Estate Planning | maizeslaw

ESTATE TAX PLANNING AND CONSIDERATION

The 2026 Federal Estate Tax Exemption is $15 million per individual and $30 million for married couples. These amounts will be adjusted for inflation annually starting in 2027.

The current New York State tax exemption is $7.35 million per person but unlike Federal law, is not portable. Estates valued below this threshold are generally exempt from the estate tax. If an estate exceeds the exemption by more than 5% ($7.7175 million), the entire estate is subject to tax, not just the excess amount. This is the New York State Estate Tax Cliff which means the exemption benefit is lost and the entirety of the estate could be subject to a 3.06% to 16% estate tax rate. Gifts made within three years of death are subject to claw back and inclusion in the New York taxable estate. Last-minute gifting is thus less effective than under Federal Law.

The current annual gift exemption is $19,000.00 per recipient per year. This means you can give up to $19,000 to any number of individuals during 2026 without filing a gift tax return and without using any of your lifetime estate and gift tax exemption and $38,000.00 per recipient if you elect gift-splitting and file Form 709. Direct payment of tuition and/or direct payment of medical expenses does not count against the $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. To be effective, assets must be transferred to or retitled in the name of the trustees/trust.

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.

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 State specific 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.

In New York State, 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 AND 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 which are not includible in the decedent's estate do not receive a step-up in basis upon the grantor's death, impacting estate planning strategies significantly.

However, if assets in an irrevocable trust are included in the decedent's estate under IRC §§ 2036, 2038, 2041, or similar provisions, those assets generally receive a basis adjustment (step-up or step-down) to fair market value at death under IRC § 1014.

The IRS clarified that for an asset to receive a basis adjustment, it must be considered "bequeathed," "devised," or "inherited." If 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.

An irrevocable trust carefully drafted may still be eligible for a step-up in basis at death. The trust assets must be included in a person’s taxable estate when they die.

IRREVOCABLE TRUSTS AND STEP-UP IN BASIS

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