New York State Estate Tax Changes: How to Potentially Save Millions in New York Estate Taxes
|New York State Estate Tax Changes:
How to Potentially Save Millions in New York Estate Taxes
|Effective April 1, 2014, New York State substantially changed its rules regarding estate taxes. The biggest changes concern the size of the estate tax exemption and how the estate tax is calculated. For most, New York State estate taxes have been reduced. For some, New York State estates taxes remain very high. The rules are quite complicated. However, with proper planning, significant New York estate taxes can be saved or eliminated for those who would otherwise be subject to estate taxes.
Prior to April 1, 2014, the New York State estate tax exemption was only $1 million. The estate of a New York resident whose New York taxable estate was greater than $1 million had to pay an estate tax to New York on the taxable amount over $1 million. However, as of April 1, 2014, there have been incremental increases in the New York State estate tax exemption which will continue until January 1, 2019, at which point the New York State estate tax exemption will “catch up” to the federal exemption. The federal exemption is $5,430,000 in 2015, and under current law, is indexed for inflation each year. The following chart summarizes the scheduled increases in the New York State estate tax exemption:
The rising New York State estate tax exemption sounds great at first, but along with the increase came a new and bizarre way of calculating the estate’s tax base. If the New York taxable estate is greater than 5% of the exemption amount, the tax is calculated on the entire amount of the taxable estate rather than only the amount over the exemption. This rule is terrible for New York residents whose estates exceed the New York State exemption by more than 5%
While we cannot know exactly how indexing will impact the exemption by 2019, we will assume for purposes of this discussion that it will reach $6 million by 2019. Therefore, a New York taxable estate of $6 million would result in no New York or federal estate tax. However, if a New York taxable estate exceeds the exemption by more than 5% of the exemption (or $300,000), a New York estate tax will be payable. As an example, a New York taxable estate of $6.5 million would generate a New York State estate tax of $574,000 (or approximately 8.83%). However, compared to paying no tax on $6 million, the marginal tax rate on the additional $500,000 is a whopping 114.8%! In this example, every dollar over the assumed exemption results in a tax of almost $1.15.
PROPER PLANNING IS VITAL FOR MARRIED COUPLES
For married couples, it is particularly critical that the New York exemption is not wasted at the death of the first spouse. While federal law allows a transfer of the unused exemption to the surviving spouse under the doctrine of portability, New York law does not have an equivalent statute. Therefore, the first spouse’s New York exemption will be lost if not used at the first death. As a result, if a couple with a $12 million estate leaves everything to the surviving spouse, no federal or New York estate tax would be payable at the first death (due to the unlimited marital deduction), but a New York State estate tax would be payable at the second death of $1,386,800 (on the entire $12 million). With proper planning, this outcome could be avoided.
IMPLEMENTATION OF PLAN
The first step is to ensure that that each spouse separately owns at least the New York State exemption amount. This may involve separating jointly held assets and/or transferring assets from one spouse to the other. In addition, both spouses must have properly drafted Wills providing for an exemption trust at the first death for the available New York State estate tax exemption. The surviving spouse can retain access to the assets in the exemption trust by being a beneficiary of the trust. This strategy will allow for the maximum amount to be held in the exemption trust at the death of the first spouse regardless of which spouse passes away first. Therefore, if the first spouse to die has a taxable estate of $6 million and the surviving spouse also has a taxable estate of $6 million, all estate tax can be eliminated! This is a much better result than the example above.
It is very important that all available estate planning tools be utilized to maximize tax savings in light of the current law. This advice is particularly important for New York State residents and those nonresidents with significant real property located within New York. Although the new rules in New York can be detrimental to taxpayers, with proper planning they can be used to your advantage. The suggestions made in this article may not be appropriate for you, but other planning strategies may achieve similar results