1. ESTATE PLANNING FOLLOWING NEW YORK STATE ESTATE TAX REFORM Martin W. O’Toole, Esq. 585-231-1103 motoole@hselaw.com May 12, 2015

2. New York State Estate Tax The New York State estate tax is based on the federal estate tax with respect to what is potentially subject to tax (gross estate) and what is actually subject to tax (taxable estate) Assets covered by the tax include, but are not limited to: – Real Estate – Securities and Cash – Life Insurance – Business Interests – Retirement Accounts – Retained Beneficial Interests, such as certain trusts. For example, if an individual transfers assets to a trust and retains the right to receive income from the trust, it is part of the individual’s gross estate. 2

3. New York State Estate Tax For residents, the New York tax does not apply to: – Real property located outside New York – Tangible personal property located outside New York New York tax is based on federal estate tax as it existed on January 1, 2014. Even if the federal estate tax were repealed, there would still be a New York estate tax. 3

4. Federal and New York Estate Tax Federal and New York — unlimited marital deduction for transfers of assets between spouses. Federal estate tax exemption is “portable” between spouses, meaning that the surviving spouse may elect to inherit the federal exemption available to the first spouse to die. The New York “exemption” is not portable. Change in cost basis of assets to their estate tax value. Generally, but not necessarily, this results in a step-up in basis. 4

5. Exemption Amount New York Estate Tax Exemption: – $2,062,500 from April 1, 2014 to March 31, 2015 – $3,125,000 from April 1, 2015 to March 31, 2016 – $4,187,500 from April 1, 2016 to March 31, 2017 – $5,250,000 from April 1, 2017 to December 31, 2018 – After December 31, 2018 (beginning January 1, 2019), the New York exemption will be equal to the federal exemption, as indexed to inflation. The exemption amount is projected to increase to close to $6 million as of January 1, 2019, based on inflation adjustments. 5

6. New York Estate Tax Rates New York has a graduated estate tax rate schedule which begins at 3.06% for taxable estates not exceeding $500,000 and climbs to a top rate of 16% for taxable estates exceeding $10,100,000 (see chart on next page). For estates subject to federal estate tax (e.g., estates exceeding $5.43 million in 2015), the New York estate tax is a deduction on the federal return. This effectively reduces, by 40%, the New York estate tax rate on that portion of the estate which exceeds the federal exemption. Thus, the top New York estate tax rate on an estate exceeding $10.1 million is actually 9.6% rather than 16%. The changes to the New York estate tax law made in 2014 provided for the application of the new tax rate schedule only through March 31, 2015. The 2015 budget made permanent the rates. 6

7. New York Estate Tax Rate Chart IF THE NEW YORK TAXABLE ESTATE IS:THE TAX IS: Not over $500,0003.06% of taxable estate Over $ 500,000 but not over $ 1,000,000$ 15,300 plus 5.0% of excess over $ 500,000 Over $ 1,000,000 but not over $ 1,500,000$ 40,300 plus 5.5% of excess over $ 1,000,000 Over $ 1,500,000 but not over $ 2,100,000$ 67,800 plus 6.5% of excess over $ 1,500,000 Over $ 2,100,000 but not over $ 2,600,000$106,800 plus 8.0% of excess over $ 2,100,000 Over $ 2,600,000 but not over $ 3,100,000$146,800 plus 8.8% of excess over $ 2,600,000 Over $ 3,100,000 but not over $ 3,600,000$190,800 plus 9.6% of excess over $ 3,100,000 Over $ 3,600,000 but not over $ 4,100,000$238,800 plus 10.4% of excess over $ 3,600,000 Over $ 4,100,000 but not over $ 5,100,000$290,800 plus 11.2% of excess over $ 4,100,000 Over $ 5,100,000 but not over $ 6,100,000$402,800 plus 12.0% of excess over $ 5,100,000 Over $ 6,100,000 but not over $ 7,100,000$522,800 plus 12.8% of excess over $ 6,100,000 Over $ 7,100,000 but not over $ 8,100,000$650,800 plus 13.6% of excess over $ 7,100,000 Over $ 8,100,000 but not over $ 9,100,000$786,800 plus 14.4% of excess over $ 8,100,000 Over $ 9,100,000 but not over $10,100,000$930,800 plus 15.2% of excess over $ 9,100,000 Over $10,100,000$1,082,800 plus 16.0% of excess over $10,100,000 7

8. Gifts No gift tax in New York. One option to reduce the size of the gross estate to ensure that it is under the New York exemption is through lifetime gifts. Under 2014 amendments to the New York estate tax, the gross estate includes taxable gifts made after April 1, 2014 and before January 1, 2019 by a New York resident donor within 3 years of death. The 2015 budget makes a technical correction confirming this. Taxable gifts do not include gifts to a spouse or charity, annual exclusion gifts ($14,000 per donee in 2015), and certain gifts for tuition and medical expenses. 8

9. The “Cliff” Estates with a value equal to or less than the New York exemption are entitled to a dollar-for-dollar credit against the New York estate tax, which eliminates the tax altogether. The credit also is effectively a filing threshold. The New York exemption/credit is phased out for estates worth between 100% and 105% of the amount of the exemption, meaning that estates within this range are only entitled to a partial credit. For estates worth 105% or more of the New York exemption ($3,125,000 x 105% = $3,281,250) the New York exemption/ credit disappears entirely, and the entire estate is taxable based on the New York graduated rate schedule. 9

