Initially, when news broke that New York was doubling its estate tax exemption, many breathed a sigh of relief. For some, though, it was a short lived sigh of relief. Here’s a breakdown of the pros and cons that many who are planning their estates should know.
First, every year through 2019, the exemptions continue to increase, ultimately matching federal exemptions. It’s believed the federal exemption will be close to $6 million in 2019.
Before today, if your assets equated $1.2 million, the $200,000 would be taxed at a top rate of 16%. It didn’t apply to the first $1 million, which is the current exemption rate. That’s now changed.
Double Your Estate Tax Exemption
The exemption rate now has more than doubled. It’s at $2,062,500. If, though, you leave an estate valued at $3 million, you pay an estate tax on the entire $3 million instead of the difference between the exemption and your estate’s value. This is what economists refer to as the “New York cliff”. Worse, your estate could be subject to a whopping 164 percent marginal estate tax rate should you fall off that proverbial cliff.
Some estates could end up paying more in the estate taxes than the value of the difference between the exemption and the actual estate value. Forbes provided this example:
By the time the exemption is $5.25 million in 2017 and 2018, a New York taxable estate of $5,512,500 would pay New York estate tax of $430,050. In other words, the estate tax is $430,050 on the extra $262,500.
As mentioned, the exemptions will roll out over the course of a few years. For deaths after April 1, 2014 but prior to April 1, 2015, the tax exemption is $2,062,500. For those deaths after that, but before April 1, 2016, the exemption is $3,125,000. Between 2016 and 2017, the exemption is $4,187,500. Finally, for those deaths after the April 1, 2017 date, the exemption comes in at $5,250,000.
Many couples take advantage of the portability provision, which allows a surviving spouse to not only shelter assets up to his limit, but those of his deceased spouse as well. That’s no longer an option unless there are specific trusts in place. The exception is if the gift was made while the tax filer resided in another state.
Three Year Look Back
Taxable gifts are defined for these purposes as those that are “pulled back” into your estate) and there’s a three year look back period that’s now in place. There’s a three-year look-back for taxable gifts (those gifts are pulled back into your estate) for gifts made on or after April 1 and before Jan. 1, 2019, but not including any gift made when the decedent wasn’t a New York state resident.
Unfortunately, this is one of the more complex changes made in recent years. Overlooking one important aspect can wreak havoc on your estate. If you’re unsure of what these new laws mean for you, we strongly encourage you to contact us today. Our team of experienced estate planning lawyers can point out ways to make the most of these new laws while keeping your estate tax bill as low as possible. We can also explore your estate plan as a whole to ensure it’s serving your purposes to provide for your family after you’re gone.
The Law Offices of Barton P. Levine is a member of the American Academy of Estate Planning Attorneys.