Stocks and bonds which are includable in the gross estate under I.R.C. §§ 2036 and 2037 because of certain retained interests are reported on Form 706, Schedule G—Transfers During Decedent’s Life.
Dividends and interest on each stock or bond should be listed separately. Dividends that have not been collected at the decedent’s death, but which are payable to the decedent or the decedent’s estate because the decedent was a stockholder of record on the date of death, should be listed as a separate item. If the stock is being traded on an exchange and is selling ex-dividend on the date of the decedent’s death, the amount of the dividend should not be included as a separate item. Instead, it should be added to the ex-dividend quotation in determining the fair market value of the stock on the date of the decedent’s death. Dividends declared on shares of stock before the death of the decedent but payable to stockholders
of record on a date after the decedent’s death are not includable in the gross estate of the decedent.