10. The “Cliff” Example: Estate Under Exemption – A taxable estate of $3,000,000 (less than the current New York exemption amount of $3,125,000) will be entitled to a dollar-for-dollar credit against the New York estate taxes on an estate of that size ($182,000) and will not pay any New York estate taxes. 10

11. The “Cliff” Example: Estate Between 100% and 105% – An estate worth $3,218,750, which is between 100% and 105% of the current New York exemption amount of $3,125,000, will be subject to a gross New York estate tax of $202,200; however, the New York exemption in this instance provides for a partial credit of $54,050 against the gross tax due, which results in a net tax of $148,150. 11

12. The “Cliff” Example: Estate Over the Exemption (Over the Cliff?) – An estate worth $3,500,000, which is greater than 105% of the current New York exemption amount of $3,125,000, will be subject to a New York estate tax of $229,200 without the benefit of any exemption/ credit (in other words, the entire estate is taxable). 12

13. Portability of New York Exemption Leaders in the Trusts and Estates Section of the New York State Bar Association have asked about enacting portability at the state level—to no avail as yet. Adoption of New York portability would eliminate the “use it or lose it” phenomenon, a concern for a married couple whose combined estates exceeds one New York exemption. Ignoring other considerations (to be discussed later), there would be less reason to create a trust at first death: – Whether a “mandatory” credit shelter trust or – Disclaimer trust 13

14. Planning for Married Couples Examine Who Owns What Examine Estate Plan – If estate plan is All to each other, without a disclaimer trust “Two Trust Will” and family portion is defined only with reference to the federal exemption Marital Trust with general power of appointment – Then it makes sense to consider changes 14

15. Planning for Married Couples Take Assets Out of Gross Estate Through Gifting – Annual exclusion gifts and gifts for tuition and medical expenses do not get brought back into estate if the donor dies within the “window”. Should always consider donor’s remorse, however – For gifts that will use some federal gift tax exemption, need to analyze what would happen if die within “window”. Should consider tax allocation clause Should consider potential non-availability of federal estate tax deduction Should always consider donor’s remorse 15

16. Planning for Married Couples Reduce Value of Estate: – Asset sales that shift income and appreciation – Loans to freeze value of assets and shift appreciation – Formation of Family Partnerships or LLCs – Charitable Giving Example: Where estate is $3.2 million, a charitable gift of $75,000 will save $124,475 in NYS estate tax Can make bequest contingent on being “on the cliff” Become a Resident of Another State: – Simply having a residence elsewhere is not enough “Other” residence has to be the individual’s principal residence Buy realty in another state (presumably without an estate or inheritance tax): – Key time is resident’s death – No “look back” period 16

17. Single Individuals Many of the Same Concepts Apply: – Use of Annual Exclusion – Reduce Size of Estate Through Sales or Valuation Reduction Techniques such as FLPs – Change Residency – “Relocate” Assets – Charitable Giving 17

18. What To Do: The Factors in the Changing Matrix of Planning The increase in the New York exemption, together with the federal exemption, means that many estates will not face either federal or New York estate tax. Given clients’ health, wealth, and estate plans, the impact of estate tax, income tax, and “creditors” (most particularly long-term care) will have more or less significance in any particular instance. This means that there is no standard model that will work for all. It also means that what works at one point in a client’s life might not work at another time. 18

19. What To Do: Basis If the estate tax is not a realistic prospect, clients should consider the desirability of having assets be subject to estate tax to achieve a step-up in basis. Step-up does not affect “income in respect of decedent” assets (“IRD”). – Qualified Plans and Regular IRAs – Build-up in annuities – Unpaid compensation at death Legislative Change? – 2001 provision for carry-over basis when no federal estate tax – Obama Administration provision (2016 Greenbook) 19

20. What To Do: QTIP Trusts For many married couples, a Qualified Terminable Interest Property Trust (“QTIP”) will be a good solution. – Ensures surviving spouse has an income stream from assets – May restrict ability of spouse to change disposition at his or her death Useful for second marriage situations – QTIP treatment is elective: can make partial election If elect, property is includible in survivor’s estate and so assets get step-up (assuming appreciation) If do not elect, use some exemption at the first death 20

21. What To Do: QTIP Trusts At present, cannot elect QTIP treatment just for New York purposes: estate needs to file a federal estate tax return. – So, by electing QTIP on a federal return, taking a chance that assets in trust will be exposed to federal estate tax in the future Some have expressed concern that do not have a valid federal QTIP election if the election is not needed to avoid/defer tax. – No known instances in which IRS has made argument – IRS has announced regulatory project to confirm that the election is valid 21

22. What To Do: Case Studies In all instances, assets are $3.5 million, that is, above the New York exemptions for one person for 4/15 to 3/16 period. – 45 year old couple: disclaimer trust – 65 year old couple: disclaimer trust, QTIP trust – 85 year old couple: QTIP trust Effect of second marriage? What about single individuals? 22

23. Use of General Power of Appointment Basic Notion: Trust for individual (typically, a spouse; may be a child). A third party has the right to grant the individual a general power of appointment. – The general power causes estate tax inclusion, generating step-up The planning can make it more difficult for someone actually to exercise power. – How? Requiring consent of third party whose economic interest is not affected by exercise or non-exercise of the power of appointment 23

24. Questions? 24

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