Back on 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 estate taxes have been reduced. For some, New York estate taxes remain very high and many New York residents (for income and estate tax reasons) are moving to Florida or other low tax states. However, with proper planning, significant New York estate taxes can be saved or eliminated for those who would otherwise be subject to New York estate taxes.
As the New York exemption is still tied to the prior federal law, New York will not raise is exemption to equal the new federal exemption of $11.18 million that became effective in 2018. Thus, New York exemption effective January 1, 2019 will be approximately $5.8 million.
The rising New York 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 the New York estate tax exemption amount, the tax is calculated on the entire amount of the taxable estate rather than only the amount in excess of the exemption (even if it’s by only $1). This rule is terrible for New York residents whose estates exceed the New York exemption. Therefore, it is critical to implement an estate plan (if possible) to ensure the taxable estate is less than the New York exemption.
Proper Planning is Vital for Married Couples
For married couples, it is particularly critical that planning be implemented so that the New York exemption is not wasted at the death of the first spouse. While federal law allows a transfer of the unused federal exemption to the surviving spouse under the doctrine of “portability” (provided a federal estate tax return is timely filed), New York law does not have an equivalent portability 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 combined $10.5 million estate has all assets passing to the surviving spouse at the first death in 2018 (as would be the case if all assets are owned jointly), no federal or New York estate tax would be payable at the first death (due to unlimited marital deduction), but a New York estate tax would be payable at the second death of $1,146,800 (on the entire $10.5 million).
Implementation of Plan
The first step is to ensure that each spouse separately owns assets that are at least equivalent to New York 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 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 New York exemption amount to be held in the exemption trust at the death of the first spouse regardless which spouse passes away first. Therefore, if the first spouse to die has a taxable estate of $5.25 million, all estate tax can be eliminated! A Will containing an exemption trust is generally preferable to so-called “disclaimer” wills to ensure the New York exemption is not wasted.
It is very important that all available estate planning tools be utilized to maximize tax savings in light of the current law.