Section 6

TAXES

A. Individual Income Taxes
B. Estate Taxes
The 2016 Federal Estate Tax Rates
The 2017 Federal Estate Tax Rates
The New York Estate Tax Rates Between April 1, 2016 and March 31, 2017
The New York Estate Tax Rates Between April 1, 2017 and March 31, 2018
C. Fiduciary Income Taxes
The 2016 Federal Fiduciary Income Tax Rates
The 2017 Federal Fiduciary Income Tax Rates
The 2016 New York Fiduciary Income Tax Rates
The 2017 New York Fiduciary Income Tax Rates
D. Income Taxes To Beneficiaries

As Benjamin Franklin said, the only things that are certain are death and taxes. The heirs are not the only ones with an interest in the decedent's estate; Federal and New York State taxes may chip away at the assets and income of the decedent and the estate. These include final (individual) tax filings for the decedent through the decedent's date of death, one-time (estate) taxes on the value of the decedent's assets and ongoing (fiduciary) income taxes from the decedent's date of death through the settlement of the estate.

A. Individual Income Taxes

Final Federal and New York State income tax returns are due for the year the decedent died. On the decedent's final income tax returns, the full amount of the standard deductions and exemptions can be claimed regardless of the date of death.

Some assets that were not subject to income taxes during the decedent's lifetime- such as IRA's, 401-K plans, interest income on life insurance and annuities-will be subject to both income tax (payable by the individual beneficiaries or the estate, as applicable) and estate taxes upon the decedent's death.

The beneficiary of an IRA may elect to defer payment of the proceeds from the IRA, thereby deferring the income taxes as well. There is a short window for making such an election based on (1) the date of decedent's death; (2) whether the decedent was already taking distributions; and (3) the relationship between the decedent and the beneficiary of the IRA.

B. Estate Taxes

For decedents dying in 2017 a Federal estate tax return is required for individuals who leave a gross estate of $5,490,000 or more. The Federal estate tax is adjusted each year for inflation.

Effective April 1, 2014 New York enacted changes to its estate tax laws. For decedents dying before April 1, 2014 a New York State estate tax return is required if the decedent's gross taxable estate exceeds $1,000,000.

For decedents dying between April 1, 2016 and March 31, 2017 a New York State estate tax return is required if the gross estate of the decedent exceeds $4,187,500. For decedents dying between April 1, 2017 and March 31, 2018 a New York State estate tax return is required if the gross estate of the decedent exceeds $5,250,000.

A non-resident of New York who dies owning real property or tangible personal property in New York and whose gross taxable estate (including property outside New York) is in excess of 4,187,500 (for decedents dying between April 1, 2016 and March 31, 2017), $5,250,000 (for decedents dying prior to April 1, 2017 and March 31, 2018) also needs to file a New York State estate tax return.

Federal estate taxes are due if the net taxable estate (i.e. gross value of assets less deductible debts of the decedent and administration expenses of the estate) exceeds $5,490,000 in 2017. New York State estate taxes are due if the net taxable estate exceeds $4,187,500 for decedents dying between April 1, 2016 and March 31, 2017 and $5,250,000 for decedents dying between April 1, 2017 and March 31, 2018.

For decedents dying after April 1, 2016 and before March 31, 2017 once the net taxable estate equals or exceeds $4,396,875 (i.e. 105% of the basic exclusion amount of $4,187,500) there is no credit against the New York State estate taxes. Accordingly on a net taxable estate of $4,396,875 the New York State estate taxes total $324,050.

For decedents dying after April 1, 2017 and before March 31, 2018 once the net taxable estate equals or exceeds $5,512,500 (i.e. 105% of the basic exclusion amount of $5,250,000) there is no credit against the New York State estate taxes. Accordingly on a net taxable estate of $5,512,500 the New York State estate taxes total $452,300.

The taxable estate of a decedent under Federal law includes the taxable gifts made by the decedent at any time during his or her lifetime. Under New York law the taxable estate of a decedent includes gifts made on or after April 1, 2014 and provided the gifts are made within 3 years of the date of death.

