Estate Planning for Doctors & Physicians in NY (2024)

Gifts to Public Charities

For gifts of cash, the donor receives an income tax deduction of up to 50% of their AGI. For gifts of capital assets, donor receives an income tax deduction of 30% of their AGI. Alternative Minimum Tax will dictate whether the deduction is available or not. Charitable gifts reduce the size of the donor’s estate, thereby reducing estate taxes.

Gifts

Donor can make gifts of up to the Annual Gift Tax Exclusion Amount per donee during the calendar year without being subject to gift taxes. Gifts in excess of the Annual Gift Tax Exclusion Amount may consume a portion of the donor’s Lifetime Gift Tax Exemption amount. All future appreciation on the gifted asset will pass both gift- and estate tax-free.

Life Insurance

Death benefits pass to the insured’s beneficiary (ies) free of income taxes and estate taxes if ownership and beneficiary designations are properly established. For employer-owned life insurance, additional requirements must be met to ensure that proceeds are received income tax-free. Improper transfers of policy ownership may have adverse tax effects.

Marital Deduction & Credit Shelter/Bypass Trust

Minimizes estate taxes by allowing both spouses to take advantage of the Unified Credit against estate taxes and by fully utilizing the Unlimited Marital Deduction (thus deferring estate taxes until estate assets are distributed upon the death of the surviving spouse).

Portability of Estate & Gift Tax Exemptions

Surviving spouse can take advantage of both exemption amounts. If survivor dies in 2013, $10,240,000 ($5,120,00 X 2) can pass estate tax-free. If, however, Congress lowers the estate/gift tax exemption amounts in the future, the estate may have lost the possibility of shielding $5,120,000 of assets at the first death. This would lead to estate taxes being due on a much larger estate.

Qualified Disclaimer

Property is treated as if original donee/beneficiary had predeceased the donor/testator so no estate/gift tax is incurred by the disclaiming individual. Provides flexibility to react to family, financial or tax law circ*mstances existing at the time of a gift or death. Facilitates post-mortem tax planning.

Revocable Living Trust (RLT)

No tax advantage to the grantor, since the grantor will be taxed on the income and the assets will be included in the grantor’s taxable estate at death. An efficient way of holding assets during an individual’s lifetime so that assets are distributed to Marital Deduction Trusts or Bypass Trusts at death.

Will

With proper drafting, the individual can maximize the use of the Unlimited Marital Deduction and Unified Credit (or estate tax exemption amount).

2503(b) Trusts

Lowers the value of the grantor estate, thereby reducing his or her estate taxes; may shift taxable income to minor (subject to “kiddie tax” limitations), if that is the grantor’s intention.

Charitable Lead Trust (CLT)

CLTs can be designed as Grantor Trusts, which may allow the grantor an immediate income tax deduction, and Non-Grantor Trusts, which may allow a gift tax deduction. Grantor CLTs may provide a valuable current income tax deduction, weighed against taxation of Trust income to the grantor. A Testamentary CLT may provide a significant estate tax deduction and enable the grantor(s) to transfer substantial wealth to heirs at a discounted gift/estate tax cost.

Charitable Reminder Trust (CRT)

Current income tax charitable deduction; deferral of capital gains upon sale of the assets; and removal of assets from grantor’s/grantor’s estate(s). If children are named as income beneficiaries, there may be unforeseen gift and estate tax consequences.

Dynasty Trust

Subject to gift taxes on Generation-Skipping Transfer Tax (“GST Tax”) for transfers made over the gift and GST Tax exemption amounts. If not done properly, gift, estate and/or GST taxes may apply.

Family Limited Liability Company (FLLC)

Reduces parents’ estate taxes because the value of the estate is lowered by gifts made, plus future appreciation is removed from the estate. Possible reduction in income taxes by shifting FLLC income to members who may be in lower income tax brackets.

Family Limited Partnership (FLP)

Reduces parents’ estate taxes because the value of the estate is lowered by gifts made, plus future appreciation is removed from estate. Possible reduction in income taxes by shifting FLP income to LPs who may be in a lower tax bracket.

Grantor Retained Trust (GRT)

Allows shifting of assets to heirs at a reduced gift and estate tax costs. Assets may be transferred to the next generation at a substantial discount. Grantor must outlive the term of the Trust to receive its full benefit. If grantor dies during the term of the Trust, some or all of the Trust value may be includible in his or her estate. Gift is discounted by the value of the income interest retained by the grantor. Value of gift when the GRT is established is determined by the length of the Trust, the payout rate and the federal tax rate in effect at the time.

Installment Sales & Self-Cancelling Installment Notes (SCIN)

Any capital gains on a sale can be recognized gradually by the seller. Can reduce the estate tax by shifting appreciation in property to heirs. Any balance remaining on a SCIN at the death of the seller is cancelled and not subject to estate tax (but remaining gain is taxable income to the estate). With a regular installment sale, any installments due at the death of the seller are included in the seller’s estate.

Intentionally Defective Grantor Trust (IDGT)

There are no income tax consequences to the grantor for selling assets to the IDGT, or for receiving the installment payments, in a Note Sale to an IDGT technique. If the grantor dies before the note term ends, the remaining principal value of the note is includable in the grantor’s estate. Hence, life insurance is typically purchased inside the IDGT. The GST Tax exemption may be applied to the gift used to fund or “seed” the Trust.

Irrevocable Life Insurance Trust (ILIT)

If established properly, death proceeds are received by beneficiaries both income tax- and estate tax-free. Gifts made to the Trust for premium payments may be subject to gift taxes unless they fall within the Annual Gift Tax Exclusion Amount. Also, gifts made to the Trust reduce the value of the donor’s taxable estate.

Qualified Personal Residence Trust (QPRT)

Gift is discounted by the value of the interest retained by the grantor residing in the residence. Value of the gift is determined by the length of the Trust term and the federal tax rate in effect when the QPRT is established. Appreciation in the value of the home passes to beneficiaries both gift- and estate tax-free. Grantor must outlive the term of the trust to receive its full benefit. If the grantor dies during the term of the Trust, the entire value of the Trust will be includable in his or her estate.

Credit Shelter Trust

This helps preserve the federal estate tax exemption amount of the first spouse to die by using it to fund a trust for the benefit of the surviving spouse and children. It also helps protect assets from potential creditors, and provides tax advantages for asset growth.

Marital Trust

While assets pass estate tax-free to a surviving spouse, certain Marital Trusts may enable control over asset distribution when that spouse is gone, provide for professional management of funds or to help provide for a second spouse’s care while ensuring that children from a first marriage ultimately inherit.

Outright Gifts

Regular gifting is an effective way to reduce the size of an estate. The annual gift tax exclusion allows an individual to gift a certain amount of money to others, gift tax-free. The lifetime gift exemption amount also allows for significant gifts over and above the annual gift tax exclusion without gift taxes being incurred. However, future legislation may impact this benefit.

Grantor Retained Annuity Trust (GRAT)

Specifically authorized by the Internal Revenue Code, a GRAT is one of the most flexible instruments to allow for the use of assets now and transferring the balance to heirs later. The grantor creates an irrevocable trust, gifts assets to the trust, and receives annuity payments from the trust for a specified number of years. At the end of this term, the trust beneficiaries receive the balance. The result is that the grantor can remove assets from the estate through gifting, at a reduced gift tax amount, but maintain some use of the assets for a period of time.

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