Commonly Asked Tax Questions

What is a Charitable Lead Trust and how can it help my estate planning?

A Charitable Lead Trust is a Trust where a charity or charities have an annuity interest in the Trust for a term of years or on a measuring life and your designated beneficiaries receive the remainder held in the Trust after the term of years or measuring life ends. A Charitable Lead Trust can reduce income, gift and/or estate taxes. The Charitable Lead Trust can greatly reduce the value of the remainder interest gifted or transferred to your designated beneficiaries. The IRS uses actuarial tables with a modest growth rate to value the remainder interest gifted to the remainder beneficiaries of the Trust. If the assets held in the Charitable Lead Trust grow in excess of the IRS rate (currently about 2%), then the appreciation in excess of the IRS rate will transfer to the remainder beneficiaries tax free. The Charitable Lead Trust will allow you to fulfill your philanthropic goals, while transferring wealth to the next generation with minimized transfer taxes.

What is a Charitable Remainder Trust and how can it help my estate planning?

A Charitable Remainder Trust is a Trust that can be used to sell highly appreciated assets (retirement benefits, Employee Stock Options, etc.) at greatly reduced tax consequences. A Charitable Remainder Trust can be used to save income, gift, and/or estate tax. The basics of the Charitable Remainder Trust are that you or your designated beneficiary will receive an annuity interest in the Trust for a term of years or the lifetime of the income beneficiary, with a charity or charities of your choice receiving the remainder interest of the Trust. In addition to the tax savings offered by a Charitable Remainder Trust, you will be able to fulfill your philanthropic goals by giving a charity or charities of your choice a remainder interest in the Trust.

What is a Credit Shelter Trust and how does it allow for marital planning opportunities?

For estate tax purposes, if you are married, then you can adopt what is often referred to as an “A-B” Trust Plan, Credit Shelter Trust Plan or Bypass Trust Plan. The purpose of this plan is to utilize both your and your spouse’s Applicable Exclusion Amount at the time of your deaths. If the estate of the first spouse is left to the surviving spouse using the unlimited marital deduction, then the first spouse has failed to utilize his or her exemption, and on the death of the second spouse only one exemption amount will be available if the portability election was not made or not available. Whereas, if proper planning is employed and both spouses are able to utilize their respective exemptions from Estate Tax, your tax savings will double. If structured properly, each spouse is able to fully utilize the credit shelter amount, providing for maximum estate tax savings.

Despite the apparent simplicity of leaving everything to the surviving spouse and relying on the portability to fully use both spouses’ applicable exclusion amount, there are still strong reasons to continue to use credit shelter trust planning. One reason is that with a credit shelter trust the first spouse can be assured that the assets will go to the beneficiaries named in the trust, rather than leaving the assets outright to the surviving spouse who can then dispose of them as he or she sees fit. This is especially important for blended families or potential remarriage. Another compelling reason is that there is no portability for New York State purposes.

Please see the Estate Planning Guide for examples for Credit Shelter Trust planning. 

What is a Gift Tax Exemption?

There is a federal gift tax on uncompensated transfers to other individuals or entities. The federal gift tax exemption provides a $5,430,000 exclusion from the federal gift tax in 2015, meaning you would have to make gifts in excess of $5,430,000 before you are taxed on your gifts. New York State does not currently have a gift tax. Gift tax exemption amounts can vary year to year depending on inflation adjustments and legislation. Please see our Estate Planning Guide for more information. 

What is a Grantor Retained Annuity Trust and how can it help with my estate planning?

A Grantor Retained Annuity Trust (“GRAT”) is a Trust for a fixed term or the life of the Grantor, where the Grantor receives an annual or more frequent annuity payment from the Trust and at the end of the Trust, the remainder passes to the beneficiary(ies) of the Trust as a gift. There is an assessed value for gift tax purposes determined when the GRAT is set up, which is calculated according to IRS regulations. If the value of the assets held in the GRAT increase in value at a rate in excess of the modest rate assumed by the interest rate set by the IRS, then what is actually transferred to the beneficiaries of the GRAT will be larger than the gift reported for gift tax purposes, thus the appreciation has passed tax free.

What is a Qualified Personal Residence Trust and how can it help with my estate planning?

A Qualified Personal Residence Trust (“QPRT”) is a Trust where a Grantor (you) can either transfer your principal residence or one vacation home and retain the right to live in the residence for a term of years (ex. 10 years) during which time you pay for all the expenses of the residence. After the term of years expires, the beneficiaries of the QPRT will own the house and you can continue to live in the house by paying reasonable rent. A QPRT will remove the house held in the Trust from your taxable estate; the value of the gift is reduced by the value of your retained interest in the house; and if you survive the term of the QPRT, you will be able to further reduce your taxable estate by paying rent to the beneficiaries of the QPRT, who are most likely the intended beneficiaries of your estate (ex. Children).

What is a Wealth Replacement Trust and how can it help my estate planning?