All assets owned by the decedent (including assets that do not require Court intervention such as insurance policies) are subject to estate taxes. The full value of non-spousal joint bank accounts and other jointly held property are also subject to estate taxes unless it can be proven that the surviving joint tenant contributed to the acquisition of the asset. Estate taxes are also due on assets placed by the decedent in a revocable “living trust.”

No estate taxes are due on the assets received by either the surviving spouse or by a charitable entity as a beneficiary of the estate or by operation of law. The charity must, however, be a qualified tax exempt organization in order for the estate tax charitable deduction to be claimed.

The use of the “portability” election allows a savings of future estate taxes by permitting the future use by the surviving spouse of the balance, if any, of the unused portion of the decedent’s Federal estate tax exemption ($5,490,000 in 2017). In order to preserve the portability exemption the estate of the first spouse to die must file a Federal estate tax return even if the estate is not otherwise required to file the estate tax return. Portability is not currently available in connection with New York State estate taxes.

The Will may specify which beneficiaries bear the estate tax obligations of the estate. If not (or if there is no Will), each beneficiary or class of beneficiaries pays his or her own portion of the estate tax; the Executor or Administrator pays the appropriate taxing authorities and then deducts the proportional amount from each beneficiary’s share of the estate. The Executor or Administrator must also collect any estate taxes due on assets that pass on to a joint tenant or specifically named beneficiary, such as joint bank accounts, IRA accounts, and insurance policies. These estate taxes are collected from the designated beneficiary or joint account holder. Sometimes estate taxes are due well before the estate can liquidate certain types of assets. This is particularly true when the decedent held an interest in commercial real estate which can be difficult (or financially disadvantageous) to liquidate in time to pay estate taxes. It might also occur with a closely held business the value of which could drop precipitously if sold quickly in order to satisfy an impending tax obligation. Thus, when a certain percentage of an estate consists of closely held business assets or interests, preferential estate tax treatment (such as the right to make installment payments) is available.

Federal and state estate tax returns must be filed within nine months after death. Likewise, any estate taxes due must be paid within that nine-month period. Six-month extensions to file the Federal and New York State estate tax returns are available if applied for prior to the expiration of the nine month period. When sufficient cause is demonstrated, a six-month extension to pay the Federal and New York State estate taxes is also available through separate timely applications to each taxing authority. The estate may be approved for an extension by one taxing authority and be denied by the other.

Interest and penalties on unpaid estate taxes accrue from nine months after the date of decedent’s death until payment.


The 2016 Federal Estate Tax Rates For Decedents
Dying Between January 1, 2016 and December 31, 2016


NET TAXABLE ESTATE NET ESTATE TAX
$ 5,450,000 $ 0
$ 6,000,000 $ 220,000
$ 7,500,000 $ 820,000
$ 9,000,000 $1,420,000
$10,000,000 $1,820,200

The unified Federal estate tax credit for 2016 is $2,125,800 which is the tax due on a net taxable estate of $5,450,000 resulting in no net estate tax.

The 20175 Federal Estate Tax Rates For Decedents Dying Between January 1, 2017 and December 31, 2017


NET TAXABLE ESTATE NET ESTATE TAX
$ 5,490,000 $ 0
$ 6,000,000 $ 204,000
$ 7,500,000 $ 804,000
$ 9,000,000 $ 1,404,000
$10,000,000 $ 1,804,000

The unified Federal estate tax credit for 2017 is $2,141,800 which is the tax due on a net taxable estate of $5,490,000 resulting in no net estate tax on that amount.

For both 2016 and 2017:



The New York Estate Tax Rates For Decedents
Dying Between April 1, 2016 and March 31, 2017


NET TAXABLE ESTATE NET ESTATE TAX
$ 4,187,500 $ 0
$ 5,450,000 $ 444,800
$ 6,000,000 $ 510,800
$ 7,500,000 $ 705,200
$ 10,000,000 $ 1,067,600

Once the net taxable estate exceeds $4,396,875 there is no credit available against the estate tax. See discussion on page 17.

