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Credit Shelter Trusts For Married Couples: Five Key Points Regarding New York State Estate Taxes

Lots of people think they don’t have to worry about estate taxes, because they think they don’t have enough assets to be subject to estate taxes.  But even if you don’t consider yourself “rich,” you might be surprised – and the tax laws in New York could cost you dearly.  Learn how a Credit Shelter Trust, a valuable legal strategy designed to avoid or reduce New York State estate taxes, could help you.

First, it’s important to understand the differences between the Federal estate tax and and the taxes imposed by the states on estates or inheritances.  At the Federal level, currently the first $11.58 million per person ($23.16 million for married couples) of the estate is exempt from tax.  Only about one-tenth of one percent (0.1%) of estates will be subject to Federal estate tax.  

However, the states have their own estate tax or inheritance tax laws and limits, which are different from – and in addition to — the Federal estate tax.  New York has a significant estate tax, and this article is about how to avoid or reduce it.


#1:  You May Have More Assets Than You Realize

For New Yorkers, $5.85 million per person is exempt from estate tax (unless you “fall off the cliff” – see below).  But New Yorkers, don’t stop reading!  If you have a house, or a nice apartment, a good-sized IRA, some investments, life insurance, and any other valuable assets, you need to pay attention.  Adding up all your assets might bring you to the New York State estate tax threshold.  In that case, important differences between Federal and New York State estate tax laws could cost you hundreds of thousands of dollars if you don’t plan ahead.  

Let’s see how you could get hit with a big estate tax bill, and why a Credit Shelter Trust could be right for you.

Here’s an example of how your estate could add up to more than $5.85 million, and what that could mean for you in estate taxes.  Take a couple named John and Maria:

  1. The house John bought for $50,000 in 1978 (when he was single) is now worth $2,000,000
  2. John saved diligently, and his 401(k) is now worth $1,500,000
  3. John has a savings account of $250,000
  4. To protect his family, John owns life insurance worth $2,500,000
  5. Maria has a savings account of $500,000

On a day-to-day basis they think of themselves as having $2.25 million in savings, but their combined estate is worth $6.75 million.  $6.25 million is in John’s name and $500,000 is in Maria’s name.  John has a taxable estate.


#2:  A Credit Shelter Trust Can Currently Shield Up To $5.85 Million from Estate Taxes 

Scenario 1 — John is the first to die, with $6,250,000 in his estate

Under the terms of John’s Will, a Credit Shelter Trust for the benefit of Maria is created and funded with $5,850,000 (the current NYS Estate Tax exemption amount, which is also referred to as “the basic exclusion amount”).

The remainder of John’s estate, $400,000, is distributed directly to Maria.  The $400,000 is eligible for the marital deduction, since the money is transferred to a spouse, so it is exempt from estate tax.  

The amount transferred to the Credit Shelter Trust is also exempt from estate tax.

The result is that John’s estate pays no estate tax.

Maria now has $900,000 in her estate, and, she can receive income and principal from the Credit Shelter Trust established for her benefit under John’s Will.

Although the Trust benefits Maria during her lifetime, when she dies, the amount in the Credit Shelter Trust is not part of her estate.  Legally, it is a separate “person.”  Her estate is what remains in her name.  Since that amount, $900,000, is below the “basic exclusion amount” for NYS Estate Tax, her estate pays no estate tax either.


#3:  Failing to Create an Effective Estate Plan Can Cost You Hundreds of Thousands of Dollars

Scenario 2 — Maria is the first to die, with an estate of $500,000

Under the terms of Maria’s Will, the Credit Shelter Trust for the benefit of John is funded with $500,000.  Maria’s estate pays no estate tax. John can receive income and principal from the $500,000 in the Credit Shelter Trust established under Maria’s Will, and, as in the preceding example, those assets are not included in his estate. 

Later on, however, when John dies, $6,250,000 of assets remain in his name.  The Credit Shelter Trust under John’s Will (which would have been for Maria’s benefit) does not get funded, because Maria died before John. The amount that would have gone into the Trust – and would have been ‘sheltered’ – instead ends up being subject to New York State estate taxes.  As you will see below, this will cost his estate more than half a million dollars.


#4:  The New York Estate “Tax Cliff” Means that Estate Taxes are Paid from the First Dollar

John’s estate does not pay estate taxes on the $500,000 Credit Shelter Trust that was created under Maria’s will, but he does pay NYS Estate Tax on the entire $6,250,000 that remained in his estate.

The trap that sometimes surprises people is that instead of imposing taxes on the amount over the basic exclusion amount,  NYS calculates its estate tax on the total value of the estate, once it is more than 5% over the “basic exclusion amount.”  This is the so-called “tax cliff.”  

So John pays Estate Taxes from the first dollar, i.e., on the entire $6,250,000 – which amounts to a staggering $542,000 in taxes.


#5:  Dividing the Assets can be a Smart Financial Move

For a married couple, it is often best for each spouse to hold a fairly equal share of the couple’s total net worth.  Using my example, if John and Maria’s total assets of $6,750,000 had been evenly divided, the Credit Shelter Trust would have protected both estates.  Both would have been below the basic exclusion amount and would have paid no estate tax.  

Of course, if the assets had been evenly divided, the Credit Shelter Trust could have been omitted.  However, it would be worth considering for other reasons.  One possibility is that the basic exclusion amount could be reduced in future years.  Another possibility could be an added benefit — after the first spouse dies and the trust is funded, no matter how much it grows in value, it avoids estate taxes.  

From the example above, if John dies, Maria, the surviving spouse, could live another 20 or 30 years.  Assuming the assets aren’t touched and are invested wisely, the value of the trust could increase dramatically.  If it is distributed upon the death of the surviving spouse, the entire value of the Credit Shelter Trust is protected from estate taxes.


Take action now to review and update your Estate Plan.  Call us for a consultation.  It will give you peace of mind now, and could save you many thousands of dollars down the road.

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