New York’s Estate Tax Dramatic Changes

by Michael Kutzin Goldfarb Abrandt Salzman & Kutzin LLP

April 2, 2014 — New York’s Estate Tax law has just undergone its most dramatic changes since the late 1990s, with long overdue increases in tax exemption that will eventually equal the Federal Estate Tax exemption, but also with a “cliff” that results in the loss of any exemption from New York Estate Taxation altogether if taxable estate exceeds 105% of the exemption.

Exemption:  Under the prior law the exemption from New York State Estate Tax was only $1 million, and it was tied to a complicated formula using the State Death Tax Credit as it existed in 1998.  Under the law that went into effect April 1st , 2014,  the exemption will rise as follows:

For Decedents Dying 4/1/14-3/31/15            $2,062,500

For Decedents Dying 4/1/15-3/31/16            $3,125,000

For Decedents Dying 4/1/16-3/31/17            $4,187,500

For Decedents Dying 4/1/17-12/31/18            $5,250,000

For all subsequent years, the exemption will be indexed for inflation so that it will equal the exemption from Federal Estate Tax.

Gifts:      Under the new law, taxable gifts for Federal Gift Tax purposes made within 3 years of death will be added to the New York Taxable Estate in determining the New York Estate Tax, unless (1) the gift was made when the decedent was not a New York resident, (2) the gift was made before April 1, 2014, or (3) the gift was made on or after January 1, 2019.

The “Cliff”:    One of the stated purposes of the modernization of the New York Estate Tax was to prevent wealthier people from moving out of state to avoid draconian state taxation.  While the legislation will provide some relief, the relief drops off dramatically if the estate exceeds the exemption then in effect, and the relief disappears altogether where the taxable estate exceeds 105% of the exemption in effect at the person’s death.

As is demonstrated below, small differences in estate size can have a dramatic impact on the tax imposed.

Ex #1:  A widow dies with a New York taxable estate of $5,250,000 on January 1, 2018.  As the taxable estate is equal to the NYS exemption at the time of her death, no tax is imposed.

Ex. #2: A widower dies with a New York taxable estate of $5,300,000 on January 2, 2018.  In this case, the taxable estate exceeds the NYS exemption, but is below the 105% threshold.  In this case, the credit is $307,600, and the New York State Estate Tax, after the credit is applied, is $119,200.  The effective marginal tax rate on the addition of $50,000 from Ex #1 (and above the exemption amount) is 238.4%.

Ex. #3: A widow dies with a New York taxable estate of $5,500,000 on February 1, 2018.  While in this case, the taxable estate is still below 105% of the $5.25 million exemption,   most of the benefit of the exemption disappears.  The credit will only be $7,650, and the New York State Estate Tax will be $443,150.

Ex #4: A widow dies on January 3, 2018 with a New York taxable estate of $5,513,000, which is above the 105% of the New York State Estate Tax exemption of $5,250,000.  Her estate will be subject to a New York State Estate Tax of $452,360, as there is no credit whatsoever to reduce any part of the tax.

As can be seen by these examples, relatively small differences in the size of the taxable estate can have a dramatic impact on the tax imposed once the estate exceeds the exemption amount.

Please contact Michael Kutzin at our firm if you would like further details about how these changes in tax law may affect you and your family.