Why you probably do not need a trust; Estate of Philip Knight

When it comes to planning your NY estate for most of us nothing beats starting with a NY estate lawyer drafted will.  As a NY estate lawyer practicing in Forest Hills, New York for more than two decades I am frequently asked common NY estate questions. By far the NY estate question I am most often asked is can you set up a NY trust for my family?  My reflexive responsive to this question is almost always the same, why do you want your NY estate lawyer to create a trust?  My inquisitor usually responds in one of two ways. Either the perspective client went to a NY estate law seminar or was watching late night infomercials on television that directed them towards trust formation and here we are.  The problem is most people have no idea why they need a trust.  In fact, for 99% of New Yorkers, a simple NY estate lawyer drafted will is all they actually require.

Pursuant to NY estate law anyone passing with an NY attorney drafted will can transfer up to $6,110,000.00 to their heirs or beneficiaries without any NY estate tax liability.  With a little creative NY estate planning a married couple can pass up to $12,220,000.00 free of any and all NY estate tax liability.  Things get even better at the federal level where the estate tax exemption permits married couples to pass $24,120,000.00 to their heirs without incurring any federal estate tax liability whatsoever.

So who needs a trust?

Probably not you.  Trust formation is best utilized when removing estate assets from your NY estate when their values would trigger a taxable event.  A taxable NY estate is an estate valued in excess of the tax exempted amounts as stated above.  Additionally trust formation is exponentially messier and costlier to set up opposed to a NY estate lawyer drafted will.  A simple NY will can pass your entire NY estate through the probate process in an orderly manner within the above-mentioned exemptions free of any and all estate tax liability.  Moreover all assets passing through probate are afforded the stepped up basis thus removing any and all appreciation in the assets from the date the assets were initially purchased. As such any and all NY estate assets passing through probate are not subject to capital gains tax on their appreciation from their dates of purchase.  Instead the assets’ cost basis, becomes the value of the asset on the date of the decedent’s passing not the date of purchase.

In fact last year, only 1276 estates in the entire nation owed federal estate liability.  Among the wealthiest families in America the estate tax is nothing more than a minor annoyance easily circumvented with trust formation. Their general belief is that only those individuals who make a conscious decision to voluntarily expose their estates to tax liability will incur estate tax liability.  In other words it is so easy for the wealthy to circumvent estate taxes that to pay estate taxes they have to intend to.  Dating all the way back to Andrew Mellon’s tenure as treasury secretary in 1916 creating new and creative ways to bypass estate tax liability has been something of political sport for the wealthy.  So this begs the question, why even have an estate tax?  In fact only 17 states in the union currently have an enacted state tax.  Furthermore, all estate taxes collected last year would only amount to .2% of all estates in the entire nation, roughly 2 out of every 1,000 decedents.  To put this into perspective in 2019, in a country of 350 million people, there were just 2,570 estate tax returns filed nationally.

How do the wealthy avoid NY estate tax liability?

For the 2,570 high net wealth families with estate tax exposure in 2019 trust formation should have been a part of their estate planning.  The trust most NY estate lawyers create for wealthy clients is a type of irrevocable trust called a Grantor Retained Annuity Trust, GRAT.  How it works is a client comes to their NY estate lawyer to form the trust to lower their estate tax liability to zero by taking assets out of their NY estate and instead granting the assets into the trust.  For example, Nike’s founder Philip Knight, whose very much alive, has a net worth in excess of $50 billion dollars comprised largely of shares of Nike common stock.  If Knight passed away a resident of NY his NY estate would incur roughly $25 billion in federal and state estate tax liability.

Rather than absorbing the $25 billion estate tax bill someone like Knight would rather create a series of trusts to avoid any and all estate tax exposure.  In this case, the grantor Knight would gift his company’s shares of common stock into several trusts, commonly known as Grantor Retained Annuity Trusts, for the benefit of his family.  The gifts are tax free at the time they are made to each of the trusts. This allows Philip Knight to continue to receive any and all income from the shares during his lifetime while the contents of each trust would pass to his beneficiaries upon his passing free of any and all estate tax.   And that is how simple it is to circumvent the federal and NY estate taxes with the help of your NY estate lawyer.

Unless your net worth exceeds the exempted amounts as stated above, a simple NY estate lawyer drafted will is probably all your family needs.  It is simpler and cheaper to create a NY estate lawyer drafted will than forming an irrevocable trust such as the GRAT, and will achieve essentially the same result. Additionally when you place assets into an irrevocable trust you are removing them from your NY estate which creates complications such as required annual tax filings.

If you or a family member have any questions regarding the planning of your NY estate it never hurts to ask the opinion of an experienced NY estate lawyer.  Feel free to call the NY estate lawyers at The Law Offices of Jason W. Stern & Associates for a free consultation at (718) 261-2444. Our NYC estate lawyers have more than 60 years of combined NY estate law experience drafting and probating the wills for families like yours in the counties of Queens, New York, Kings, Bronx, Westchester, Rockland, Nassau, Orange and Dutchess.





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