New York State Budget Modifies Estate Tax Exemption

New York State doubled its estate tax exemption as of April 1, 2014. Governor Cuomo's 2014-15 budget bill has raised the New York State estate tax exemption amount to $2,062,500 per person immediately and it’s set to rise gradually over the next five years to eventually match the generous federal exemption, projected to be $5.9 million by then. That will sure make planning much easier for a lot of folks, but there are still potential pitfalls in the new law to watch out for.

Here's the new exemption schedule:

• For deaths as of April 1, 2014 and before April 1, 2015, the exemption is $2,062,500.

• For deaths as of April 1, 2015 and before April 1, 2016, the exemption is $3,125,000.

• For deaths as of April 1, 2016 and before April 1, 2017, the exemption is $4,187,500.

• For deaths as of April 1, 2017 and before January 1, 2019, the exemption is $5,250,000.

Potential Pitfalls

Before April 1, 2014, the amount an individual could leave at death without owing state estate tax in New York was $1 million, one of the lowest exemption amounts in the 19 states (plus the District of Columbia) that impose state level death taxes. That meant you’d pay New York estate tax (at up to a 16% top rate) on your assets above $1 million.

As of April 1, 2014, the exemption amount is $2,062,500. That shields way more people from the state levy. But if you die with just 5% more than $2,062,500, you face a cliff. That means you’re taxed on the full value of your estate, not just the amount over the exemption amount. Surpass the threshold in New York and you can be subject to a 164% marginal estate tax rate.

In addition to the potential pitfalls, there are other problems with the new law. For one, there is no provision for portability like in the federal law that would allow a surviving spouse to shelter two times as much without the use of complicated trust structure.

In addition, while there is still no state gift tax, any taxable gifts made within 3 years of date of death will be included in the decedent's taxable estate, unless the gift was made at a time when the decedent was not a resident of New York State.

There is also a three-year look-back for taxable gifts (those gifts are pulled back into your estate) for gifts made on or after April 1 and before Jan. 1, 2019, but not including any gift made when the decedent wasn’t a New York state resident.

Future Years

January 1, 2019 and after the exemption amount will be linked directly to the federal amount, which the IRS sets each year based on inflation adjustments—it’s projected to be $5.9 million in 2019. The top rate remains at 16%.

Tax laws are very complex. Be sure to consult with our office before any planning.

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