By now, everyone has heard of the Tax Cuts and Jobs Act and how it increased the federal gift and estate tax exemption to approximately $11.2 million per person in 2018, with the exemption amount being doubled to approximately $22.4 million for married couples. Further, thanks to portability, the estate of a surviving spouse can use the unused portion of the deceased spouse’s exemption amount.
Many New York residents believe, therefore, that if their estate value is less than $11.2 million (or $22.4 million, as applicable), that they do not have to worry about estate tax. While this may be true for some individuals, it is not the case for everyone.
What is not known to many New Yorkers is that New York imposes a separate state estate tax, and the exemption amount is significantly lower than that of the federal estate tax. The current New York estate tax exclusion amount is $5.25 million. This amount will remain until January 1, 2019, at which point it will rise to $5.49 million. Thereafter, it will continue to rise with inflation each year. The top New York estate tax rate is 16%, which only applies when the New York taxable estate is over $10.1 million. However, amounts below that amount are subject to tax at graduated rates, starting at 3.06% for the first $500,000.
As if the fact that the New York state estate tax exemption amount being significantly lower than the federal estate tax exemption amount is not alarming enough, even more pressing is the fact that New York also implements a rule precluding certain estates from taking advantage of that exclusion at all. In short, if the amount of a decedent’s taxable estate is more than 5% of the exclusion amount at the decedent’s death, the decedent cannot take advantage of New York’s exclusion. Essentially, the decedent would “fall off the cliff” if his/her taxable estate is too high. As such, the estate would be subject to New York estate tax in their entirety – starting from dollar one!
By way of example, if an individual died today with a taxable estate of $5,600,000 when the New York estate tax exclusion amount is $5,250,000, then the entire estate would be subject to New York estate tax, since $5,600,000 is more than 5% higher than $5,250,000. This would result in a New York estate tax of $462,800, despite the fact that the amount by which the estate exceeded the exclusion amount was only $350,000. This results in an over 100% tax on the amount by which the estate exceeds the exclusion amount!
So what can be learned from this? New York residents should not simply assume that they are completely in the clear on estate taxes; rather, they should consult with their estate planning attorney so that the best estate planning strategy can be implemented to defer or possibly eliminate New York state estate taxes upon their death.