How To Lower Your Estate Tax



There are several ways individuals (married or single) can reduce their estate tax at death. Some include but are not limited to: (i) gifting inter vivos, (ii) setting up irrevocable trusts, and (iii) donating to charitable causes. For the purposes of this article, lets look at these methods through the lens of a single person.


Gifting Inter Vivos

An inter vivos gift simply means a transfer of property (where there is no consideration on behalf of the person receiving the gift - think $ in exchange for the property) or gift made during the life of the grantor (the person making the gift to another).


Currently, under Federal Law, an individual has a Estate Tax Exemption of $11.7 million and under New York State Law, an Estate Tax Exemption of $5.93 million.


What this means is an individual can gift up to the State and Federal exemption thresholds before paying any State and/or Federal Estate Tax.


One special issue to consider with an inter vivos gift is that the beneficiary (or the person receiving the gift) during the Grantors life takes the gift at the Grantors adjusted basis (think generally what the grantor bought the asset for).


As an example, Person A buys a home for $200,000 and now the house's Fair Market Value is $500,000. Person A gifts the home to Person B who will now take the property with an adjusted basis of $200,000 (what Person A bought the home for).


What this means is that Person B may be subject to Capital Gains tax if they were to sell the home - see generally IRS guidelines on capital gains tax imposed on home sales for single and married persons.


Transfer of Property on Death

One way Person B can avoid capital gains tax (from the example above) is if Person A bequests (leaves behind) assets to Person B through a last will and testament.


When property passes at the testators death the beneficiaries receive a full step-up basis in that asset. Like our example above, if Person A died and left the house to Person B in their will, instead of taking the property with an adjusted basis of $200,000, the step-up basis would allow Person B to take the property at the Fair Market Value of $500,000 - ultimately not having to pay a capital gains tax if they were to sell the asset.


However, unlike an inter vivos gift, which would no longer be apart of the testators estate and therefore not considered a probate asset, the asset passing to the beneficiary at the testators death would be considered a probate-asset and therefore have to go through probate.


Irrevocable Trusts

Another way to make a transfer to lower your estate tax would be through the creation and transfer of assets to an irrevocable trust.


A couple things to remember...


Following the transfer, you would file a gift tax return, as you would with anything over $15,000.00 in a single calendar year, with the IRS - this is to keep track of your estate and your lifetime exemption at death.


New York does not impose a gift tax but does observe a "look-back" period of three (3) years. Essentially what this means is the grantor must live three (3) years following the date of the transfer for the State not to add that amount you gifted back into your Estate for tax purposes.


Lets use an example. Lets say you have $1,000,000 in securities (i.e. stocks). You create a irrevocable trust and transfer the $1M to your children as beneficiaries.


The $1M transfer is now out of your estate for the benefit of your children. It will not be considered in your estate for tax purposes and it will provide creditor and tax protection for your children, as the money they just inherited will not be subject to their debts, divorces, disabilities or taxation.


The key to creating an irrevocable trust is that you are removing your control and benefit to the asset from your estate. You cannot create an irrevocable trust and receive the benefits from the trust assets.