Gallet Dreyer & Berkey, LLP | New York State Estate Tax Changes - Now You Really Need to Do the Math
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New York State Estate Tax Changes - Now You Really Need to Do the Math

06/10/2014 | Summer 2014 Newsletter
In the Summer 2013 issue of this Newsletter I authored an article entitled “Estate Planning — You Still Need to do the Math.” Recent changes in New York’s Estate Tax Laws have made it even more critical for those subject to the New York estate tax to plan their estates properly to minimize their liability for New York State estate taxes.

Effective April 1, 2014, New York’s estate tax laws changed dramatically. The exclusion, previously $1,000,000, has been increased. When the exclusion is fully phased in on January 1, 2019, New York’s exclusion will be the same as the Federal exclusion which is currently $5,340,000 after being indexed for inflation. Until the New York exclusion is fully phased in, the exclusion will gradually increase each year as shown on the table on page 8.

However, unlike the Federal exclusion, New York’s new law provides that if the amount of the New York taxable estate exceeds 105% of the available exclusion, the New York exclusion is eliminated, making the estate fully taxable for New York State purposes.
 
Date of Death NY State Exclusion
4/1/14 - 3/31/15 $2,062,500
4/1/15 - 3/31/16 $3,125,000
4/1/16 - 3/31/17 $4,187,500
4/1/17 - 3/31/18 $5,250,000
After 1/1/19 Federal Exclusion

Without proper planning this can result in a substantial New York estate tax, even if there is little or no federal estate tax payable. For example, if someone that dies in 2019 has a New York taxable estate that is exactly $5,512,500, there would be no New York estate tax payable. However, if the decedent’s New York taxable estate were $5,512,501 ($1 more than 105% of the $5,250,000 exclusion), the New York estate tax would be $452,300.

So how do you plan to avoid this? Since New York does not currently impose a gift tax one would think that they could simply make a gift to their children of an amount that is calculated to keep their New York taxable estate below the threshold. However, included in the legislation that increased the exclusion was a provision that adds back to the computation of the New York taxable estate the amount of any gifts made within three years of death if made between April 1, 2014 and December 31, 2018. Furthermore, since these gifts are not part of the New York taxable estate the New York estate attributable to these gifts is not deductible for Federal estate tax purposes. What can one do? Provide a provision in your will that makes a contribution to a charity of the amount necessary to keep the New York taxable estate below the threshold. Essentially by giving something away to someone that is not part of your family, you will be increasing the amount your family receives.

It is also important to remember that New York has not adopted the Federal concept of “portability” which permits the unused exclusion of the estate of the first to die to be available for use by the estate of their spouse. Accordingly, while for Federal purposes it often does not matter which spouse is the legal owner of the asset, for New York purposes it becomes very important. For example, assuming a married individual dies in 2015 when the New York exclusion is $2,062,500 and their spouse dies in 2016 when the exclusion is $3,125,000. Further, assume that the combined value of their assets will be $4,000,000 upon their respective deaths and that the assets are held in the couple’s joint names with the right of survivorship. Since upon the first death the assets will automatically pass to the survivor, the marital deduction will shelter the assets from estate taxation. However, upon the second death the entire $4,000,000 will be subject to New York estate tax since the value of the survivor’s New York taxable estate is greater than 105% of the $3,125,000 exclusion. (There would be no Federal estate tax payable at either death.) Had the couple separated the ownership of their assets (i.e., if they owned the assets as tenants-in-common), there would be no New York estate tax payable.

The firm’s estate planning attorneys stand ready to help you understand the new law and help you plan your estates to avoid the payment of estate taxes unnecessarily.

About the author: David N. Milner is a partner at Gallet Dreyer & Berkey LLP. Mr. Milner’s practice focuses on tax law, estate planning, corporate law, and real estate. Mr. Milner, who is also a certified public accountant, helps clients to structure transactions in a manner calculated to reduce adverse tax consequences, and helps families develop estate planning strategies. He is a frequent speaker before community groups and trade organizations on matters relating to estate planning. Mr. Milner can be reached at dnm@gdblaw.com.