New York families that have been able to accumulate a significant store of wealth have to take steps to protect these resources. There is the estate tax to fend off, and asset protection should be a consideration as well.
Let’s take a look at the present estate tax parameters, because you have to understand them to know if you are potentially exposed. On the federal level we have a $5.25 million estate tax exclusion and a 40% maximum rate.
There is also a New York State estate tax that carries a $1 million exclusion. This death tax has a progressive rate that maxes out at 16%.
The federal estate tax is unified with the gift tax that we have on the federal level. As a result, the aforementioned $5.25 million exclusion is a combined exclusion. It applies to the combination of taxable gifts that you give and the value of your estate.
There is a $14,000 per person, per year gift tax exclusion that exists separate from the lifetime unified exclusion. So, if you gave $30,000 to someone within a given calendar year the first $14,000 could pass free of the gift tax.
You could use part of your unified gift/estate tax exclusion to give the other $16,000 tax-free. But, your available lifetime exclusion would be reduced by $16,000.
New York Family Limited Partnerships
Estate Tax Efficiency
One step that you could take to gain estate tax efficiency would be to create a family limited partnership. We will provide a very surface explanation here. To learn about these devices in detail contact our firm to schedule a free consultation.
With a family limited partnership you as the person creating and funding the entity act as general partner. Your ultimate goal is to transfer assets to your family members in a tax efficient way. As a result, the family members that you want to transfer assets to would serve as limited partners.
You could use the aforementioned $14,000 annual gift tax exclusion to give shares equal to this amount to the limited partners each year. However, if you were to give gifts that exceed this amount you could give the gifts at a tax discount.
This is because of the fact that the limited partners have no rights of control or marketability. Yes, they may own shares, but they can’t access any liquidity. Only the general partner can facilitate distributions. Because of this, gifts of shares are discounted by the IRS.
In addition to the estate tax efficiency, family limited partnerships are also used by people who would like to protect their assets from litigants and creditors. Once you convey assets into the family limited partnership they can no longer be attached by those who may want to go after your personal property.
Asset protection is important for many individuals, and family limited partnerships are very effective asset protection devices.