Estate Tax Planning for New York Residents

The Tax Cuts and Jobs Act increased the Federal Unified Credit for 2019. The estate and gift tax exemption is $11,400,000* per person. What’s better is that for a married couple the Federal exemption is “portable” – this means that an individual can leave $11,400,000 to heirs and married couples can transfer up to $22,800,000 to their children without any estate tax or complicated planning.

New York Estate Tax

What does this mean for New Yorkers? Unfortunately, New York State’s laws are not as generous.  New York only exempts the first $5,740,000* per person.  Additionally, there are two features of the New York estate tax laws that make it challenging to plan for:

• Unlike the federal exemption, there is no portability between spouses. This means that if you do not utilize the exemption when the first spouse dies you lose it.
• New York taxes your estate based on a “Cliff”. Once an estate exceeds the exemption amount by 105% New York imposes a tax on the full gross estate, not just the amount over the exemption.

These two items are important to plan for because the New York Estate Tax is significant.  It ranges from 5-16%. Although there are challenges with the New York estate tax laws there are also opportunities.

Planning Opportunities

Make Gifts
New York does not have a gift tax.  With the increased federal exemptions you can make lifetime gifts up to $11,400,000 per person.  This allows for increased lifetime planning. Gifting can be done outright or in trust.  Some gift options to consider:

• Put assets in trust for certain situations, such as your child is getting divorced, has a chemical dependency issue or is receiving government benefits that could be jeopardized by receiving a lump sum of money.
• Make gifts to 529 accounts for your grandchildren so that the money can grow without additional income taxes

Add a “Santa Clause”
Plan for the Cliff with a “Santa Clause”.  Many individuals fall into the category of taxpayers whose gross estate falls just over 105% of the New York exemption (currently $6,027,000).  Consider the following example, Jane, a widow has a gross estate of $6,150,000.  Her estate would have to pay New York an estate tax of $529,000.   However, Jane’s will or Living Trust could contain a formula clause which allows her executor or trustee to make a gift charity, decreasing the taxable estate below the Cliff and causing the beneficiaries to end up with more.  For example, the executor could gift  make a gift of just over $125,000 that would cause the estate to only pay tax on the amount over $5,740,000 (less than $30,000).  The net result is that the beneficiaries get more and a charity benefits.

The “Santa Clause” will only benefit a few estates but if your estate hovers around the New York Exemption amount we highly recommend adding it to you estate plan.

Create a Flexible Estate Plan
Some older estate plans fund a credit shelter trust on the death of the first spouse up to the maximum Federal exemption.  If your plan does this the surviving spouse may end up paying New York State estate tax.  We recommend building in a flexible estate plan which allows the surviving spouse to fund a credit shelter trust via a “disclaimer.”  Each spouse would leave each other the remainder of their estate but allow the surviving spouse to “disclaim” or give up a portion of the estate and have it paid to a credit shelter trust.  With such uncertainty over both Federal and New York State estate tax exemption this allows the surviving spouse to tax plan at the time of death when there is certainty.

Utilize the Additional Federal Exemption Against
The increase in the Federal Unified Credit didn’t eliminate the Federal estate tax for all New Yorkers.  For those with gross estates greater than $11,400,000 per person consider utilizing the additional credit by making gifts to Grantor Retained Annuity Trusts (GRATs) or Intentionally Defective Grantor Trusts (IDGTs) to lower or eliminate your Federal estate tax as well.

Next Steps

Review your Estate Plan!  Every situation is different but many can take advantage of these opportunities as well as others.

*The Federal and New York exemptions are scheduled to be increased for inflation annually.