New York and Federal Estate Taxes
The current exemption from New York estate taxes is 6.94 million, indexed for inflation. For most clients this presents no issue – their estates will never approach the exemption. However, for the fortunate few who have assets, including life insurance, that may exceed roughly seven million dollars, there is a significant tax liability. Changes in New York estate tax law in the last few years introduced a “fiscal cliff ”. Whereas formerly New York only taxed the amount over the exemption, if you exceed the limit today (by a mere 5%) they tax the whole estate. You’re over the cliff!
The tax is surprisingly large. On a roughly seven million dollar estate, the taxes payable to New York exceed five hundred thousand dollars. An estate over ten million would owe over a million in estate tax.
These New York estate taxes are avoidable if you have a spouse and you create an estate plan using two trusts, which doubles the exemption. Another way to avoid the fiscal cliff is to use the “Santa Clause” providing that you gift to charities of your choice all amounts over the exemption. Gifts to charities are deductible from estate taxes.
While the Federal estate tax exemption of 13.61 million is “portable”, i.e. if the first spouse doesn’t use their exemption or any part of it, it passes to the surviving spouse, New York does not allow for portability. It’s use it or lose it.
The Federal exemption is expected to be reduced from the 13.61 million exemption, passed by the Trump administration, to the 6.94 million, adjusted for inflation, that New York uses, at the end of 2025. For larger estates, there remains a planning opportunity by making gifts while the higher exemption is in place. You may use any of your Federal estate tax exemptions to make gifts while you are living. These gifts are reported to the IRS and get subtracted from what you may give at death.
One added attraction to gifting is that New York does not tax gifts -- so that gifts may also be used to avoid onerous New York estate taxes at death. There is a minor exception that gifts made within three years of the death of the donor are brought back into the donor’s estate for New York estate tax purposes.