I’ve spoken at length in the past about Estate Tax and why unless you are a high net worth individual it will likely not impact the distribution of your estate. In those prior posts I explained that there is both a federal tax exemption AND state tax exclusion for estates that contain less than a few million dollars.
I received a call from a client the other day who asked me the question about the raising of the NY state exclusion amount and realized that it is a probably a question that many of my clients might share.
In short, The New York State Estate Tax exclusion amount will be increasing again as of April 1, 2016 to $4,187,500.00. Currently (for those dying in March of 2016), the exclusion amount is $3,125,000.00. As we know from previous discussion, since January 1, 2016, the federal estate tax exclusion has been and continues to be $5,450,000.00.
The NYS legislature has built in an escalator to the exclusion amount, and it will increase again on April 1, 2017 to $5,250,000.00. This exclusion amount will remain in effect until December 31, 2018. On January 1, 2019. This exclusion amount will be indexed for inflation annually and will be equal to the federal exclusion amount. The New York State and federal exclusion amount is estimated to be $5,900,000.00 in 2019.
As most things are when it comes to governmental agencies, it gets slightly more complicated from there. The law doesn’t simply create a nice neat pre-determined exclusion. The NY legislature built in a so called “cliff” that is built into the program. If the estate is valued between 100% and 105% of the exclusion amount, the amount over the exclusion will be taxed. As of April 1, 2016, the 105% amount is $4,396,875.00. However, once an estate exceeds the exclusion amount by more than 5%, not just the amount in excess of the exclusion amount is taxed, but, rather, the entire estate is subject to estate tax. Practically, this means that taxable estates greater than 105% of the exclusion amount receive no benefit from the exclusion amounts shown above and will pay the same tax that would have been paid under the prior estate tax law. What this means is that as an estate planning attorney, it is IMPERATIVE that we keep the taxable estate at less than 105% of the exclusion amount, or there will be tax incurred on the ENTIRE estate. Obviously you are talking about thousands and in some instances tens and hundreds of thousands of dollars, so it is very important to speak with your planning or financial professional to ensure that this law change has not exposed you to a tremendous tax liability.
Also note that the New York State Estate Tax law does not contain a portability provision like in the federal estate tax law. This means that for federal estate tax purposes, the law allows the unused estate tax exemption of a married taxpayer to carry over to his or her surviving spouse. Without portability (in NY state), the manner in which a married couple holds title to their assets may continue to have a significant effect on the amount of New York State Estate Tax ultimately payable upon the survivors’ death.
It is clear that the lawmakers are working towards closing, and eventually eliminating the gap between the New York and federal estate tax exclusion amounts. For the next three years, however, as the exclusion amount increases tax planning will still be complex.
For any questions about the law change please feel free to give our office a call.