New York Adds Twist to Estate Tax Exemption

In order to keep the wealthy and elderly citizens residing in the state, New York recently raised its state estate tax exemption to five million dollars, up from the mere one million dollar limit of previous years. Matching the federal exemption level, many people in the state were thrilled that their estates were now shielded from tax. However, legislators added a twist to the new limit that may put the wealthy at even more of a disadvantage than they were before.

New York Estate Tax Limits

Under the new law, the state estate tax threshold will gradually increase from one million dollars to five million dollars, indexed for inflation, so that it matches the federal estate tax exemption level by January 1, 2019. However, the new law also includes an estate tax “cliff” that applies to all estates that exceed the current exclusion amount by more than five percent. Those estates are taxed back to the first dollar, effectively eliminating the state estate tax benefits for any wealthy New York estates.

The current state exclusion, valid until April 1 of this year, is $2,062,500. Those estates that are valued at more than the original one million dollar limit but less than five percent of the current exclusion limit will benefit from the state’s new law. However, for any New Yorker with a taxable estate of more than five percent of the current exclusion limit, the estate tax bill will be just as high as or higher than it was before the new laws were enacted. Applied to the current limit, this means that any New York estate valued in excess of $2,165,625 – 105% of the current exclusion amount – will be taxed on the entire amount of the estate, with no exclusions taken into consideration.

Other Issues of New York Estate Law

Along with the increased state estate tax limit and estate tax cliff, the new statewide estate tax laws also come with some other interesting issues. For one, the top estate tax rate in New York will remain at sixteen percent. The top rate remains in place despite a commissioned study that recommended that the top estate tax rate for the state be lowered to ten percent because the state legislature opted not to enact that particular change.

In addition, the new laws also incorporate a gift tax “add back,” which calls for all gifts made within the last three years of a person’s death to be added back to the estate for the purposes of calculating the estate tax. The purpose of this was to prevent deathbed gifts that would put the estate under the exclusion amount, but it is currently only limited to gifts made between April 1, 2014 and January 1, 2019 while the taxpayer was a New York resident. It also means that more careful planning must be done when gifting parts of an estate, both in the timing of gifts and the structure of how they are given.

The final issue is that New York also opted not to incorporate portability into their estate tax structure. Portability allows a surviving spouse to use the unused portion of their deceased spouse’s federal gift and estate tax exclusion. Because of this, New York residents still need to use estate planning techniques and tools that will keep both spouses’ exclusions intact.

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