Changes to estate tax create opportunities

Ann Carrozza



The “Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010” creates unprecedented planning opportunities for the next 22 months. The federal estate tax exemption is $5 million for decedents passing away in 2011 and 2012. Amounts in excess of $5 million will be taxed at a rate of 35 percent.

How, you ask, does this apply to individuals with less than $5 million?

First, the new $5 million exemption amount only applies to the federal tax. New York State residents must still deal with and plan for tax on estates in excess of $1 million.

Next, the $5 million federal exemption is temporary. It is currently scheduled to sunset on December 31, 2012. We cannot be certain what the exemption amount or tax rates will be after that. This is especially true given the fact that 2012 is a presidential election year.

Lastly, the new estate tax threshold can result in unintended consequences for wills created under prior law. For example: If my husband and I did wills in the 1990s when the estate tax threshold was $600,000, we may have a formula tax clause directing “the largest amount that can pass free of federal estate tax into a credit shelter trust.” This formula produced a desirable result at that time. Under the current law, however, pushing the “largest amount free of federal tax” (i.e. everything up to $5 million) into a trust, could result in the surviving spouse being deprived of assets. A better result is described below.



Couples with assets in excess of $1 million should consider implementing credit shelter trusts as part of their estate planning. This will prevent the loss of the New York State tax exemption for the first spouse to die. Just because each spouse has a $1 million credit does not mean that the credits automatically combine to shelter the entire estate up to $2 million.

If, for example, a couple has a combined estate of $1.5 million and they have simple Wills leaving everything to the surviving spouse and the remainder to children, a bad tax consequence will ensue. This is because the unlimited marital deduction prevents the imposition of tax on transfers between spouses. Without any tax liability on the first death, there is no opportunity to utilize the first credit. It, in essence, dies with the first decedent. Upon the death of the second spouse, her estate can only apply her $1 million New York State credit. The result in this example is that $500,000 will be subject to New York State estate tax.

In order to avoid this result, the wills or revocable trusts should contain credit shelter trusts which can operate as follows: husband and wife leave everything to each other with the exception of whatever amount the surviving spouse chooses to disclaim into the credit shelter trust of the first decedent. The survivor has nine months to execute the disclaimer.

There are several different ways to fund the credit shelter trust. I believe that the “disclaimer” method described above is the most flexible. The family has the luxury of waiting until the first death to make a good decision based upon the survivor’s age, health, expenses, as well as the estate tax laws at that future point in time.



Nearly all assets owned by a decedent or over which he or she retained some control are included in the estate tax base. Just because an asset passes outside of probate does not mean that it passes free of tax.

Death benefits payable through life insurance, IRAs, 401Ks, bank accounts with beneficiary designations and brokerage accounts with “transfer on death” designations will all be taxed to the decedent who owned the asset as of his or her death.


It is very important to have your estate planning documents reviewed periodically. I advise my clients to come in every two years or so, to make sure that we are all on the same page.

If your estate is currently less than $1 million, you need not be concerned about state or federal estate taxes at this time. The possibility of future long term care needs, on the other hand, may cause you to consider creating a trust or taking other steps to protect your assets.

If your estate is between $1 and $5 million, you will still need to implement New York State estate tax planning. This planning may include credit shelter trusts as well as an insurance trust to prevent the policy death benefit from being taxed. Remember that life insurance grows income tax free. It does not pass estate tax free unless it is owned by someone or something (a trust) other than the decedent.

If your estate is in excess of $5 million, now is a great time to plan! In addition to the increased estate tax exemption, the lifetime federal gift tax exemption has also been raised to $5 million. This gives us an unprecedented opportunity to push some assets out of one’s taxable estate at today’s low asset valuations. These gifts should not, however, be made directly to children or grandchildren to avoid exposing the assets to their potential liabilities (divorces) or mismanagement. Instead, the assets or fractional shares thereof, can be transferred into a family trust. An added benefit is that all of the post-transfer growth and appreciation will occur free of any future transfer taxes.

Ann-Margaret Carrozza is an estate planning and elder law attorney with offices in Bayside, Glen Cove and Port Jefferson. She can be reached at (516) 741-7870.


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Ann Carrozza

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