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.
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.
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
April 1, 2015
April 1, 2016
April 1, 2016
April 1, 2017
April 1, 2017
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).
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.
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.
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.
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.
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.
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.
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 firstname.lastname@example.org or visit www.bollhoferlaw.com.