Estate Tax

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On March 31, 2014, broad changes were made to the New York estate and gift tax laws.  In addition to increasing the New York basic exclusion amount for taxable estates, a New York estate tax “cliff” was introduced that phases out the New York basic exclusion amount for taxable estates between 100% and 105% of the exclusion amount.  As a result, taxable estates that exceed 105% of the New York basic exclusion amount will lose the benefits of the exclusion entirely.

In 2019, the New York basic exclusion for taxable estates is $5,740,000 per person.  In addition, as of January 1, 2019, taxable gifts made within three (3) years of death are no longer included in a New York decedent’s estate for estate tax purposes.  The combination “cliff” and elimination of the three-year look back has created a valuable gifting opportunity available to New Yorkers.

Below is a chart indicating various New York taxable estates, the amount of New York State estate tax due, the amount that would ultimately pass to beneficiaries, the total benefit from gifting, and the generated savings (i.e. the amount that would be saved in taxes that exceeds the amount that would be gifted).

New York State Taxable Estate New York State
Estate Tax		 Applicable Credit Total Passing to Bene-ficiaries Without Gifting Amount Gifted Total Passing to Bene-ficiaries With Gifting Total Benefit from Gifting Generated Savings
(Savings From Taxes Less Gift)
$5,740,000 $0 $479,600 $5,740,000 $0 $5,740,000 $0 $0
$5,740,100 $219 $479,393 $5,739,881 $100 $5,740,100 $219 $119
$5,750,000 $25,170 $455,630 $5,724,830 $10,000 $5,750,000 $25,170 $15,170
$5,800,000 $146,746 $340,054 $5,653,254 $60,000 $5,800,000 $146,746 $86,746
$5,850,000 $259,774 $233,026 $5,590,226 $110,000 $5,850,000 $259,774 $149,774
$5,900,000 $356,804 $141,996 $5,543,196 $160,000 $5,900,000 $356,804 $196,804
$5,950,000 $434,397 $70,403 $5,515,603 $210,000 $5,950,000 $434,397 $224,397
$6,000,000 $493,493 $17,307 $5,506,507 $260,000 $6,000,000 $493,493 $233,493
$6,001,960 $495,709 $15,326 $5,506,251 $261,960 $6,001,960 $495,709 $233,749
$6,027,000 $514,040 $0 $5,512,960 $287,000 $6,027,000 $514,040 $227,040
$6,100,000 $522,800 $0 $5,577,200 $360,000 $6,100,000 $522,800 $162,800
$6,150,000 $529,200 $0 $5,620,800 $410,000 $6,150,000 $529,200 $119,200
$6,200,000 $535,600 $0 $5,664,400 $460,000 $6,200,000 $535,600 $75,600
$6,250,000 $542,000 $0 $5,708,000 $510,000 $6,250,000 $542,000 $32,000
$6,286,697 $546,697 $0 $5,740,000 $546,697 $6,286,697 $546,697 $0
$6,300,000 $548,400 $0 $5,751,600 $560,000 $6,300,000 $548,400 $0
$6,400,000 $561,200 $0 $5,838,800 $660,000 $6,400,000 $561,200 $0
$6,500,000 $574,000 $0 $5,926,000 $760,000 $6,500,000 $574,000 $0
$6,600,000 $586,800 $0 $6,013,200 $860,000 $6,600,000 $586,800 $0
$6,700,000 $599,600 $0 $6,100,400 $960,000 $6,700,000 $599,600 $0
$6,800,000 $612,400 $0 $6,187,600 $1,060,000 $6,800,000 $612,400 $0
$6,900,000 $625,200 $0 $6,274,800 $1,160,000 $6,900,000 $625,200 $0
$7,000,000 $638,000 $0 $6,362,000 $1,260,000 $7,000,000 $638,000 $0
$7,500,000 $705,200 $0 $6,794,800 $1,760,000 $7,500,000 $705,200 $0
$8,000,000 $773,200 $0 $7,226,800 $2,260,000 $8,000,000 $773,200 $0
$8,500,000 $844,400 $0 $7,655,600 $2,760,000 $8,500,000 $844,400 $0
$9,000,000 $916,400 $0 $8,083,600 $3,260,000 $9,000,000 $916,400 $0
$9,500,000 $991,600 $0 $8,508,400 $3,760,000 $9,500,000 $991,600 $0
$10,000,000 $1,067,600 $0 $8,932,400 $4,260,000 $10,000,000 $1,067,600 $0

As detailed in the above chart, the beneficiaries of a New York decedent in 2019 with a taxable estate of $5,740,100 would actually receive less in assets than if the decedent died with an estate of $5,740,000. If such decedent had gifted $100 the day before he/she died, his/her beneficiaries would have received an additional $119 in assets.  The total benefit in this case would therefore be $219 (which equals the estate tax that would have been due to New York State on his/her death).  These potential savings increase exponentially as the taxable estate increases.  In fact, a New York decedent in 2019 with a $6,001,960 taxable estate could save $495,709 by gifting $261,960 the day before he/she died.  The result is a realization of $233,749 in generated savings.

