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By Nancy Burner, Esq.

Nancy Burner, Esq.

Federal and state funding of COVID-19 related relief will likely require major budget overhauls and could potentially change the estate and gift tax landscape.

On the federal level, the 2017 Tax Cuts and Jobs Act doubled the estate and gift tax exclusion from $5,000,000 to $10,000,000, as adjusted for inflation, for decedents passing away between 2018 and 2025. However, the increase in the exclusion amount is temporary and is scheduled to sunset on December 31, 2025 and revert back to $5,000,000 (adjusted for inflation).

Currently, the federal 2020 lifetime exclusion amount is $11,580,000 per person, which can be utilized to transfer assets during life or upon death, free of federal estate or gift tax. In New York, the current estate tax exclusion is $5,850,000. New York does not impose a gift tax, although gifts made within three years of death are brought back into the estate for estate tax purposes.

Portability on the federal level allows a surviving spouse to use the deceased spouse’s unused federal lifetime exclusion. Therefore, if the first spouse to die has not fully utilized his or her federal estate tax exclusion, the unused portion, called the “DSUE amount,” can be transferred to the surviving spouse. The surviving spouse’s exclusion then becomes the sum of his or her own exclusion plus the DSUE amount. 

To take advantage of the DSUE amount, a timely filed federal estate tax return must be filed within 9 months from the deceased spouse’s date of death, or within 15 months pursuant to an extension request. Many surviving spouses may not be aware of this requirement or fail to see how filing a return would be beneficial at the time of the first spouse’s death with the current exclusion amount being so high. If ignored, upon the death of the surviving spouse, his or her estate is unable to utilize the DSUE amount unless other specific actions are taken. New York State does not currently have portability.

With the looming sunset, practitioners were concerned with what exclusion amount would be used to calculate the estate tax for a decedent dying after January 1, 2026 who made gifts between 2018 and the end of 2025, or the DSUE amount for the spouse that died between these dates that filed a return for portability. Finally, on November 26, 2019, the Treasury

Department and IRS issued regulations clarifying that the estate tax and DSUE amount will be calculated using the increased exclusion amount that was in place between December 31, 2017 and January 1, 2026, confirming that there will be no “claw back.”

Increased spending associated with COVID-19 will likely leave the government searching for revenue. One such avenue could be a reduction in the exclusion amount on the federal and/or state level, even prior to the current federal sunset date. It is more important than ever for an executor to file a federal estate tax return on the death of the first spouse to lock in the higher DSUE amount. 

Additionally, individuals with high net worth should consider gifting assets now to reduce their taxable estate on both the federal and state levels. 

With so many political and social changes on the horizon, it is of paramount important to work with an experienced estate planning attorney to discuss these issues, review your estate plan and potentially revise your current estate planning documents to include provisions for estate tax planning on the death of the first spouse. The potential to be subject to estate tax could increase for a significant number of individuals if the exclusion amount is lowered in the future.

Nancy Burner, Esq. practices elder law and estate planning from her East Setauket office. Visit www.burnerlaw.com.

Stock photo

By Nancy Burner, Esq.

Nancy Burner, Esq.

The Tax Cuts and Jobs Act (the Act) increased the federal estate tax exclusion amount for decedents dying in years 2018 to 2025. The Act is set to sunset on Dec. 31, 2025. 

The exclusion amount for 2020 is $11.58 million. This means that an individual can leave $11.58 million and a married couple can leave $23.16 million dollars to their heirs or beneficiaries without paying any federal estate tax. This also means that an individual or married couple can gift this same amount during their lifetime and not incur a federal gift tax. The rate for the federal estate and gift tax remains at 40 percent.

There was concern that the sunset of the higher exclusion amount and reversion to the lower amount could, retroactively deny taxpayers who die after 2025 the full benefit of the higher exclusion amount applied to 2018-25 gifts. This scenario has sometimes been called a “claw back” of the applicable exclusion amount. In November, the IRS issued new regulations that make clear that gifts made within the time period of the increased exemption amount used before death will not be “clawed back” into the decedent’s estate and subject to estate tax.

There are no 2020 changes to the rules regarding step-up basis at death. That means that when you die, your heirs’ cost basis in the assets you leave them are reset to the value at your date of death. 

The portability election, which allows a surviving spouse to use his or her deceased spouse’s unused federal estate and gift tax exemption, is unchanged for 2020. This means a married couple can use the full $23.16 million exemption before any federal estate tax would be owed. To make a portability election, a federal estate tax return must be timely filed by the executor of the deceased spouse’s estate. 

For 2020 the annual gift tax exclusion remains at $15,000. This means that an individual can give away $15,000 to any person in a calendar year ($30,000 for a married couple) without having to file a federal gift tax return. 

