Now that Congress has implemented a relatively large per person federal gift/estate tax exemption (i.e., the per person federal gift/estate tax exemption is $5,250,000 in 2013, indexed for inflation), many think that estate tax consequences are no longer relevant in estate planning. However, New York residents and non-residents of New York who own assets located in New York at death, are subject to the New York estate tax (which has a maximum rate of 16%). The per person exemption from New York estate tax is only $1,000,000 (which is NOT indexed for inflation). Moreover, New York allows a State-only qualified terminable interest property (“QTIP”) election under only two circumstances: 1) the federal estate tax is not in effect at the decedent’s death; and 2) the federal estate tax is in effect but the decedent’s gross estate is too low in value to require the filing of a federal estate tax return. A QTIP election allows a trust established for the benefit of the decedent’s surviving spouse to qualify for the marital estate tax deduction (federal and/or State), thereby exempting the trust property from estate tax upon the first spouse’s death.
Many married individuals have revocable trusts that are designed to generate no federal estate tax upon the death of the first spouse. This is typically accomplished through a funding formula in the will or revocable trust, which provides that upon the first spouse’s death, the “Family Trust” (which may not qualify for the marital deduction) will be funded with assets equal in value to the decedent’s remaining federal estate tax exemption, and the balance of the decedent’s assets, if any, will fund the “Marital Trust” (which would qualify for the marital deduction). However, if the decedent is subject to New York estate tax AND has a gross estate in excess of $1,000,000, this funding formula will result in the Family Trust being funded with assets in excess of $1,000,000, and thus generally New York estate tax will be due at the death of the first spouse.
There are several ways to draft a will or revocable trust (or revise it, as the case may be) to account for this issue, and potentially provide the decedent’s surviving spouse or fiduciaries with options with respect to how much (if any) New York estate tax to pay at the first spouse’s death. Drafting options include marital gift/disclaimer funding plans, funding the “Family Trust” with assets equal in value to the lesser of the decedent’s federal or New York estate tax exemptions, or establishing a trust for the surviving spouse’s benefit that can qualify for the federal and New York QTIP election, and be divided into separate trusts to achieve optimal tax results through elections made by the decedent’s fiduciaries.