Lifetime gifting, as described above, not only permanently removes such gifted assets from the donor’s taxable estate without any loss to the ultimate amount inherited by his/her beneficiaries, but also eliminates the future appreciation on such gifted assets from the donor’s taxable estate.  With the 2019 federal estate exemption of $11,400,000 ($22,800,000 for married couples), many New Yorkers could take advantage of this gifting opportunity.

The gifting described above works best when done with cash or cash equivalents.  Using highly appreciated assets for such gifting may offset any gains achieved from such gifting as a result of the loss of a stepped-up cost basis in such assets on the donor’s death.  Individuals should always consult with a tax professional prior to any lifetime gifting to ensure that such gifting would not result in adverse gift or income tax consequences.

Note: On January 15, 2019, Gov. Andrew Cuomo released his proposed 2019 Executive Budget which would revise the New York Tax Law to reinstate the three-year look back for taxable gifts made within three (3) years of death in a New York decedent’s estate for estate tax purposes for gifts made before December 31, 2025.

On November 15, the IRS announced the official estate and gift exclusion amounts for 2019 in Revenue Procedure 2018-57.

For an estate of any decedent dying during calendar year 2019, the applicable exclusion is increased from $11.18 million to $11.4 million.  This change increases not only the applicable exclusion amount available at death, but also a taxpayer’s lifetime gift applicable exclusion amount and generation skipping transfer exclusion amount.  This means a husband and wife with proper planning could transfer $22.8 million estate, gift and GST tax free to their children and grandchildren in 2019.   If no new tax law is passed, the increased exclusion amounts are scheduled to expire on December 31, 2025, which would mean a reduction in the exclusion amounts to $5 million plus adjustments for inflation.

The estate, gift and GST tax rate remains the same at 40% and the gift tax annual exclusion remains at $15,000.

The gift tax annual exclusion to a non-citizen spouse has been increased from $152,000 to $155,000.  While gifts between spouses are unlimited if the donee spouse is a United States citizen, there are restrictions when the donee spouse is not a United States citizen.

The New York exclusion amount was changed as of April 1, 2014, and does not match the federal exclusion amount.  In 2018, the New York exclusion amount is $5.25 million.  Beginning in 2019, the exclusion is scheduled to increase to $5.49 million, and then will increase with inflation each year thereafter.  It is important to note that, unlike the Federal exclusion amount, the New York exclusion amount is not portable, meaning if the first spouse to die fails to utilize his or her full exclusion amount, the surviving spouse will not be able to utilize the first spouse to die’s unused exclusion amount.

The New Jersey Appellate Division recently issued its opinion in Estate of Van Riper v. Dir., Div. of Taxation, No. A-3024-16T4 (N.J. Super. Ct. App. Div. Oct. 3, 2018), upholding the Tax Court’s finding that the full fair market value of a marital home transferred to a trust was subject to New Jersey Inheritance Tax.  The case highlights the importance of understanding the effect of transferring property into trusts for estate planning and tax purposes.

A husband and wife transferred their home into an irrevocable trust and retained the right to live in the home until the death of the survivor.  Any assets remaining after their deaths were to be distributed to their niece.  It appears that this trust was created in connection with Medicaid planning.  The NJ Tax Court held that, due to the fact that the couple retained a life interest in the property and delayed their niece’s enjoyment of it until both their deaths, the value of the home in the trust was subject to Inheritance Tax.  Estate of Van Riper v. Dir., Div. of Taxation, 30 N.J. Tax 1 (2017).  

On appeal, the Estate argued that each spouse held only one-half ownership interest in the property at the time they transferred it to the trust, so the Inheritance Tax should only apply to one-half of the value of the home.  The appellate court upheld the assessment of the full value of the home because the couple owned the property as “tenants by the entirety,” meaning they each “held an interest in the entire estate, not fifty-percent interests.”  Van Riper, slip op. at 8-9.  This reasoning was further supported by the fact that at the first spouse’s death no Inheritance Tax was paid on the property as it qualified as an exempt transfer from husband to wife under New Jersey law.  See N.J.S.A. 54:34-2(a)(1).

This cautionary tale warns New Jersey taxpayers of the complications that may arise from retaining interest in property during one’s lifetime, even if such property has been placed in an irrevocable trust.  It is strongly advised that taxpayers seek the assistance of an estate planning attorney to better understand the tax and other consequences of certain planning techniques.

