Understanding Estate Tax: A Guide for New York Residents

You have worked hard to accumulate assets so that you may pass your legacy to your family. There is no better time to talk to estate attorneys in New York about gift and estate taxes.

A gift tax is a tax that is levied on assets transferred by a person to a beneficiary during their lifetime. An estate tax is a tax that is levied on assets transferred by a person to a beneficiary upon death. There are federal and state gift and estate taxes. However, these taxes only apply to gifts and estates over the applicable threshold amounts.

No, there is no NY State gift tax. Therefore, you may reduce the value of your estate subject to estate taxes by gifting assets to your beneficiaries during your lifetime. However, it is important to note that any gifts made within three years of death will be “clawed back” into your estate for valuation purposes and subject to estate tax. So, you can’t avoid estate tax by making a deathbed gift of all your assets. Also, the federal gift tax will apply to gifts with a value of more than $16,000, per person, per year. These annual exclusion gifts are not subject to federal gift tax.

Is there a NY State Inheritance Tax?

No, there is no NY State inheritance tax. When your beneficiary inherits your assets, the beneficiary does not have to pay an inheritance tax to New York. There are exceptions for beneficiaries other than a spouse or charity over a specified threshold.

Is there a NY State Estate Tax?

Yes, you will pay NY State estate taxes if you die a resident of New York or own real property in New York. It is important to note that New York estate taxes are in addition to the federal estate tax.

Does New York State Have an Estate Tax for Married Couples?

No, there is no New York or federal estate tax for assets passing from the deceased spouse to the surviving spouse. An estate planning attorney can explain the unlimited marital deduction.

What Is the New York State Estate Tax Rate?

The New York State estate tax rates are graduated. The lowest rate starts at 3.06% for the first $500,000 of assets. The highest rate is 16% and is applicable to estates valued above $10,100,000. The federal estate tax rates are also graduated and range between 18% and 40%.

Is There a Basic Exclusion Amount from New York State Estate Tax?

Yes, the New York State basic exclusion amount for 2022 is $6.11 million and is indexed for inflation annually. This means that if you die in 2022 and the value of your estate is less than this threshold amount of $6.11 million, there would be no New York estate tax due. However, you must be aware of the impact of the New York State “estate tax cliff.” The federal estate tax exemption for 2022 is $12.06 million and is portable between spouses meaning that the surviving spouse can timely elect to use both exemptions protecting $24,120,000 from federal estate tax.

What Is the New York State Estate Tax Cliff?

If you die in 2022 and the value of your estate exceeds the $6.11 million basic exclusion amount by more than 5%, you will lose the benefit of the exclusion, and your entire estate will be subject to New York estate tax starting at the first dollar. When the value of your estate is greater than 105% of the basic exclusion amount, you will “fall off the cliff.”

Here is an example for 2022: 105% of $6.11 million is $6,415,500. If your estate is valued between $6.11 million and $6,415,500, you only pay New York estate tax on the amount exceeding the $6.11 million threshold. So, if your estate is valued at $6.2 million, your taxable estate is only $90,000. However, if your estate is valued at $6,500,000, you fall off the cliff, the basic exclusion amount is zero, and your entire $6,500,000 estate is taxable and subject to New York estate tax.

Tips to Minimize New York State Estate Taxes and Avoid  Falling Off the Cliff

1. Understand the value of your taxable estate and that it is comprised of both probate assets and non-probate assets which pass by operation of law to a designated beneficiary, a joint owner, or in trust;
2. Review your estate plan to ascertain how it will operate considering the increased basic exclusion amount and to ensure that your estate plan meets with your testamentary desires;
3. Instead of utilizing the unlimited marital deduction, implement the estate tax planning techniques of a post-mortem disclaimer of assets by the surviving spouse or the creation of a Credit Shelter Trust (also known as a Bypass Trust) funded upon the death of the first spouse in order to preserve the New York basic exclusion amount of the first spouse to die. Since the surviving spouse can’t elect portability for the New York basic exclusion amount (as can be done with the federal exemption), without a post-mortem disclaimer of assets or a Credit Shelter Trust, the New York basic exclusion amount would be lost;
4. Consider making gifts during your lifetime to reduce the value of your taxable estate below the basic exclusion amount. However, remember that even though New York does not have a gift tax, you must outlive your gifts by three years otherwise, the gifts will be “clawed back” into your estate and subject to estate tax. Although there is a federal gift tax, you can make gifts of up to the federal gift and estate tax exemption which is $12.06 million for 2022, without any gift tax; and
5. Consider making charitable bequests and/or including a “Santa Clause” provision in your Last Will and Testament or Trust to allow for a conditional charitable bequest of the amount exceeding the basic exclusion amount. The charitable bequest would be satisfied only if the excess amount is less than what the amount of the estate tax would be without the charitable bequest.

Regardless of whether you will be adversely impacted by the New York State estate tax cliff, now is the time to revisit your estate plan in light of the increase in the federal exemption and New York State estate tax basic exclusion amount. The attorneys at Russo Law Group, P.C. now the latest changes in estate law and can minimize your estate taxes with a customized estate plan.

It is important when implementing estate planning to consult with and retain estate attorneys in New York experienced in estate law. Russo Law Group, P.C., has knowledgeable attorneys who can provide professional services and advise you. We invite you to take advantage of our comprehensive website as well as our free seminars and webinars to learn more about how Russo Law Group, P.C., may assist you and provide you with peace of mind.