The Federal government and many states, including New York, levy a tax on the transfer of wealth–this is commonly referred to as the Estate Tax for inheritances, and the Gift Tax for transfers during life. When a person dies, any assets he or she owns or has sufficient connection to or control over are included in his or her “estate”. If that estate is valued over a certain amount, it is subject to tax. The good news for most people is that these taxes only apply to significantly wealthy individuals. But, new legislation from Senator Bernie Sanders seeks to apply that tax to more modest estates, especially in the context of family businesses.

The Estate and Gift Tax

In New York State, the “applicable exclusion amount” for estates in 2021 is $5,930,000 per person. This means that any person dying with an estate up to this value is not subject to any estate tax. This number increases slightly every year, with inflation. The recent history of the New York State estate tax basic exclusion amount is:

Basic exclusion amount (BEA)

Source: New York State Department of Taxation & Finance

The limit for the Federal government for 2021 is $11,700,000. The Federal limit’s recent history is:

• $5,000,000 in 2011
• $5,120,000 in 2012
• $5,250,000 in 2013
• $5,340,000 in 2014
• $5,430,000 in 2015
• $5,450,000 in 2016
• $5,490,000 in 2017
• $11,180,000 in 2018 (doubling as a result of the passage of the Tax Cuts and Jobs Act of 2017)
• $11,400,000 in 2019
• $11,580,000 in 2020

Source: Internal Revenue Service

With proper planning, a married couple is able to “double up” on these exemptions, making the effective exemptions for married couples $11,860,000 in New York State and $23,400,000 Federal.

There is no expectation that the New York State law will change, but new legislation introduced by Senator Bernie Sanders seeks to reduce these Federal limits. The “For the 99.5% Act” would decrease the Federal Estate Tax exemption to $3,500,000 per person ($7,000,000 per married couple), which is notably less than the New York State exemption. Potentially more importantly for families that own businesses with the intention of passing it to the next generation, Sanders’ legislation seeks to reduce the Gift Tax exemption from its current $11,700,000 by an order of magnitude–to $1,000,000. This means that a person could not give away assets valued in excess of $1,000,000 during his or her lifetime without incurring a tax, making it even more important to have an intentional strategy for business succession.

Experienced Trusts & Estates attorneys have well-worn strategies to avoid paying unnecessary taxes, and in this time of uncertainty, a flexible, thoroughly vetted plan is more important than ever.

Capital Gains Tax

Most people in the Hudson Valley do not even come close to these thresholds, and therefore don’t need to worry about estate taxes. However, that does not mean that taxes are of no concern. The biggest tax that can now affect the middle class is the Capital Gains tax. Depending on factors such as income and amount of capital gains, the tax rate will be somewhere in the low- to high-twenty-something percent. It applies to any asset that has increased in value since its purchase. The most common example is a person’s primary residence, but this also applies to stock, other real estate and artwork, to name a few. When such an asset is sold capital gains tax applies to the sale price, less the initial purchase price and any capital investment–the technical way of arriving at its increase in value.

While homeowners do not typically need to worry about capital gains upon sale of their primary residence, due to an exemption of $250,000 per person ($500,000 per married couple), that exemption only applies to the homeowner. So, in a situation where mom & dad are no longer the homeowners–for example when they gift the house to their children to avoid nursing home or other long-term care costs, they are also saddling those children with the capital gains tax, unless the child(ren) live in the house. This also applies to gifts of any other asset that has increased in value.

Regardless of where you fall on the spectrum of wealth, whether your concern is avoiding unnecessary taxes or avoiding tax pitfalls while protecting assets from long-term care, it is important that we protect assets based on a thoroughly informed and considered plan, guided by an experienced Trusts & Estate and Elder Law attorney.