There have been sweeping changes to both the federal and New Jersey tax laws for the first half of 2018.  At the federal level, the elimination of the state and local tax (SALT) deduction, which for decades allowed people to itemize and deduct state and local income and property taxes from their federal bill is now being capped at $10,000.

It has been widely publicized that residents of states with high SALT such as New York and New Jersey will pay much more in overall taxes than those residents of states with no income and/or low property taxes. Northeast states attempting to counteract the impact of recent federal tax laws by forming associations to sue Washington or disguising property taxes as charitable contributions are seemingly ineffective solutions.  To compound the impact of the SALT limitation, New Jersey has recently increased its highest marginal rate to 10.75% for those families with income in excess of $5 million, enacted laws to impose a surtax on carried interests and increased corporate business tax rates.  For more details concerning New Jersey recent tax law changes, see our previous blog post here.

As the 2019 tax season gets underway, high net worth residents of New Jersey and New York will find significant increases in their annual state tax bills. Accountants should be the first to anticipate client questions as to whether a change in residency to states such as Florida could alleviate this increased state tax burden and to what extent state tax savings can be achieved while continuing to own a residence in New Jersey or New York.

The short answer is yes. A well counseled client who becomes a permanent resident of Florida can spend significant time in New Jersey and/or New York and maintain a residence here, but successfully avoid state taxes on non-New Jersey and New York source income. On the other hand, snowbirds, spending three to five months in Florida and the balance of their time in New Jersey / New York face serious exposure, including an audit resulting in an additional assessment of tax, interest and penalties by filing a non-resident return or no state tax return without meeting the statutory requirements for non-residency status.

There are many considerations in changing permanent residence from New York or New Jersey to a tax friendly state such as Florida in an effort to escape the harsh effects of these new tax laws. Aside from feasibility issues — such as whether telecommuting is a viable option and whether children and spouses are amenable to relocating — there needs to be a thorough tax analysis before making that decision to relocate as to whether: (i) changing residence will necessarily reduce state income tax (i.e., is the income sourced in New Jersey or New York); and (ii) if so, to maximize the level of preparedness in anticipation for what will likely be a residency audit from the New York and/or New Jersey tax authorities.

New York has one of the most sophisticated residency audit programs in the country.  New Jersey is also expected to ramp up its program in light of the most recent changes to its tax laws.  The purpose of a residency audit is to determine whether you correctly filed your non-resident or part-year resident income tax return or if no return is filed in the years immediately following a move outside of the state.  The likelihood of a residency audit is particularly high during the first year in which an individual files a non-resident tax return or no return at all.

Once audited, in making the determination of whether an individual is resident of New York or New Jersey, the auditor will first determine whether an individual is domiciled in New York or New Jersey.

If the auditor is persuaded a taxpayer has successfully changed his or her domicile from New York or New Jersey to a different state, that person can still be taxed as a “statutory resident” if he or she maintains living quarters in New York or New Jersey for substantially all of the year and spends more than 183 days in that state.

In a residency audit, the auditor will request EZ-Pass records, cell phone records, calendars, credit card and bank account statements along with travel records.

In addition, the auditor may also request utility bills, vehicle registration and voting registration in an effort to determine how strong your ties are to a specific location and whether you sufficiently abandoned your former domicile.

More intrusive steps may be taken when the auditor is not satisfied with the information that he or she has received and can even subpoena your records from third parties or depose you and/or your family members. If it is determined that you are a resident of a New York or New Jersey and you did not properly file a resident return, in addition to an assessment of unpaid tax, there can be substantial penalties and interest.  For example, in New York, the penalty for late filing is 5% of the tax due for each month (or part of a month) that the return is late, up to a maximum of 25%.  And the penalty for late payment is 0.5% of the unpaid amount for each month (or part of a month) it is not paid, up to a maximum of 25%.  New Jersey also imposes similar penalties for failure to file and failure to pay tax along with interest charges.

If you are a resident of New York or New Jersey and you are considering changing your residency (whether tax motivated or otherwise), it is important that you seek the advice of an experienced SALT counsel to fully understand the potential benefits, feasibility and most importantly, how to effectively prepare for what will likely be a residency audit twelve to eighteen months after you file a New York or New Jersey non-resident return or no state tax return.

While success in crypto-currency investing is far from assured, death, sadly, is.  Accordingly, it is vital that investors in Bitcoin and other crypto-currencies are prepared for the unique estate planning factors that apply to digital assets.  The following are five estate planning factors that should be addressed immediately by crypto-currency investors to ensure that their digital assets are effectively passed on to their heirs or beneficiaries.

