Asset protection is the part of estate planning that minimizes estate taxes. Estate taxes siphon value from the assets a decedent leaves in his or her estate. However, New York State (NYS) and Federal estate taxes only apply to estates of high net worth individuals.
High net worth is a relative term. From the perspective of New York State, an estate greater than $5.25 M per person will be subject to estate taxes. From the Federal perspective, the number is $11.2 M per person. The portion of an estate below these values is exempt from estate tax, and the exemption may prove useful for couples.
Today, the NYS Estate tax ranges from 5% to 16% of an estate’s value, while Federal estate taxes run from 18% to 40% of the estate’s value. If estate value criteria are met, the estate will owe both NYS and Federal estate taxes, with no deduction for the former when calculating the latter. Therefore, asset protection is critical for high net worth individuals.
Unlike Medicaid planning for long term care, there is no lookback period for asset transfer. However as your estate’s assets begin to approach the exemption limits, it is time to get an asset protection plan in place. Today, in NYS, if you are within 5% of the exemption amount, you only pay what is over the exemption. But if you are over the 5% limit, you pay taxes on the whole estate amount. This is called “The Cliff”. The federal estate tax does not have the cliff, and you only pay tax only on the estate’s value that is greater than the exempt amount.
All assets in the estate are included in its valuation. Monetary asset valuation is straightforward, but other asset classes are more complex. For example, assets like cars and boats must be valued by Appraisers. They perform the valuation when the estate’s tax returns are filed.
The IRS may challenge one or more valuations, but there is a 6-year limit. If the estate and the IRS cannot agree on a valuation, a trial in tax court might ensue. Therefore, it is critical to file an estate tax return even if it appears no tax will be due. Filing the return starts the 6-year clock running. The sooner it runs out, the better for the estate.
Small businesses are often challenging to value. For example, how should the estate value the interest of the decedent when there are multiple owners. Most commonly, appraisers apply discounts for minority shareowners.
This occurs because it would be difficult to sell a share of a small business. It is unlikely a buyer would want 50% or less of a business, preferring instead to buy the whole business. This type of valuation is the realm of appraisers specializing in business estate tax valuation.
Gifting is getting assets out of the owner’s name as the owner ages, by giving them away. With the right estate structure, asset owners may give a percentage of their assets to others.
However, there are also a gift taxes to manage, so an owner cannot simply give away the entire estate just before death. NYS has no gift tax, but the state “claws back” any gifts given in the last year of life. There is a Federal gift tax. The IRS uses a unified credit for estate and gift.
Gift are taxed in the same way as the estate. Therefore asset owners may give away and expire with a combined $11.2 M. For example, if an owner were to give away $11.2 M but die with an estate of $5 M, there would be no exemption left for the $5 M.
Therefore, the estate would be subject to estate tax on that amount. Remember, all these rules may change at any time. This means regular reviews of estate plans are critical.
Remember the exempt amount that might be useful for couples? With the right advanced planning, a surviving spouse may inherit the unused estate tax exemption from their deceased spouse.
This approach, called a Credit Shelter Trust, is not an automatic right but requires estate structuring to enjoy this protection. Larger property owners and business owners should certainly consider this type of trust.
The end goal is reduced asset valuation, below $11M in today’s environment, in an acceptable manner, so as not to be challenged by the IRS. For planning purposes, it is a good idea to have an anticipatory valuation of assets while the estate owners are alive.
1 – Get your Credit Shelter trust in place to avoid tax liability for a couple’s combined assets for 10.5M in NYS or $22M Federal.
2 – If you are above the exclusion limits, begin gifting to take assets out of your name. Give the max that is gift tax free as it will not affect your exemption and doesn’t trigger a gift tax. Today, that gift amount is $15,000 per individual receiving your gift, per year.
3 – Investigate using trusts to pass assets at a discounted valuation. For example, if a trust retains the interest accrued by a gift in a Grant Retained Annuity Trust, this may reduce the value of the gift while maximizing the exemption.
Getting started is simple. The first step is to recognize you are a candidate for estate tax and gift tax, and begin planning. Sheryll Law uses a comprehensive questionnaire to evaluate your need for such plans. It is important to recognize a potential estate tax liability, as that will trigger certain initial planning steps. These include a review of assets and evaluation, and placing a Credit Shelter Trust in a couple’s wills, to maximize the value of each spouse’s credits. Remember, If a spouse dies without passing their credit with a Credit Shelter Trust, the credit will be completely lost. With trust in place, the first-to-die’s credit will be preserved. Just this simple portion of an estate plan may mean no taxes would be due.
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Pick the Right Firm for Asset Protection
Asset Protect for high net worth individuals is a specialized field in estate planning. As with Medicaid planning, it makes sense to use a practitioner who practices in this specialty every day. The scope of the asset protection problem space is vast, so it requires specific expertise and experience. It also requires the ability to connect with the right appraisers, financial advisors, and CPAs to obtain the best result. Everyone on the team must be a specialist. Sheryll Law has a standing team of experts available and will work seamlessly with your existing trusted advisors. In the event one or more specialists are absent, Sheryll Law will draw on its team to complement yours.
It’s Later Than You Think
It is clear that none of us is getting younger. Time passing is time lost for gifting. In addition, you may lack the simple estate protections that belong in your will. These lapses are especially devastating in NYS, with its “Cliff”. Remember, if your goes “over the cliff” it will be taxed on the entire value of the estate, rather than on the overage. That would be needlessly costly. What are the risks of doing nothing or delaying action? Your estate may pay too much in taxes that might well have been avoided.
We have the right skills to work in today’s information age, by staying on top of the changes in relevant laws. Massive changes occurred in 2017 with the new Federal Tax bill, The Tax Cuts, and Jobs Act. Sheryll Law invests time and effort in continuing legal education courses and seminars. In addition, named partner Jay Sheryll maintains active participation in the NYS Bar Association Trust and Estates group and Suffolk County Bar Assoc estate planning group, where he collaborates with other estate planning professionals.
Remember, with asset protection, a stitch in time may save your estate millions of dollars. Preserve your hard-won assets for your beneficiaries, and start your asset protection planning today.
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