Recent estate tax changes will cost New Yorkers

After the very good market advances of 2003 and recent estate tax law changes, you might want to have a look at your current estate plans so that your estate is distributed to your intended heirs at a minimum estate tax cost.

Many Queens residents don’t realize that while the exemption for the federal estate tax has been increased many New Yorkers will now be subject to a New York death tax since New York has “decoupled” from the federal system. Let me explain.

I will try to keep this simple since it can get very complicated. Currently the new federal estate tax allows you to leave an estate of $1.5 million tax free (of course unlimited between husband and wife). Prior to EGTRRA ( The Economic Growth and Tax Revenue Reconciliation Act of 2001) an estate could take a credit for state death taxes which ranged up to 16 percent. New York limited its death tax so that it was completely covered by the federal credit and thus resulted in no additional tax to the estate.

This is no longer the case since the federal credit for state death tax is being reduced and New York limits its exemption to $1 million, thus if the taxable estate is $1.5 million there will be no federal estate tax but there will be a New York death tax. We keep a copy of our clients’ estate plans and have been reviewing who needs to make changes, you should do the same.

If you don’t believe this effects you, add up the value of your home, retirement plan and all other assets and you might be surprised. Most married people have wills that provide for a credit-shelter or bypass trust equal to the federal exemption. This would be funded upon the first spouse’s death. This needs to be reviewed since the federal exemption is now $1.5 million and increasing. If the bypass trust was completely funded now with $1.5 million, $500,000 would be subject to New York estate tax. There may be strategies to help, such as setting up a Clayton QTIP trust. The point is: now is a good time to review your estate plan to save your heirs some money.

Relying solely on the unlimited marital deduction, you can leave all your assets to your spouse without paying any estate taxes. However, if you have assets in excess of the unified applicable exclusion amount your heirs do not get to utilize that exclusion amount when you leave all your assets to your spouse. Thus, when your spouse dies, they may pay more estate taxes than if you had left some of your assets to them.

Currently, the federal estate taxes will increase from $1.5 million in 2004, to $2 million in 2006 and $3.5 million in 2009. Estate taxes will be repealed in 2010 but then reinstate again in 2011 based on 2001 tax laws. Certainly tax changes will be made before 2011 so this makes planning even more difficult.

If your estate is less than $1.5 million you still should plan your estate for other reasons. You want to provide for your estate’s distribution, to name a guardian for minor children or to have special needs trusts set up for adult children who may not be able to fully take care of themselves. Also Medicaid planning needs to be considered.

Don’t forget a big part of estate planning is an ongoing gifting strategy program. You can make annual gifts up to $11,000 in 2004 ($22,000 if the gift is split with your spouse), to any number of individuals without paying federal gift taxes. You can also use the NY college savings program for estate reduction purposes.

Remember that certain assets bypass your will. Jointly owned property will transfer directly to the co-owner, while assets with named beneficiaries will transfer directly to those beneficiaries, such as in a retirement plan. This is one reason why each year we have our clients review the named beneficiaries for their IRAs and other retirement plans to see if everything is still correct.

I believe another major part of good estate planning is to have your financial affairs set up so that your surviving heirs will be able to easily make sense of everything. The best way to do this is to consolidate all of your investments at one brokerage firm and keep your banking at one bank. This will not only allow your heirs to settle your estate more easily, but will make your life much less complicated especially when it comes to tax time.

Raymond D. Mignone is a fee-only Certified Financial Planner & President of Ray Mignone & Co., Inc. Specializing in retirement planning and investment management; he can be reached in Little Neck at 718-229-2514 or visit www.RayMignone.com.

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