New York Estate Tax: Should You Be Concerned About The Cliff?
New York is one of only fifteen states that impose a state estate tax. Prior to April 1, 2014 New York had among the lowest exemption levels and among the highest tax rates of any state in the country. According to politicians in Albany, the effect of this was to have elderly New Yorkers leave the state as well as an increased burden on small family owned businesses.
New Estate Tax
Last year’s state budget made major changes to the New York estate tax law. The most significant change is the gradual increase of the basic exclusion amount of a taxable estate from One Million Dollars to over Five Million Dollars, illustrated as follows:
Date of death from April 1, 2014 to April 1, 2015= $2,062,500
Date of death from April 1, 2015 to April 1, 2016= $3,125,000
Date of death from April 1, 2016 to April 1, 2017= $4,187,500
Date of death from April 1, 2017 to January 1, 2019= $5,250,000
Date of death after January 1, 2019= $5,000,000 indexed to inflation with consumer price index (by January 1, 2019 the federal exclusion is projected to be $5,900,000).
What is surprising about the above exclusion amounts is what is referred to as the new "cliff." If your estate is less than or equal to the amounts above then there is no estate tax. For estates between 100% and 105% of the exclusion amount, the credit is rapidly phased out, so that for estates above 105%, the entire taxable estate will be subject to New York estate tax.
If your estate is significantly greater than the exclusion amount above, for example, $6,200,000, this would put you into a higher tax bracket (12.8%). Your estate would pay an estate tax of $535,600 (tax on $6,100,000= $522,800 plus $12,800).
The top rate prior to April 1, 2014 was 16%, which has not changed with the new law. The Governor's budget bill initially included a reduction from the 16% to 10%, but the Executive Budget kept the rate at 16%. Although the top bracket is still 16%, the same tax applies as under the old law for estates valued over 105% of the basic exclusion amount.
New York Gift Tax
The second change made in the budget comes in the form of taxable gifts. The budget law indicates that a taxable estate will be "increased by the amount of any taxable gift under section 2503 of the IRC not otherwise included in the decedent's federal gross estate, made during the three year period ending on the decedent's date of death, but not including any gift made: 1) when the decedent was not a resident of New York state; 2) before April 1, 2014; or 3) on or after January 1, 2019." IRC 2503 codifies that exclusion amount ($14,000 per donee for 2014) for making gifts.
Qualified Terminable Interest Property ("QTIP")
In accordance with the federal estate tax provisions, New York allows for a QTIP election (an election that allows assets in a Trust for the benefit of a spouse to qualify for the marital deduction). Previously, however, this election could only be made if it was made at the federal level. The new law allows for a "New York-only" QTIP election. The law says that "where no federal estate tax return is required to be filed, the executor may make the election referred to in such paragraph (7) with respect to the tax imposed by this article on the return of the tax imposed by this article. Any election made under this subsection shall be irrevocable."
The importance of revising your estate plan can be aptly illustrated by providing an example of the "cliff." A taxable estate of $3 million will not pay any estate tax as April 1, 2015. An estate between 100% and 105% of the current New York threshold of $3,125,000, i.e. $3,218,750, will result in a net tax of $148,150. An taxable estate worth $3,500,000 will pay a New York estate tax of $229,000.
Due to the change in the law, there may be less of a reason to incorporate the provisions in your current Will that call for the mandatory funding of a credit shelter trust or the funding of a disclaimer trust. It is imperative that if your estate either as a single individual or combined as a married couple exceeds the New York exemption that you examine how your assets are titled. If you are a married couple, the assets that each of you own individually should equal less than the new thresholds.
If your estate plan contains a Marital Trust with a general power of appointment, a two trust Will with the family portion defined only by the federal tax exemption, or a Will that leaves everything to your spouse without a disclaimer trust then you should seek counsel to make changes.
Any discussion about alleviating your estate tax liability evolves into how you can reduce the value of your estate to avoid owing estate tax or having enough liquidity in your estate to pay any estate tax. Charitable giving, establishing residency in another state, buying real property in another state or transferring your assets into a various trust instruments that fit your needs are all concepts that you should be discussing if your estate is taxable in New York.
How Can We Help?
Our Trusts and Estates attorneys’ goal is to help preserve our clients’ accumulated wealth by providing appropriate planning. Our attorneys have a broad range of skills and experience to assist families in the area of asset protection and management, minimization of taxes and disposition of wealth.
If you don't have a will, or if it's been a while since you reviewed your estate plan, you may wish to contact one of our estate planning attorneys to schedule a consultation to review your current plan, to ensure that it reflects your values, concerns and intended beneficiaries. We would be happy to assist you with that process. Call Dan Williford or Mike McConville to set up an appointment to consult about this priority.
This publication is intended as an information source for clients, prospective clients, and colleagues and constitutes attorney advertising. The content should not be considered legal advice and readers should not act upon information in this publication without individualized professional counsel.