2008-12-05 / Columnists

Spo tlight On Elderlaw

Commentary By Nancy J. Brady, RN, Esq. And Linda Faith Marshak, Esq.

In past articles we have mentioned means for married couples to maximize their estate tax savings by dividing assets, and creating special trusts in the Last Will and Testament. In addition to those tools, a plan for lifetime gifts is an effective way to reduce the size of one's estate during one's lifetime, resulting in additional tax savings.

As a refresher for those of you who don't keep our articles under your pillows, or on your refrigerator, here are a few things to keep in mind. Married individuals (who are citizens) can leave any amount to the surviving spouse tax free. This is called the unlimited marital deduction. If the first spouse, to die leaves everything to the surviving spouse however, depending upon the value of the estate, on the death of the surviving spouse, there can be tax consequences for the next generation. The amount of taxes due depends upon the year the decedent passes away. In 2008, an individual can pass an estate of up to $2 million (this is called the applicable exclusion amount) free of federal taxes. (In New York if your estate is valued at over one million dollars, there will be NY state taxes due.) We know that this amount is increasing each year through the year 2009, when individuals can pass estates of up to $3.5 million free of federal estate tax. As of now, there will be no estate tax for individuals who pass away in 2010, and if Congress does not pass additional legislation, the estate tax will go back to $1 million in 2011. One solution is to pass away in 2010 - and if the laws don't change by then, there will be no federal estate tax consequences. If you're not sure that will work out for you, other alternatives should be considered.

So, for individuals with estates valued over $2 million, you may wish to establish a gift-giving plan (with your lawyer and accountant's advice) to utilize your gift tax exclusion, and reduce the size of your taxable estate.

The federal gift tax exclusion equivalent is $1,000,000. For gifts made after January 1, 2006, the annual exclusion per calender year per person is $12,000. In plain language, that means that for your lifetime, you are allowed to gift up to one million dollars tax free, and annual gifts of $12,000 per person will not count towards that million dollars. If gifts in excess of $12,000 per person per calendar year are made, the amount over $12,000 will be counted towards the one million, and the excess over one million will be taxed (depending upon the year) at upwards of 45 percent, and once the estate tax is repealed in 2010, at the highest individual income tax rate of 35 percent. The person making the gift is liable for the taxes. Payments made for tuition or medical expenses are exempt from any gift tax if the payments are made directly to the educational institution or medical provider.

In many situations, seniors set up custodial accounts for grandchildren and deposit annual gifts to the accounts. In New York, the grandchild will have the right to access that account at age 18. A more sophisticated "Minor's Trust" can be established to prevent the child's accessing the funds at age 18, by provisions in the trust with stated ages or events to occur before the child may access the assets.

Married couples can each gift $12,000 to the same person per calendar year. So, for example, if Dick and Jane have two married children, and those married children each has one child - Dick and Jane can each give each child, each child's spouse and each grandchild $12,000, or a total of $144,000 for the year, without any gift tax implications, or requirement for filing a gift tax return. In addition to outright gifts, there are other means to gift assets such as payment of premiums for insurance, trusts for grandchildren's college educations. Don't overlook the gift giving strategies when establishing your estate plan. And, one last thing, don't forget the gifts must be made by December in order to qualify for the annual exclusion.

Due to the limited space of this column, we can provide only very basic information. This information should not be construed as individual legal advice. In order to establish an effective plan for your specific family and financial situation, you should speak to an attorney.

Ms. Brady and Ms. Marshak can be reached at 718-945-7777.

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