An estate plan typically consists of documents relevant in the event of death, consisting of a will and revocable trust, and incapacity, consisting of a durable power of attorney and health care directives including a living will and appointment of health care representative.
Having an estate plan in place allows a client to identify who should make decisions in the client's place and who should benefit from the client's property. Without an estate plan, state law provides certain defaults that require involvement of the courts. In addition to the time and expense of needing to go through the court system, the defaults may or may be consistent with the client's wishes and in many cases can trigger estate tax at the death of the first spouse that might have otherwise been deferred using an estate plan. In some cases more importantly, having documents in place and ready to go can alleviate some of the emotional burden of an otherwise difficult time.
Our approach to estate planning is to create a plan that is first and foremost consistent with the client's wishes, typically in a trust structure that provides tax efficiency, creditor protection, and flexibility to adapt as circumstances change.
Federal Estate Tax Considerations
Estate taxes can play a significant role in estate planning because of the high tax rate (currently 40% for federal estate tax) and the uncertain timing of the tax bill, coming due 9 months after date of death. These factors can be particularly challenging where the estate holds mostly illiquid assets that may need to be sold or leveraged when a person dies. As a result, proper estate planning for high-net worth individuals will address federal (and where applicable, state) estate taxes, typically by deferring estate taxes in the case of a married couple until the death of the survivor and maximizing the benefit of charitable bequests. Once the estate plan is set, gift planning becomes an important second step in mitigating the eventual estate tax.
As of 2023, $12,920,000 can pass free of federal estate tax (referred to as an "exemption amount"). This amount is unified with the federal gift tax such that the amount used during lifetime, is no longer available at death. The exemption amount is adjusted for inflation annually, and in 2026 is scheduled to decrease by half. Tax is imposed on the value of the estate above the exemption amount at a rate of 40%. The exemption amount and tax rate are subject to change by legislation and are frequently the subject of policy proposals coming out of Washington.
The estate tax is imposed on the worldwide assets of US citizens and those residents who consider the United States as their home country (aka US domiciled), at the assets fair market value as of the person's date of death. The exemption amount discussed above is only available for this group. Non-resident, non-citizens who have assets situated in the United States at death are taxed differently.
Connecticut Estate Tax
Connecticut imposes a state level estate tax on Connecticut residents excluding any real or tangible property located outside the state, and non-residents with real or tangible property in Connecticut. As with the federal estate tax regime, Connecticut has a unified gift tax that applies to transfers during lifetime. As of 2023, the amount that can pass free of Connecticut gift and estate tax (i.e. the Connecticut exemption amount) is tied to the federal exemption amount.
The tax rate is assessed at a flat rate of 12% to the extent the value of the estate exceeds the exemption amount.
New York Estate Tax
New York imposes a state estate tax on assets included in a New York resident decedent's estate for tax purposes plus certain gifts made within 3 years of death, excluding real and tangible property located outside of New York. Decedents who are non-residents of New York are subject to estate tax in New York on real and tangible property located within New York.
New York estate tax is not imposed if the value of relevant assets is less than the New York exemption amount, currently $6,580,000 and adjusted annually for inflation. However, unlike the federal estate tax, New York's exemption amount operates as a cliff where the exemption is phased out incrementally and once the total assets subject to the tax exceed 105% of the exemption amount, it no longer applies and tax is due on every dollar of assets. The tax rate is progressive and tops out at 16% to the extent the value subject to tax exceeds $10,100,000.
Utilizing the Generation Skipping Transfer Tax Exemption
In addition to the estate and gift tax regime, there is a second type of federal transfer tax called the “generation-skipping transfer tax” or “GST tax.” The GST tax was added to further backstop the estate tax by disincentivizing wealthy individuals from leaving assets directly to grandchildren to avoid the assets being subject to gift or estate tax in their children's estates. There is an exemption available for the GST tax that is the same as the estate tax exemption amount, currently $12,920,000. The exemption can be applied to transfers directly to grandchildren or applied to a transfer in trust so that distributions from the trust can be made to beneficiaries at any generation without incurring the GST tax. It is an additive tax such that if a person had exhausted the federal gift and estate tax exemption and GST tax exemption, a transfer that skipped a generation would be subject to both types of taxes. Utilizing the GST tax exemption therefore becomes an important feature in a tax-driven estate plan.
