Clamor Continues Around State Estate Tax – Are Increased Exemptions Coming?

The New York Times reported late last month on a growing trend across the country–discussions about lowering estate tax obligations on state residents. The estate tax is the bite the government takes out of an individual’s assets before they go to heirs. There are two layers of tax, at the federal and state level. Under current law, the federal tax kicks in on all assets over $5.34 million for individuals at a top rate of 40%.

But the federal tax is not the only concern of residents, because many individual states have their own tax, including New York. The New York tax starts far lower–at $1 million. This means that even those residents who have no concerns about the federal estate tax still must account for their obligation under state law.

Lower NY Estate Taxes
As we discussed recently, New York Governor Andrew Cuomo proposed altering the New York tax burden to more closely mirror the federal rules. He recently suggested that the state should increase the exemption amount to $5.25 million and peg it to inflation. This change would happen gradually over the next five years, reaching the intended level by 2019.

New York is certainly not the only state to consider these changes. New Jersey (which has the most burdensome estate and inheritance tax) is considering alterations. And many other states across the country have similar provisions in the docket.

But there is a big difference between proposing a law and actually enacting one. The problem is that any changes to estate tax rules for the state will result in lower state revenues. Those lowered revenues will then need to be made up elsewhere, which is the constant challenge for policymakers. As a result, the status quo often remains, regardless of individual wishes, because no agreement can be reached on how to make up the difference in the state budget.

Minimize New York Estate Tax Burden
While discussions about legal changes are encouraging for residents, as it now stands these changes are nothing more than possibilities. The current law continues to place a high burden on many families, making it critical for individuals to prudently plan to take advantage of legal steps to lower their tax burden.

Besides moving to another state and establishing residency, the main strategies to account for the tax is to set up trusts and engage in a gifting plan to pass on assets to lower the overall size of the estate. Because New York state does not have “portability” it is important even for married spouses to consider setting up trusts (like a credit shelter trust) to lower their state obligation.

Contact a NY estate planning lawyer today to learn more.

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