New York’s Overhauled Estate Tax
Posted on Mar 31, 2015 in News
When President Bush signed the 2001 Economic Growth and Tax Relief Reconciliation Act, he increased the federal estate tax exemption and, perhaps more importantly, eliminated the state estate tax credit, starting the process of decoupling between the federal estate tax system and those of theindividual states. Since 1963, New York has imposed its own level of estate tax. However, its amount and collection were integrated within the federal estate tax prior to the decoupling.
For the past 13 years, New York had been a relatively expensive state in which to pass away. While the per-person federal estate tax exemption amount continued to rise from $1 million in 2001 to $5,340,000 in 2014 and now $5,430,000 this year, New York has held its exemption at $1 million. That meant that while one may not have had to worry about a federal estate tax liability, the estates of many New Yorkers were exposed to a state-level of estate tax—until April 1 of last year.
New York overhauled its estate tax system in 2014. The legislature and Governor Cuomo revised the system to mirror the federal system by 2019, at least from an exemption standpoint. For those passing away on or after April 1, 2014, but before April 1, 2015, the New York estate tax exemption increased from $1 million to $2,062,500. This exemption will continue to increase over the next few years to ultimately match the federal exemption by 2019 (Figure 1). This overhaul means that the estates of thousands of New Yorkers will be relieved of the burden of a New York estate tax liability over the next few years.
Don’t Be Fooled
Many of your clients may come to realize that this overhaul comes with a rather cruel April Fools’joke. While the New York exemption amount is going to increase, the revised law has two challenging components.
First, unlike the prior law, what a client has done in the past may come back to haunt him or her. Taxable gifts made within three years of the date of death will now be included in the gross estate.Therefore, it is even more important to properly plan one’s gifting strategy going forward.
Second, and even more contentious, is what some are calling a “cliff” estate tax reality. The current law will eliminate the beneficial effects of the New York estate tax exclusion amount for estates equal to or above 105 percent of that year’s exemption. Therefore, for a New Yorker passing away on April 1, 2015, with an estate valued at $3,281,249, his or her estate would benefit from an exemption on the first $3,125,000. However, if the estate was worth just $1 more, the entire exemption would disappear and $3,281,250 would be completely exposed to New York’s estate tax.
Failure to Plan Is a Plan to Fail
While it is clear that there are some tremendous benefits of this overhaul, there are also some serious issues to address via prudent planning. Estate tax minimization is not the sole reason to engage in estate planning. Some would argue that tax minimization is a distant third to asset protection and ongoing management and control of what has taken a lifetime to accumulate to benefit one’s intended heirs.
Tax season is an ideal time to reconnect with your clients and help them to understand the benefits of prudent planning. It is also an ideal time to ensure you have an understanding of their complete financial picture.
Edward R. Collins, CFP, AAMS, RFC, is a founding partner and wealth advisor at Artisan Wealth Management, LLC.