  1. Custody of Private Keys and Other Information to Access Digital Assets

Unlike bank accounts which can be accessed post-mortem, digital assets typically require a variety of private information to be accessed.  This information (and an investor’s digital assets) may be lost forever if an investor fails to record it or share it with a trusted third party before they die.  To avoid this, it is crucial that investors physically record the following private access information and provide for custody of this information in their will:

  • Private Key: Most crypto-currencies use a public-private key system to ensure that transactions are valid.  While the public key is made public every time the investor buys or sells crypto-currency, only the investor knows the private key.  Private keys are essential to verify ownership and access digital assets, and should be recorded.  Gaining access to a private key is similar to gaining ownership of a bank account, so it is vital that private keys are kept safe.  Creating a physical copy of your private key and securing it in a bank safety deposit box insulates your private key from hacking and may provide the safest means to protect it.
  • Passwords: Crypto-currencies are traded on online platforms commonly known as exchanges.  Investors that fail to secure their digital assets in hardware wallets (see below) typically have their crypto-currencies stored on default digital wallets provided by an exchange.  It is important that the username, password, and security question information for exchanges be recorded to retrieve digital assets from exchange wallets.
  • Two-Factor Authentication: Many crypto-currency exchanges also require that investors use two-factor authentication to authenticate their identity when accessing their account and transferring digital assets.  Two-factor authentication is typically accomplished via a mobile application that provides a unique code to be entered into the exchange.  Investors who use two-factor authentication should record their username, password, and security question information.
  1. Custody of Hardware Wallets

Once Bitcoin and other crypto-currencies are purchased on an exchange, they are automatically stored on that exchange’s default wallet where they can be accessed electronically by the investor.  Digital wallets, especially those used by exchanges, are susceptible to hacking. Investors should transfer their digital assets to a hardware wallet.  Hardware wallets can be purchased online and are, generally, encrypted flash drives that require a password to be accessed.  Investors and their heirs may lose their digital assets if their hardware wallet is lost or damaged.  Investors should record the password and other access information for their hardware wallets, and provide for custody of the information and the wallet itself in their will.

  1. New Jersey Uniform Fiduciary Access to Digital Assets Act

In 2017, New Jersey enacted the Uniform Fiduciary Access to Digital Assets Act (the “Act”).  The Act generally enables individuals to appoint a fiduciary to manage their “digital assets”, broadly defined as electronic records.  Under the Act, electronic records include account information for online exchanges.  Unfortunately, while the Act authorizes a fiduciary to access a deceased investor’s exchange account, it fails to consider that the private key – the essential information to remove digital assets from a digital wallet – is not available to exchanges.  Moreover, the Act’s limited applicability to electronic records may exclude its applicability to hardware wallets.

  1. Fiduciaries under Power of Attorney and Will

Under a well drafted Power of Attorney, an agent, appointed by the principal, is given the power to manage the principal’s assets and make investment decisions on behalf of the principal.  Depending on how the document is drafted, the powers granted under the Power of Attorney can either be effective immediately upon execution or only effective upon the disability or incapacity of the principal.  Having such a document avoids the necessity of asking the court to appoint someone as the principal’s guardian if he or she cannot manage his or her own affairs.

Among other things, the executor of an estate is tasked with distributing the property of the decedent in accordance with the decedent’s will.

In the context of Bitcoin and other crypto-currencies, it may be necessary for the agent under a Power of Attorney or the executor of an estate to have control over these assets.  As such, it is critical that an owner of crypto-currency have a well drafted Power of Attorney and Will, specifically providing the agent with authority over the crypto-currency assets and the necessary information to access such assets.

  1. Estate Planning with Crypto-Currencies

The federal estate tax is based on the value of one’s assets less liabilities at one’s date of death and is imposed at a rate of 40%.  One important exception that is critical to understanding how the federal estate tax works involves the estate and gift tax exemption.  This exemption is the amount that one can transfer to anyone during one’s lifetime or at death without incurring a gift or estate tax.  In 2018, the exemption is $11.18 and this amount will be indexed annually for inflation until 2026, when the exemption amount is scheduled to revert to $5.49 million, with an adjustment for inflation.

For wealthier owners of crypto-currency assets, implementing certain estate planning techniques in order to remove the value of these assets from his or her estate could be highly beneficial.  One such technique would be the creation of a limited liability company (“LLC”), funding the LLC with crypto-currency assets, and then gifting most of the economic value of the LLC to a family trust.

The gift would use a portion of the owner’s federal gift tax exemptions and thus no federal gift tax would be due.  Additionally, if the LLC is created with voting and non-voting membership interests and only the non-voting interests are transferred to the family trust, the value of the gift could be discounted for gift and estate tax purposes.  Moreover, all future appreciation on the value of the LLC interests gifted would accrue outside of the transferor’s taxable estate.

Investors in crypto-currencies are at risk of losing their assets at death unless they plan ahead.  Following these five factors and speaking to an estate planning attorney versed in crypto-currencies will help ensure that digital assets are effectively passed to heirs or beneficiaries.