New York Estate Tax Changes!

Our firm has a very active estate planning business in New York, especially New York City, and we recently opened a New York office. We thought it would be helpful for our clients to understand that New York has followed a large trend among the States to reduce estate taxation levels and overhauled its estate tax laws effective April 1, 2014, more than doubling its previous estate tax exemption of $1 million. The new exemption will now rise gradually each fiscal year through 2019 when it is set to match the generous federal exemption, which was originally set at $5 million but increases each year based on inflation adjustments and is projected to be almost $6 million in 2019. The top estate tax rate in New York remains at 16% under the new law.

On one hand, the increased estate tax exemption will make planning much easier for a lot of people, but there is a new, rather large, surprising trap in the new law which requires careful planning.

New York’s new exemption schedule is as follows:

  • For deaths as of April 1, 2014 and before April 1, 2015, the exemption is $2,062,500.
  • For deaths as of April 1, 2015 and before April 1, 2016, the exemption increases to $3,125,000.
  • For deaths as of April 1, 2016 and before April 1, 2017, the exemption increases to $4,187,500.
  • For deaths as of April 1, 2017 and before January 1, 2019, the exemption is $5,250,000.

Thus, in effect, the estate tax exemption increases by $1.0625 million on April 1st of each year until 2017, when it reaches $5.25 million. These increases will allow far more assets to flow from a decedent’s estate to his or her beneficiaries free from estate taxation.

New York’s estate tax is applied in a unique manner. Under the taxation schemes of other states, as well as that of the federal government, once an estate is subject to the tax, only the amount that is over the exemption amount is subject to the tax. For example, if the estate tax exemption is set at fiscal year 2015’s $3.125 million and an estate is valued at $4.15 million, only the $1 million amount over the $3.125 million exemption standard would be subject to the estate tax. New York, however, taxes the entire amount of the estate once the estate is valued at an amount just 5% over the exemption limit. Estates thus face a cliff if their values exceed 5% of the exemption because New York will then tax the full value of the estate, not just the amount over the exemption like other states.

In addition to the tax cliff, New York, unlike New Jersey and the federal government, does not allow for portability whereby a surviving spouse can shelter twice as much without the use of technical trust provisions by using each spouse’s exemption amount. This aspect of New York’s law makes estate planning critical in and of itself!

When calculating the value of an estate, executors must include the value of money in bank and investment accounts, certificates of deposit, real estate, vehicles, personal belongings (e.g., jewelry, furniture), life insurance proceeds of policies owned at death, retirement accounts, and business interests.

If you’re a client and feel you want to take maximum advantage of estate taxation laws considering the New York law which became effective April 1, 2014, please call our offices to further discuss your planning options.

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