The New York Estate Tax Rates For Decedents
Dying Between April 1, 2017 and March 31, 2018


NET TAXABLE ESTATE NET ESTATE TAX
$ 5,250,000 $ 0
$ 5,490,000 $ 435,816
$ 6,000,000 $ 510,800
$ 7,500,000 $ 705,200
$ 10,000,000 $ 1,067,600

Once the net taxable estate exceeds $5,512,500 there is no credit available against the estate tax. See discussion on page 17.

On and after April 1, 2014:

C. Fiduciary Income Taxes

Federal and New York State Fiduciary income tax returns must be filed by the Executor or Administrator of the estate in each year the estate earns $600 or more of gross income even if no tax is due.

Executor or Administrator commissions, attorney fees, accountant fees, and distributions of income to the estate's beneficiaries may be deducted from gross fiduciary income. Commissions, legal fees, accounting fees and other administration expenses can be deducted on either the fiduciary income tax returns or the estate tax returns.


The 2016 Federal Fiduciary Income Taxes Rates



NET INCOME LESS THAN TAX
$2,500 15% of such amount
$5,950 $382.50 + 25% of the amount over $2,500
$9,050 $1,32.50 + 28% of the amount over $5,950
$12,400 $2,100.50 + 33% of the amount over $9,050

NET INCOME MORE THAN TAX
$12,400 $3,206.00 + 39.6% of the amount over $12,400


The 2017 Federal Fiduciary Income Taxes Rates


NET INCOME LESS THAN TAX
$2,500 15% of such amount
$6,000 $382.50 + 25% of the amount over $2,500
$9,150 $1,245 + 28% of the amount over $6,000
$12,500 $2,127 + 33% of the amount over $9,150

NET INCOME MORE THAN TAX
$12,500 $3,232.50 + 39.6% of the amount over $12,500

 



The 2016 New York Fiduciary Income Tax Rates


NET INCOME LESS THAN TAX
$8,450 4% of such amount
$11,650 $334 + 4.5% of the amount over $8,450
$13,550 $482 + 5.25% of the amount over $11,650
$21,300 $598 + 5.9% of the amount over $13,850
$80,150 $1,037 + 6.45% of the amount over $21,300
$214,400 $4,833 + 6.65% of the amount over $80,150
$1,076,350 $13,734 + 6.85% of the amount over $214,000

NET INCOME MORE THAN TAX
$1,070,350 $72,394 + 8.82% of the amount over $1,070,350

The 2017 New York Fiduciary Income Tax Rates


NET INCOME LESS THAN TAX
$8,500 4% of such amount
$11,700 $336 + 4.5% of the amount over $8,400
$13,900 $480 + 5.25% of the amount over $11,700
$21,400 $600 + 5.9% of the amount over $13,900
$80,650 $1,042 + 6.45% of the amount over $21,400
$212,400 $4,864 + 6.65% of the amount over $80,650
$1,077,550 $13,825 + 6.85% of the amount over $215,400

NET INCOME MORE THAN TAX
$1,077,550 $72,885 + 8.82% of the amount over $1,077,550

Estates of individuals who resided in either New York City or the City of Yonkers are subject to additional fiduciary income taxes.


D. Income Taxes to Beneficiaries

Generally, a beneficiary who receives property under a Will (or an heir in an estate where there is no Will), does not pay income taxes on their inheritance. However, the beneficiary may owe taxes in any year they receive income from the estate (most commonly in the year the estate is concluded). This income is reported to the beneficiary (and to the taxing authorities) on a Schedule K-1 when the fiduciary income tax returns reflecting that income are filed.

If the estate incurs a loss in the final year of the estate (for example, if the allowable expenses of the estate exceed its income), each eligible beneficiary will receive a Schedule K-1 reflecting his or her share of that loss. The loss may be deducted by the beneficiary as an itemized deduction on his or her individual income tax returns subject to certain income and time limitations.

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Howard Garfinkel, Esq.

Lauterbach Garfinkel Damast & Hollander, LLP
49 North Airmont Road, Suite 101
Suffern, New York 10901
845-368-4400 - Office
howardg@lgdhlaw.com