As the saying goes, “nothing is certain but death and taxes.” In the context of estate planning, this reality drives the estate planner’s desire to minimize taxes upon death as much as possible. In fact, the world of estate planning is consumed with the minimization of taxes in all of its forms. New York estate attorneys and tax advisers have clients jump through legal and financial hoops in order to avoid or delay the payment of taxes, whether estate, capital gains, gift, income, etc. It is imperative that clients know if their assets will be taxed upon their death so that they can properly seek advice from their estate planning professional. This article provides a general overview of estate taxes in New York State.
What Is Taxable?
Very generally, any property that a person owns at his passing is taxable including bank account, cash, securities, real estate, cars, etc. are includable in his gross estate. Contrary to popular belief, the death benefit of life insurance policies a person owns are taxable unless properly structured. Read a more detailed explanation of how life insurance policies are taxed here. Joint property owned with a non-spouse, including joint bank accounts, is 100% includable in the estate of the first joint property owner to die except to the extent that the other joint owner can show that he contributed to the property. If husband and wife own property jointly, half the value of the property is includable in the first spouse's estate, and 100% of the remaining asset would be includable in the second spouse's estate. Business, corporate, and LLC interests are also includable in the gross estate as are general powers of appointment.
Deductions from the Gross Estate:
To determine the taxable estate, we need to reduce the gross estate by the applicable deductions. The IRS allows the following deductions from the gross estate which reduce the gross estate:
1. Marital Deduction: One of the primary deductions for married decedents is the Marital Deduction. Both jurisdictions allow for an unlimited marital deduction which means that assets passing outright to a citizen spouse will not be taxed at the death of the first spouse. There are often very good financial, legal, and tax reasons not to leave everything to the surviving spouse as will be discussed in the upcoming article dealing with credit shelter/bypass trusts
2. Charitable Deduction: If the decedent leaves property to a qualifying charity, it is deductible from the gross estate.
3. Mortgages and Debt associated with the properties.
4. Administration expenses of the estate including executor/administrator, accountant’s and attorney’s fees.
5. Losses during estate administration.
Not One, But Two Estate Taxes:
Both New York State and the federal government impose separate estate taxes on decedents who pass away with a certain amount assets. It should be noted that only about 15 states and Washington D.C. impose estate taxes which explains why many seniors move to states like Florida which don’t have an estate tax. New York State and the federal government tax estates at different levels and at different rates. Uncle Sam does, however, give taxpayers a deduction for the amount they paid in state taxes (the Estate Tax Credit was phased out completely in 2005).
Federal Estate Taxation:
The federal government taxes estates valued at over $11.18 million (in 2018), which is adjusted for inflation ever year, at a rate of 40%. The high threshold for filing combined with "portability" which allows one spouse to use the deceased spouse's unused estate tax exemption essentially means that few couples' will be taxed, as each couple has over $22 million in combined Federal estate tax exemptions.
New York State Estate Taxation:
New York State enacted a new budget which drastically changed the estate tax system starting April 1, 2014.
For decedents dying prior to April 1, 2014, New York State taxes their estates of New York residents if they are over $1,000,000.
For decedents dying on April 1, 2014 - March 31, 2015, the exemption amount is $2,062,500.
For decedents dying on April 1, 2015 - March 31, 2016, the exemption amount is $3,125,000.
For decedents dying on April 1, 2016 - March 31, 2017, the exemption amount is $$4,187,500.
For decedents dying on April 1, 2017 - December 31, 2018, the exemption amount is $$5,250,000.
For decedents dying after on January 1, 2019 onward, the exemption will be $5,600,000, and will be indexed to inflation thereafter.
Non residents pay the tax only if their estate includes real property or tangible personal property located in New York which worth over the threshold amount. NY estate tax rates range from 5.6% to 16% depending on the size of the estate. New York's inheritance/death tax is one reason so many seniors make the move to Florida after they retire. A couple worth a combined $5,000,000 can save over $300,000 in state estate taxes for their heirs by moving from New York to Florida.
It is important to know that New York State has a "cliff" which means that if the amount of your taxable estate is more than 5% of the exemption amount at your death, you lose the entire exemption. That means that, in 2018, an estate worth more than $5,525,000 has to pay the full amount of tax with no exemptions.
Taxable New York estates with a gross estate are required to file form ET-706 along with a federal estate tax return, even though one may not be required by the IRS. The tax thresholds mentioned above assume that the decedent did not make taxable gifts during his lifetime. A taxable gift is a gift made by a person above the annual gift tax exclusion amount, currently at $15,000 in 2018. Effective April 1, 2014, NY imposes a three-year look back period for gifts made between April 1, 2014 and January 1, 2019. Therefore, if a NY resident dies within three years of making a taxable gift, the value of that gift will be included in their estate. This only applies to gifts made between April 1, 2014 and January 1, 2019, and does not include gifts that the decedent made when he/she was not a NY resident. Married couples can “gift split” and give away $30,000 a year without making a taxable gift. This $15,000 figure is pegged for inflation and adjusts to the nearest thousand every year.
It is possible to avoid the sting of the estate tax by (1) fully utilizing each spouse’s estate tax exemption (2) deferring taxes until the death of the second spouse (3) and completely escaping taxes by gifting assets during your life through the use of irrevocable trusts as well as upon death by gifting to qualified charities. To speak to a New York estate planning attorney for an evaluation of your financial situation and to see which options can minimize or eliminate your potential estate tax liability, contact us at (347)766-2685.
This article was originally published in 2012 but has been updated to reflect 2018 guidelines.
