Estate Planning | maizeslaw

ESTATE TAX PLANNING AND CONSIDERATION

The current federal tax exemption is $13.99 million/$27.98 million per couple, which is portable. If there is no legislative action, the amounts will return in 2026 to $7 million/$14 million per couple. Amounts above the exemptions are taxed at varying rates between 18% to 40%.

The current New York State tax exemption is $7.16 million but is not portable. In addition, there is a New York State Estate Tax Cliff which means the exemption benefit is lost if the exemption is exceeded and the entirety of the estate could be subject to a 3.06% to 16% estate tax rate.

The current annual gift exemption is $19,000.00.

Revocable trusts are good vehicles for avoiding probate and associated costs and delays. Irrevocable trusts also avoid probate, but potentially provide creditor protection, asset protection, and estate tax benefits. Assets must be transferred to or retitled in the name of the trustees/trust for them to serve their purposes.

If you and/or your spouse have assets that are nearing, equaling or exceeding these thresholds, now is a good time to consult with your estate planning attorney, accountants, and financial advisors for methods and strategies to preserve wealth and potentially avoid or reduce taxation. Given possible legislative sunset provisions, this task becomes even more time sensitive and important.

FUNDING OF A TRUST

A trust, revocable or irrevocable, to be effective, must be funded. If your trust is not fully funded, the assets that have not been transferred to the trust during your lifetime may have to go through probate and be distributed per the terms of your will or intestacy instead of the terms and conditions and instructions contained in the trust. Funding of a trust is changing or amending the title of the assets to the trust and thereby transferring assets into the trust.

Retitling assets is, for the most part, simple and administrative. Concerning Real Estate and Condos, the deed has to be changed to reflect the trustees/trust ownership. Insurance and tax records also have to be changed. Concerning Banks, Stocks, Investment Accounts, and Life Insurance, the account/policy has to be amended or changed to reflect the trustees/trust as owner, or as transfer on death beneficiary. Concerning Retirement Accounts, Pensions, Annuities (with death benefits), the beneficiary should be changed to the trust/trustees. Personal property can also be assigned to the trustees/trust. For Coops, board consent is required.

TRUSTEE COMMISSIONS

Often overlooked are statutory commissions that are to be paid to a trustee on an annual basis, which are separate and in addition to the trustee’s reasonable and necessary expenses, and legal fees. These commissions must be carefully considered in the decision to form a trust. If there are more than two trustees, no more than two commissions shall be allowed unless specifically provided otherwise in a signed writing.

There are three sets of commissions:

For receiving principal or property subject to the power in trust
1. 3% on the first $2,000
2. 1.5% on the next $10,000
3. 1.25% on the anything above $12,000
For paying out principal or property subject to the power in trust at the rate of 1 per cent.
Annual commissions:
1. $10.50 per $1,000 or major fraction thereof on the first $400,000 of principal or property subject to the power in trust;
2. $4.50 per $1,000 or major fraction thereof on the next $600,000 of principal or property subject to the power in trust; and
3. $3.00 per $1,000 or major fraction thereof on all additional principal or property subject to the power in trust.

IRREVOCABLE TRUSTS ARE NO LONGER ELIGIBLE FOR STEP-UP IN BASIS

The IRS issued Revenue Ruling 2023-2, which has a substantial impact on estate planning, particularly where an irrevocable trust is involved. Revenue Ruling 2023-2 clarifies that assets in irrevocable trusts do not receive a step-up in basis upon the grantor's death, impacting estate planning strategies significantly.

The IRS clarified that for an asset to receive a basis adjustment, it must be considered "bequeathed," "devised," or "inherited." Since the assets in irrevocable trusts are not included in the grantor's gross estate, they do not meet these criteria.

Revenue Ruling 2023-2 represents a significant shift in how assets in irrevocable trusts are treated for tax purposes. It is crucial for individuals and families involved in estate planning to understand these changes and consider revising their strategies accordingly to mitigate potential tax impacts on their heirs. Consulting with legal and tax professionals is highly recommended to ensure compliance and optimal planning.

This ruling has significant implications for families utilizing irrevocable trusts to protect assets from estate taxes or to qualify for government benefits. Without the step-up in basis, beneficiaries may face unexpected tax liabilities on appreciated assets.

IRREVOCABLE TRUSTS ARE NO LONGER ELIGIBLE FOR STEP-UP IN BASIS

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