A Wealth Replacement Trust is an Irrevocable Life Insurance Trust that works in tandem with a Charitable Remainder Trust to replace wealth transferred to the charity, which allows you to maximize your charitable deduction with no reduction in the wealth you transfer to the next generation of your family, while incurring no income or estate tax on the life insurance proceeds. The Grantor(s) (You and/or your spouse) can pay the life insurance premium of the life insurance held in the Wealth Replacement Trust by using a portion of your retained annuity from the charitable remainder trust, and/or a portion of the tax savings from the charitable income tax deduction from the transfer of assets to the charitable remainder trust, and/or making annual exclusion gifts to the Wealth Replacement Trust. In the end, the Wealth Replacement Trust will allow you to take a highly appreciated asset (ex. Stock) and sell that highly appreciated asset inside a charitable trust without incurring income (capital gain) tax, provide you with an income stream from the charitable remainder trust, without reducing the wealth transferred to your intended beneficiaries (ex. Children).

What is an Estate Tax Exemption?

Upon your death, the federal government and certain states (including New York) impose a tax on the value of your property when you pass it to your descendants. This tax is commonly referred to as a "death tax". An "Estate Tax Exemption" is the amount of assets you can transfer without paying tax. The federal estate tax exemption will include the value of gifts made during your lifetime in determining whether there is a federal estate tax due. This amount will vary from year to year depending on legislation and inflation. The 2015 federal estate tax exemption is $5,430,000. This means that a decedent dying in 2015 can transfer $5,430,000 worth of assets when he or she passes away without paying federal estate tax.

Beginning January 1, 2011, estates of decedents survived by a spouse may elect to pass any of the decedent’s unused exemption to the surviving spouse. This election is made on a timely filed estate tax return for the decedent with a surviving spouse. This is known as "Portability". If the rules regarding portability are strictly adhered to, a couple should be able to utilize two full federal exemptions even if the first spouse to die fails to do so.

Through March 31, 2014, $1,000,000 was excluded from tax under the former New York Exemption. Legislation in 2014 imposes a tax on a decedent’s entire taxable estate but allows a credit, known as the “Applicable Credit Amount”, against the tax imposed.  For decedent’s dying between April 1, 2015 and March 31, 2016, the New York State Basic Exclusion Amount is $3,125,000. There is no portability of the New York State estate tax exemption. Please see our Estate Planning Guide for more information. 

What is an Intentionally Defective Grantor Trust and how can it help my estate planning?

An Intentionally Defective Grantor Trust (“IDGT”) is a Trust that is treated as a Grantor Trust for income tax purposes but is a completed transfer for estate and gift tax purposes. This will allow the Grantor (you and/or your spouse) to remove appreciating assets (estate freeze) from your estate for estate tax purposes, while you will pay the income tax liability of the IDGT. The reason that your payment of the income tax liability of the IDGT is an important planning technique is that the payment of the income tax is a tax free gift to the beneficiaries of the IDGT (by not reducing the assets held in the IDGT by its income tax liability), while at the same time reducing your taxable estate.

What is an Irrevocable Life Insurance Trust and how can it help my estate planning?

An Irrevocable Life Insurance Trust (“ILIT”) is a Trust that holds a life insurance policy on the life of the Grantor (you and/or your spouse) and if the ILIT is properly structured, the life insurance proceeds will not be includable in your taxable estate. The trustee of the ILIT will purchase the life insurance held on your life. The ILIT will allow you to determine how and when life insurance proceeds will be paid to the next generation (instead of naming the children as the outright beneficiaries of a life insurance policy), while having the proceeds excluded from your gross estate. Also, the life insurance held in the ILIT can be used to create liquidity in your estate to pay your estate tax liability and avoid selling illiquid assets (most likely for less than FMV) held in your estate to pay your estate tax liability.

What is the Annual Exclusion and how can the Annual Exclusion be used to reduce the size of my Taxable Estate?

There is an annual exclusion from federal gift taxation of $14,000 each year per donee in 2015. This means that you can make present interest gifts of $14,000 each year per donee without incurring federal gift taxation or the gifts being counted against your federal gift tax exemption. If you are married, you and your spouse can transfer $28,000 per year per donee. This means if you are married and have three children, you and your spouse can transfer $28,000 to each child for total gifts of $84,000 without incurring federal gift taxation or the gifts being counted against your federal gift tax exemption. Warning: While annual exclusion may be free from federal taxation, these transfer are not excluded from a Medicaid lookback period. 

What is the Marital Deduction and how does this allow for marital planning opportunities?

There is a deduction from gift and estate taxes for transfers to your spouse. This deduction is known as the marital deduction. The marital deduction will allow a husband and wife to defer estate taxes until the death of the second spouse, which will allow for estate tax deferral.

Why is it important to do Tax Planning?

By doing proper tax planning with your estate, you are able to maximize the amount of assets or wealth that you can pass to the next generation of your family or your intended beneficiaries. Proper Tax planning can also help minimize income taxes and capital gains taxes.