The purpose of this page is to explain in plain English what the estate tax is and how you can reduce your estate taxes by using wills and trusts. The estate tax is a tax on the transfer of property at death. The person who dies is called the decedent and the person who receives the property is called the beneficiary. The estate tax is different from an inheritance tax because the estate tax is on the transfer of property from the decedent, while an inheritance tax is a tax on the receipt of property by the beneficiary.

Both the Federal government and New York State have an estate tax and a gift tax.

The Federal Estate and Gift Tax Laws provide a single unified rate schedule for both estate and gift taxes. The rates are progressive and are based cumulative transfers that you make during life over the annual gift tax exclusions plus transfers at death.

In order to understand the estate tax, it is necessary for me to define certain terms for you:

1. Gross Estate - Your gross estate for estate tax purposes consists of all gifts you made during life over the annual gift tax exclusions ($12,000 per person, $24,000 if you are married and elect to "split" a gift with your spouse, meaning making a joint gift, plus certain medical and tuition expenses) plus assets you own at death or in which you had an interest at the time of death under the tax law. Without going into detail, the Internal Revenue Code also includes in the gross estate certain property which may have been transferred by you during your life or property in which you retained a taxable interest. The technicalities are beyond the scope of this page, but the bottom line is the government wants to tax any assets that you owned at death or retained certain types of interest in or control over, such as life use. It is necessary to consult an expert in this area because assets may be included in your gross estate under the law that you are not aware of.

2. Federal Unified Credit - This is a credit against the Federal estate tax which is the equivalent of an exemption from Federal estate taxes of $2,000,000. In other words, every individual who dies in 2007 can own up to $2,000,000 worth of assets and not pay any Federal Estate Taxes.

3. New York State Unified Credit - This is a credit against the New York State estate tax which is the equivalent of an exemption from estate taxes of $1,000,000. In other words, every individual can own up to $1,000,000 worth of assets and not pay any New York State Estate Taxes.

4. Marital Deduction - The marital deduction is a deduction allowed for assets you leave to your spouse at death. By leaving assets to your spouse at death you insure that there will be no estate tax on those assets upon your death. There may be estate taxes on those assets at your spouses death if your spouse's assets exceed either $2,000,000 for Federal estate tax purposes or $1,000,000 for New York State estate tax purposes. Both the Federal estate tax and the New York State estate tax contain marital deduction provisions.

5. Rates - Federal estate tax rates for estates in excess of $2,000,000 are 45%.  New York State estate rates for estates in excess of $1,000,000 start at 5.6% and go up to about 16%.

Now let's see how this all works.

The most common will that a husband and wife usually have is called a "Loving Will". It is called a "Loving Will" because each spouse leaves all of their assets at death to the other spouse. From a tax point of view, this type of will can be a tax disaster. Let me explain.

Assume that a couple has $1,600,000 worth of assets and a "Loving Will". Husband dies leaving the entire estate to his wife, then the wife dies. What are the estate tax consequences? There will be no tax on the husband's estate at his death because of the marital deduction. He has, what is called "overfunded the marital deduction" and wasted his state and federal unified credits.

Since the wife's estate exceeds $1,000,000 by $600,000, that $600,000 will be subject to New York State estate tax rate of approximately 6% when the wife dies. That means that there would be approximately a $36,000 tax on that $600,000 upon the death of the wife. Yuk :(

Now the good news. If the husband executed a new will and placed $1,000,000 into a trust for his wife, called a credit shelter trust, there would be a totally different result. There would be no tax on the husband's death for Federal or New York State estate purposes since the Federal and New York State unified credit would wipe out any tax in the husband's estate on the $1,000,000 he placed into the credit shelter trust for the wife. The entire $600,000 balance of the estate left outright to the wife would be excluded from the wife's estate, bringing her estate below $1,000,000 and thus saving about $36,000 in New York State estate taxes. :) The news gets better for larger estates.

Assume an estate of $2,500,000 and a "Loving Will". While there would be no tax on the husband's death, the wife's estate would exceed $2,000,000 by $500,000. The excess $500,000 will be subject to tax at a combined Federal and New York State rate of about 50%. That is roughly $250,000 in estate taxes. :( Really Yuk! 

Now for the good news. If the husband executes a new will and places $1,000,000 into a unified credit shelter trust for his wife on his death, that $1,000,000 will not be included in the wife's estate at all, thus saving all Federal and New York State estate tax on that $1,000,000. Also the $1,500,000 he leaves outright to his wife will not be subject to any Federal estate tax on the wife's death savings $225,000 in Federal estate taxes that would otherwise have been owed if the husband used a simple loving will leaving the entire $2,000,000 outright to the wife. Just by executing a new will and using a unified credit shelter trust we are able to completely eliminate all federal estate taxes on an estate of up to $4,000,000 in 2007. You can pass a $4,000,000 total estate free of federal estate tax using the unified credit shelter trust by putting $2,000,000 into the shelter trust for the spouse. You can pass a $2,000,000 total estate free of New York State estate tax by placing $1,000,000 in the unified credit shelter trust for the spouse.

Note that it makes sense to transfer assets into the wife's name during her lifetime into a revocable trust she creates for herself and the husband, to avoiding losing her unified credits in case the wife dies first.

What if the estate were $2,100,000 and the estate contained $100,000 worth of life insurance? The husband could set up an irrevocable life insurance trust and transfer the $100,000 policy into that trust. After three years, that $100,000 life insurance policy would be excludable both from his estate and his wife's estate thus saving the 6% New York State estate tax of approximately $6,000 upon the death of the wife. If the estate were $4,100,000, the savings using the life insurance trust would equal about $50,000 in federal and state estate taxes.

I should point out that the wife is a trustee of the unified credit shelter trust and life insurance trust and that she controls the investment of the funds in the trust and gets all the income from the trust, plus has access to the principal of the trust for support payments for support in her accustomed manner of living, plus medical and hospital bills, plus the greater of 5% of the principal or $5,000 per year. The bottom line is that the wife will have more access to the assets in trust than she will need for her support, but the assets will not be included in her estate at her death for estate tax purposes.

Also, any appreciation or growth on the assets in the trust from the death of the first spouse to the death of the second spouse will also escape tax on the death of the second spouse to die. So if $2,000,000 in the unified credit shelter trust for the wife doubles to $4,000,000 between the death of the husband and the death of the wife, the entire $4,000,000 would be free from tax in both estates and pass tax free to the children upon the death of the second to die saving approximately $1,000,000 in additional estate taxes on the $2,000,000 of appreciation between the death of both spouses.

I have very briefly tried to explain in layperson's terms the tremendous estate tax savings that can be achieved through the use of wills and trusts.

After practicing law for 32 years, it is clear to me that the people who pay estate taxes are the people who do not plan their estates. By planning your estate, using unified credit shelter trusts and irrevocable life insurance trusts it is possible to pass hundreds of thousands of dollars to your children as opposed to the Federal government and the State of New York.

I am available at your convenience to provide a free office conference to review your particular situation.

I hope you found the information set forth above helpful.

Warmest personal regards

Dick
D. Victor Pellegrino
Email:

Last Updated: May 11, 2007

Web Master: Email: