2016 Estate Tax Update

I.  Increase in Federal Gift and Estate Tax Exemption

As of January 1, 2016, the Federal gift and estate tax exemption increased to $5,450,000 from $5,430,000. The annual gift tax exclusion remains at $14,000.For clients who made large gifts at the end of 2011 when the exemption was $5 million, you may now have an additional exemption of $450,000 which will allow you to make additional tax-free gifts, thereby reducing the size of your taxable estate.

II.  Increase in New York State Estate Tax Exemption

As of April 1, 2016, the New York State estate tax exemption will increase to $4,187,500 from $3,125,000. The size of the New York State exemption, however, can be misleading because if the value of the estate exceeds the exemption by 5% or more, the New York State exemption is completely eliminated. In other words, the estate will be taxed by New York State on dollar one. This is referred to as the “exemption cliff.”

III. Potential Termination of Trust for Surviving Spouse

For many married clients, a trust was created upon the death of the first spouse for the benefit of the surviving spouse in order to ensure that the assets in the trust would “by pass” the surviving spouse’s estate (the “Bypass Trust”) and not be subject to the estate tax upon his/her subsequent death. Given the rise in the estate tax exemptions over the years, the value of the surviving spouse’s estate plus the value of the assets in the Bypass Trust may not exceed the exemptions. In such a case, it may make sense to terminate the Bypass Trust and distribute all of the trust’s assets to the surviving spouse. The surviving spouse’s estate would still be below the exemption so there will be no estate tax upon his/her death.

The benefit of this transfer is that the assets in the surviving spouse’s estate will receive an increase (“step up”) in basis to the fair market value at the time of the surviving spouse’s death. This allows the children to sell such assets without incurring any capital gain. If the assets are retained in the Bypass Trust, the children would inherit them at the Bypass Trust’s original basis, which in all likelihood would be much lower and a capital gain would be triggered upon a sale.

Before making the decision to terminate a Bypass Trust, a careful and thorough review of all assets must be conducted.

IV. Good News for Florida Residents

Florida residents (and residents of other states) are subject to New York’s estate tax for any real property and tangible personal property located in New York. Prior to April 1, 2014, the tax was imposed even if the value of the property was less than the New York State estate tax exemption.

Effective April 1, 2014, New York State will not impose its estate tax on non-residents owning real property and tangible personal property located in New York unless the value of such property exceeds the exemption (but beware of the “exemption cliff”).

V. Warning to Florida Residents (and New York Residents as well)

Over the years we have discussed with many clients and colleagues the advantages and disadvantages of using a Revocable Trust instead of a Will to dispose of assets upon death. While both documents are effective in accomplishing a client’s tax and estate planning goals, we have often recommended Wills for our clients. Based on our recent experiences with the Circuit Courts in Florida, in terms of delay and costs, in particular in Miami-Dade County, it is now our recommendation that clients living in Florida should execute a Revocable Trust instead of a Will in order to avoid the need of having to submit the Will to the Florida courts for probate.

We also have experienced unusual delays in the Surrogate’s Courts in New York, even on routine matters regarding the probate of Wills and clients should consider changing their testamentary instruments from Wills to Revocable Trusts.