Back in 2001, Congress passed legislation that had drastic effects on the estate tax. That year, a decedent could pass up to $675,000 to their heirs tax-free. Any funds in excess of that amount were taxed between 35-55%. Each year after that for the first decade of the new millennium, the tax-free threshold increased in increments, culminating in a tax-free threshold of $3.5 million in 2009.
Then, in 2010, Congress temporarily repealed the estate tax altogether, effective for that year only. At the end of the 2010 session, Congress reinstated the estate tax with a temporary tax-free threshold of $5 million per person, effective through December 31, 2012. As a result of this temporary measure, the vast majority of Americans were, and still are, able to pass the entirety of their estate’s value to their heirs without incurring tax penalties. However, the time in which to take advantage of this expansive tax-free loophole is quickly dwindling.
The consequences could be drastic. A person with a substantial estate (let’s say $3 million) who dies on December 31, 2012 will be able to transfer their entire estate value tax-free. By contrast, someone who has a $3 million estate and dies on January 1, 2013 will have a substantial chunk of their estate wiped out by taxes. On that date, the taxable threshold will fall to $1 million. In the example of our second individual, 2/3 of the estate will therefore be subject to taxation of 35% or more. Our second decedent’s heirs will see substantially less money than our first decedent’s heirs.
This is not to say that people with substantial estates should endeavor to depart this world before the effective date. What it does mean, however, is that someone with a substantial estate who shows no signs of ill health should begin exploring alternative strategies for protecting their estate assets.
A popular option for people in these situations is to create what is called an irrevocable trust. The primary characteristic of an irrevocable trust is that once the trust’s creator transfers the assets into the trust, the creator is effectively unable to withdraw the assets. Instead, the power to withdraw from the trust is wholly that of the beneficiaries.
The reason irrevocable trusts have become popular options is that they are an effective alternative to protect assets and project who will benefit from the assets. The classic case in which an irrevocable trust would work is for a parent with substantial assets who wishes to devise all of his or her assets equally between his or her children. Instead of all assets beyond the $1 million tax-free threshold being heavily taxed at the decedent’s death, the same assets are protected in a trust, which enjoys considerably more tax protections.
New York estate planners strongly urge all persons to consider the implications of the impending expiration of the current estate tax law. Even if you don’t intend to expire before the end of the year, its expiration could drastically affect your distribution of assets to your loved ones. Consider the aid of a New York estate lawyer, who can help you determine how to take care of your loved ones when you are gone.
New York Probate Attorney Jules M. Haas has helped many clients over the past 30 years resolve issues relating to estate planning, estate accounting and estate settlement in Manhattan and Queens and throughout New York. If you or someone you know has any questions regarding these matters, please contact me at (212) 355-2575 for an initial consultation.