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ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001 REVISITED:
PART 2 |
By: Lawrence N. Berwitz, Esq. & Maureen Rothschild DiTata, Esq.
Berwitz & DiTata LLP
Garden City, New York |
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Last month, this column addressed the repeal of the unlimited step-up in basis under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). Other changes under EGTRRA have created more immediate problems.
EGTRRA calls for the phase-out of the state estate tax credit by 2005, by reducing the credit by 25% in 2002, 50% in 2003, 75% in 2004 and repealing it entirely in 2005. The state estate tax credit is replaced with an unlimited state estate tax deduction for estates of decedents whose deaths occurred after December 31, 2004 provided that the tax has been paid and the deduction claimed within four years from the date of death. The four year limit may be extended, but only under certain enumerated circumstances.
Under sections 951 and 1021 of the New York Tax Law, New York tied its unified estate tax credit to the federal unified credit. In so doing, the statute adopts the applicable provisions of the Internal Revenue Code as amended through July 22, 1998, At that time, the maximum unified credit was going to be $1 million as of 2006. Today, New Yorks unified credit remains at that amount, notwithstanding that the federal unified credit has already increased under EGTRRA to $1.5 million, it is scheduled to increase further through 2009, and the estate tax is suspended in 2010.
This disparity in the state and federal estate tax credits can result in unanticipated estate taxation. In particular, wills and trusts containing credit shelter trusts requiring funding to minimize the federal estate tax will now subject $500,000 of the decedents estate (the difference between the state and federal estate tax credits) to state estate tax liability exceeding $70,000.
The practitioner is well advised to identify those clients whose estate plans contain credit shelter trusts that take advantage of the maximum federal estate tax credit. These clients should be alerted to the changes caused by EGTRRA and given the opportunity to modify their planning to reflect their current intent.
To the extent that credit shelter trust planning is still appropriate, there are drafting alternatives that will avoid unwanted state estate tax liability. Depending on the clients current needs and circumstances, funding of the credit shelter trust can be limited to a dollar amount equal to the state estate tax credit. This will shelter $1 million without any out-of-pocket state or federal estate tax liability.
The credit shelter trust provision can be drafted so as to be funded in a sum equal to the maximum amount by which the state taxable estate of the decedent may be increased without causing an increase in the state estate tax payable by reason of the decedents death. This strategy presumes that the state estate tax credit will be less than the federal credit and seeks to shelter an amount equal to the state credit without causing a state or federal estate tax liability.
Another alternative is to provide for the funding of the credit shelter trust with a sum equal to the smaller of either the maximum amount by which the federal taxable estate of the decedent may be increased without causing an increase in the federal estate tax payable by reason of the decedents death or the maximum amount by which the state taxable estate of the decedent may be increased without causing an increase in the state estate tax payable by reason of the decedents death. This language will allow the trust to be funded with the larger of the state or federal unified credit which results in no estate tax liability. It allows for the possibility that, at some time in the future, the state estate tax credit could become larger than the federal credit. This language will also be of importance for decedents whose deaths occur in 2010 when the federal estate tax is suspended and the federal estate tax credit equals zero.
The above suggestions are by no means an exhaustive list of alternative planning strategies. The clients are served by the introduction of the issue and the opportunity to participate in its resolution. It goes without saying that the language should reflect the clients goals and wishes.
Editors Note: The author’s are with Berwitz & DiTata LLP, a Garden City based Elder Law firm. This firm concentrates in Estate and Retirement Distribution Planning; Estate Administration and Elder Law.
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