Despite the large federal estate tax exclusion amount, New York State’s estate tax exemption for 2020 is $5.85 million. This is a slight increase for inflation from the 2019 exemption of $5.74 million. New York State still does not recognize portability.  New York still has the “cliff,” meaning that if the estate is valued at more than 105 percent of the exemption amount ($6,142,500 in 2020) then the estate loses the benefit of the exemption and pays tax on the entire estate. 

New York reinstated its short-lived elimination of the three-year lookback on gifts effective Jan. 15, 2019. However, a gift is not includable if it was made by a resident or nonresident and the gift consists of real or tangible property located outside of New York; while the decedent was a nonresident; before April 1, 2014; between Jan.1, 2019 and Jan. 15, 2019; or by a decedent whose date of death was on or after Jan. 1, 2026.

Most taxpayers will never pay a federal or New York State estate tax. However, there are many reasons to engage in estate planning. Those reasons include long-term care planning, tax basis planning and planning to protect your beneficiaries once they inherit the wealth. In addition, since New York State has a separate estate tax regime with a significantly lower exclusion than that of the federal regime, it is still critical to do estate tax planning if you and/or your spouse have an estate that is potentially taxable under New York State law. 

Nancy Burner, Esq. practices elder law and estate planning from her East Setauket office. Visit www.burnerlaw.com.

By Nancy Burner, Esq.

In my practice as an elder law attorney, clients often inquire about the benefits of gifting to reduce taxes or to qualify for Medicaid. As a senior with the unexpected need for long-term care in the future, the consequences of gifting may have unexpected results.

It is a common myth that everyone should be gifting monies during their life to avoid taxation later. Currently, a person can give away during life or die with $5.45 million before any federal estate tax is due. For married couples, this means that so long as your estate is less than $10.9 million, federal estate taxes are not a problem. For New York State estate tax, the current exemption is $4.1875 million and is currently slated to reach the federal estate tax exemption by 2019.

While it is true that there are gifting estate plans that can reduce estate taxes, any gift that exceeds the annual gift exclusion must be reported on a gift tax return during the decedent’s life and is deducted from their lifetime exemption. In 2016, that exclusion is $14,000. However, while gifting may be good if the goal is to reduce estate tax, it can be detrimental if the donor needs Medicaid to cover the cost of long-term care within five years of any gifts.

It is important to remember that the $14,000 only refers to the annual gift tax exclusion under the Internal Revenue Code. The Medicaid rules and regulations are different. In New York, Medicaid requires that all applicants and their spouses account for transfers made in the five years prior to applying for Institutional Medicaid. These gifts are totaled, and for each $12,633 that was gifted, one month of Medicaid ineligibility is imposed for Long Island applicants. It is also important to note that the ineligibility begins to run on the day that the applicant enters the nursing home and is “otherwise eligible for Medicaid” rather than on the day that the gift was made.

For example, if a grandfather gifted $100,000 over the course of five years to his grandchildren and then needed nursing home care, those gifts would be considered transfers and, if they cannot be returned, would create a period of ineligibility for Medicaid benefits for approximately eight months. What makes this even more difficult for some families is that an inability to give the money back or help the grandfather pay for his care is not taken into consideration, causing many families great hardship.

It would have been far better for the grandfather to have put assets into a Medicaid-qualified trust five years ago to start the period of ineligibility and allow the trustee to make the annual gifts. Another concern when gifting is considering to whom you are gifting? Once a gift is made to a person, it becomes subject to their creditors, legal status and can adversely affect their government benefits.

Accordingly, if you make a gift to a person who has creditors or who later gets a divorce, that gift could be lost to those debts. Consider creating a trust for the benefit of the debtor-beneficiary to ensure that their monies are protected. Another problem arises when making gifts to minors. Because a minor cannot hold property, if gifted substantial sums, someone would have to be appointed as the guardian of the property for that child before the funds could be used.

To avoid this problem, consider creating a trust for the minor beneficiary and designate a trustworthy trustee who will manage the money for the minor until they are old enough to manage it themselves.

Finally, if gifting to a disabled beneficiary, make sure to review what government benefits they may be receiving. If any of the benefits are “needs based,” even small gifts may disqualify them for their benefits. In order to maintain eligibility, a Supplemental Needs Trust could be created to preserve benefits for the disabled beneficiary.

A common phrase comes to mind “do not try this at home.” Before doing any kind of substantial gifting, or even if you have begun gifting, see an elder law attorney who concentrates their practice in Medicaid and estate planning to help optimize your chances of qualifying for Medicaid and/or reduce estate taxes, while still preserving the greatest amount of assets.

Nancy Burner, Esq. practices elder law and estate planning from her East Setauket office.