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By Joseph A. Bollhofer, Esq.

When someone dies with enough wealth, an estate tax must be paid. Many people mistakenly believe that their taxable estates are smaller than they actually are. However, “everything” you own or have an interest in is included: equity in your house, annuities, retirement accounts, businesses, life insurance, to name a few.  

Sometimes referred to as a death tax or inheritance tax, the New York State estate tax has since 2000 been payable on estates over $1,000,000.              

With the 2014-15 budget, New York made significant changes to the estate tax for persons dying on or after April 1, 2014. Estates under $2,062,500 now will escape this tax. During the next few years, the structure looks like this:  

DEATH ON OR AFTER:
               AND BEFORE:                BASIC EXCLUSION AMOUNT
       April 1, 2014                          April 1, 2015                               $2,062,500
       April 1, 2015                          April 1, 2016                               $3,125,000
       April 1, 2016                          April 1, 2017                               $4,187,500
       April 1, 2017                       January 1, 2019                             $5,250,000               

For estates of those dying on or after January 1, 2019, the excluded amount is scheduled to be indexed for inflation, which should link it to the federal exemption amount (presently $5,340,000, also indexed for inflation).              

This is good news, of course, for beneficiaries of estates valued between $1,000,000 and $2,062,500 (and estates below the applicable basic exclusion amount in later years). The exemption increase is meant to help stem the tide of wealthy New Yorkers who change their domicile to another state to avoid taxes.              

However, there is a major trap – being called a “cliff” – for estates of those who die with just 5% more than $2,062,500. In those cases, the estate is taxed on the full value of the estate, not just on the amount over the exemption.              

For example, 5% more than $2,062,500 is $2,165,625. That increase of $103,125 will result in an estate tax of $112,050. However, if the taxable estate is $2,165,624, no estate tax whatsoever will be due. Some are viewing this as a cruel April Fool’s joke.              

Estates that are between $2,062,500 and 5% more than that will pay a tax based upon a rapidly rising formula separated by percentage points.              

As with taxation of federal estates, no estate tax is due when the spouse inherits in New York. There is an “unlimited marital deduction” for assets inherited by a spouse. However, the federal estate tax structure has for the last few years allowed what is known as “portability,” which allows the unused portion of the exemption in the estate of the first spouse to die to be “ported” to the surviving spouse, whose estate could then use the first spouse’s remaining exemption. For example, if the first spouse to die had a $2,000,000 estate, the unused portion of the federal exemption currently would be $3,340,000. When the second spouse dies, this unused portion can be added to the surviving spouse’s estate to increase the exemption beyond the current per-person exemption.              

Since the portability aspect was not included in the New York estate tax law, there is still a need in the case of potentially taxable estates to do some type of advanced planning to minimize New York estate taxes. Irrevocable trusts, which can remove assets from a person’s taxable estate, credit shelter trusts, which potentially can double an estate tax exemption, and gifts all still are useful methods in appropriate circumstances. However, with regard to credit shelter trusts, it is important that “disclaimer” provisions be included to allow for maximum flexibility in making elections after the death of the first spouse. Since circumstances change, and laws change as the years go by, it is important to continue to review estate planning documents to make sure that they not only still reflect intents and expectations, but also to make sure that they provide for maximum protection.              

The possibility of estate taxes is only one consideration in a good estate plan. Considerations of capital gains taxes, the financial needs of the individuals involved, and levels of comfort are all important considerations as well. There is no question, however, that the provisions of the new estate tax are “game changers” for many persons.  

Copyright 2014 Joseph A. Bollhofer, Esq.  

Editor’s Note:
Joseph A. Bollhofer, Esq., is an attorney who practices law in the areas of elder law, Medicaid, estate and business planning and administration, and real estate. He is a member of the National Academy of Elder Law Attorneys, and of the Elder Law, Real Property, and Surrogate’s Court Committees of the Suffolk County Bar Association and of the Elder Law and Real Property Law Sections of the New York State Bar Association. He has been serving area residents since 1985 and is admitted to practice law in New York and New Jersey. His office is located at 291 Lake Ave., St. James, NY. (584-0100). For reprints of this article and others concerning Medicaid, Elder Law and Estate Planning, send a request to info@bollhoferlaw.com or visit www.bollhoferlaw.com.