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Article I Benefits of Splitting an Estate

If your New York estate is over $1 million dollars and you are married, there are benefits to splitting your estate. Read on for an overview of this strategy.

Upon your death, if your estate has not been split into marital and credit shelter portions, it will pass in full to your surviving spouse. He or she will claim the entire amount as a marital deduction and your estate will not be assessed estate taxes, commonly known as “death taxes,” by either the Federal or New York State governments. Your estate will not use its estate exemption benefit because the entire estate will have passed to your surviving spouse under the marital deduction. However, the amount that is transferred from your estate to your surviving spouse via the marital provision will be included in your spouse’s estate upon his or her death. Whether his or her estate will have to pay estate taxes will depend upon the exemption levels in effect at the time of your spouse’s death and the value of that estate. These taxes can be quite substantial. Therefore, the marital portion, in effect, defers taxes until your surviving spouse dies or makes lifetime gift transfers.

By splitting your estate into two portions, you can make use of your estate exemption amount, lower the amount that passes into your surviving spouse’s estate via the marital portion, which in turn would reduce, perhaps even eliminate, estate taxes on that estate upon his or her death. It will also enable you to provide your spouse with financial security through the credit shelter portion.

Under the current law for 2007, your estate is entitled to a New York State estate tax exemption of $1 million. Federal law provides for a larger exemption that currently is $2 million but is scheduled to increase over the next few years. In order to maximize your estate tax exemption benefit, the credit shelter portion of your estate at the time of your death should not exceed the $1 million exemption level available in New York State. By keeping the credit shelter portion at $1 million, your estate will be tax exempt from both New York State and Federal estate taxes.

The credit shelter is essentially a trust set up to provide income for your surviving spouse for life. The amount in the credit shelter will not pass into your spouse’s estate upon his or her death because the life interest retained by your spouse in it terminates upon his or her death. Thus, your spouse’s estate will not incur any estate taxes on the amount in the credit shelter portion and he or she will have the power to pass it onto your lineal descendents. In this manner, you will have shielded $1 million from potential estate taxes and provided your spouse with financial security through the use of the credit shelter.

The difference between the $1 million funding the credit shelter and the value of your estate at your death will be used to fund the marital deduction portion of your estate. The amount which may be deducted from taxation as a marital deduction is unlimited. Therefore, upon your death, no estate taxes will need to be paid.

In conclusion, this estate planning strategy benefits your surviving spouse by reducing the value of his or her future estate by the $1 million amount funding the credit shelter, and allowing more of it to pass on to your lineal descendents tax free while your spouse retains financial security.

Disclaimer: In accordance with United States Treasury Department Circular 230, I advise you that any discussion of a federal tax issue in this communication is not intended or written to be used, and it cannot be used, by any recipient, for the purpose of avoiding penalties that may be imposed on the recipient under United States federal tax laws.

Written by Christine E. Young, Esq. October 2007

 

Article II Conservation Easements

A conservation easement is a voluntary legally binding agreement between you, the landowner, and a qualified not-for-profit land conservation organization (for example The Land Trust Alliance or the Rensselaer Land Trust) or governmental unit (such as the New York State Department of Environmental Conservation). It is a means to forever protect the land you love, retain property rights, and control how the land is to be used in the future without governmental regulation and interference. These easements restrict future activities, especially development, in order to protect the conservation values of the land. They are generally in perpetuity, meaning forever. The not-for-profit or governmental unit monitors and enforces the restrictions on the property for successive generations of owners. With such an agreement, you can protect the land for hundreds and hundreds of years in the future and control how it is to be used.

There are four conservation values that can be protected with a conservation easement: 1.) preservation of open space, including farmland and forestland; 2.) preservation of land for recreation use by or for the education of the general public; 3.) preservation of a natural habitat; and/or 4.) preservation of a historically important land or a certified historic structure. We have an abundance of good fresh water in the northeast, forestland, farms, and areas of incredible beauty that are becoming increasingly threatened by the people. With a conservation easement on your land you can keep it forever wild, essentially a private or public nature preserve. You can require your historic farm house to be maintained, thereby protecting that slice of history for the future. What about that family farm? With a conservation easement restricting development, it will always retain its scenic beauty and character no matter who ends up owning it in the future. The beauty of a conservation easement is that you decide how the property is to be used forever and you retain your rights as a property owner to use the land.

Conservation easements are conveyed by deed. It can be done by donation, sale for market value, sale at bargain (reduced) price, or as part of an in-kind exchange. It can even be done after your death through your Will by your estate. It is an investment in the future and there are costs associated, including but not limited to, appraisals, surveys, legal fees, base line reports, title insurance, filing fees, and even endowments to cover future legal defense or enforcement costs.

There can be tax advantages for conservation easements. Depending on your situation, your estate taxes, otherwise known as the death tax, may be reduced or even eliminated. If the easement was conveyed as a donation (gift) or by a sale at bargain price, you may be eligible for a federal and state income tax charitable deduction. Additionally, your annual real property taxes may be reduced. New York State has a conservation easement tax credit which can be as high as $5,000 per year. This is a refundable credit, meaning that if your New York State income tax liability is lower than the credit amount, you will receive a check from the state for the difference. Obviously, a reduction in real property taxes means that your property value has decreased. This is so because you have deeded away some or all of the land’s development rights. Despite this reduction in the land’s value for tax purposes, the real estate market has not seen a decrease in sale prices on property with a conservation easement or on neighboring properties. Instead people are often paying more for land that is essentially a nature preserve or for property that abuts it. Purchasers view property as more valuable when they know that the fabulous view of the neighbors’ farm will always remain or the large forest with the clear brook will never be touched.

For more information feel free to contact me. I make house calls and will gladly walk your property with you and discuss conservation easements as a preservation option.

Written by Christine E. Young, Esq. March 2008

Law Office of Christine Young, 55 Pine Trail, Box 204, Sand Lake, New York 12153.
Telephone: 518-859-4363. E-mail: cey@christineyounglaw.com.
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I.R.C. §170(h)(4)(A) (2006).
I.R.C. §1035.
I.R.C. §170(h). and N.Y. Tax Law §606(kk) (2006).
N.Y. Tax Law §606(kk) (2006).