Gifts to minimize state estate taxes

Gifts to minimize state estate taxes

By: Martin M. Shenkman, CPA, MBA, JD


Introduction/Overview: There exists a $5 Million federal gift exemption. What should taxpayers consider doing in light of the state estate tax they might face in states like New Jersey and New York?

√ Question: Why might taxpayers, especially older ones, want to make large gifts?

√ Answer: If your estate is under $5M why gift? If you die with $4.9M, you won't pay federal estate tax, but you might pay $400,000+ in state estate tax. If you give it all away a minute before you die, no state tax and big savings!

√ Question: What if someone is sick?

√ Answer: Do a durable power of attorney, authorizing unlimited gifts now, but be careful. That is a broad and dangerous power. This is a serious double-edged sword.

√ Question: Is there another approach?

√ Answer: Put your assets into a living trust and authorize two co-trustees to make gifts. Since the trustees have nominal legal title to the assets, in contrast to an agent under a power of attorney, this approach may be more practical to implement quickly, but it is not assured.

√ Question: Are either of these approaches practical? How fast can you move assets?

√ Answer: Great point. Instead, give a selected person the power to revoke your rights in the living trust, making it a completed gift without moving assets. It can be tedious to get a bank, investment firm, or brokerage house to shift assets. The time these transfers take may prevent the planning you want. This is why, if you can get comfortable, other approaches are better.

√ Question: Anything cooler?

√ Answer: Sure! Fund a self settled domestic asset protection trust now in Alaska. You arguably remove all assets from your estate now, but you can remain a discretionary beneficiary of the trust so that you can benefit from the assets if you need them. This is a big step for many people to take but if your health is poor or you're elderly, paying $400,000 in state estate tax is not an optimal result either.

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