New York’s Recent Estate Tax Law Changes – What is Estate Tax Anyway?

By: Anne B. Ruffer

You may have heard that New Yorkers may be subject to an estate tax depending on the value of their estate when they die. You may also have heard some buzz about recent changes to New York’s estate tax law that sounds favorable to New Yorkers…favorable meaning less tax owed.

What is an estate tax? An estate tax is a tax on the transfer of assets after you die based upon the value of those assets. An estate tax is separate and distinct from income tax. It is, in a sense, a transfer tax. An estate tax will likely include some property on which you have already paid income tax. Moreover, an estate tax is assessed against you (or more accurately, your estate) once you are no longer with us.

All of the assets that you own when you die are tallied up and valued to see how much they are worth.  This includes ALL of your property — your house and all of your other real property (even that timeshare that you have not been able to unload), bank accounts, retirement accounts, life insurance (yes, life insurance that you own is considered in determining whether an estate tax is owed, although life insurance is not subject to income tax), savings bonds, annuities, artwork, cars, business interests, and more.

In 2014, upon your death if your assets are valued at over $5,340,000, your estate must file a federal estate tax return and may owe federal estate tax.  The top federal estate tax rate is 40%.

What are the new changes? For any New York resident who died before April 1, 2014, a New York estate tax return was required if your estate was over $1,000,000 (New York exclusion amount).  However, starting on April 1st, 2014 New York increased its estate exclusion amount as follows, for New Yorkers that die between the following dates:  April 1, 2014 – March 31, 2015 – $2,062,500;  April 1, 2015 – March 31, 2016 – $3,125,000; April 1, 2016 – March 31, 2017 – $4,187,500; and April 1, 2017 – December 31, 2019 – $5,250,000.  The top New York State estate tax rate is 16%.

How does it work? The way it works is that if your estate is valued at less than or up to the exclusion amount applicable in the year of your death, the amount of the tax that your estate would have otherwise owed on your death becomes a credit against that tax so that no estate tax is owed.  If, however, your estate is valued at more than the New York estate tax exclusion amount applicable in the year of your death, then the credit is gradually phased out.  If your estate is greater than 105% of the applicable New York exclusion amount, then your estate will not receive any credit against the tax (known as the estate tax “cliff”).

New Yorkers with estates valued at greater than $1,000,000 but less than the amended New York exclusion amount applicable in the year of their deaths will now certainly benefit.  Under the old rules, those estates would have likely owed an estate tax to New York.  Now those estates will not owe any New York estate tax.  For New Yorkers with estates greater than 105% of the amended New York exclusion amount applicable in the year of their deaths, their estates will not only be subject to New York estate tax but the credit used to offset the estate tax for estates valued at 105% or less of the exclusion amount will not be available to reduce the amount of the tax owed.

What does this mean? All of this means that careful estate tax planning for all New Yorkers is needed first, to ensure that your assets pass the way that you intend; and second, to be able to plan for the New York estate tax.  This may mean doing some planning to try to prevent being subject to such tax, minimize the effect of the tax, or making arrangements for future payment if it cannot be avoided.  Meeting with an experienced trusts and estates attorney to review your situation and put a plan in place to maximize any such planning will allow you to meet any tax requirements and maximize what you can leave to your desired beneficiaries.

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