The New New York Estate Tax Beware A 164% Marginal Rate
Some timely tax news from Forbes staff writer Ashlea Ebeling:
It’s no April Fool’s joke. New York state doubled its estate tax exemption as of today. And it’s set to rise gradually through 2019—if you hang on that long–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 big traps in the new law to watch out for.
One trap in New York is a new “cliff,” so called because if it’s triggered you basically fall into a state estate tax abyss.
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.
Here’s an example of how the new law could translate into a marginal New York estate tax rate of nearly 164%, courtesy of the New York State Society of CPAs in this comment letter on the proposed law. By the time the exemption is $5.25 million in 2017 and 2018, a decedent with a New York taxable estate of $5,512,500 (that’s 5% more than the exemption), would pay New York estate tax of $430,050. In effect, there is a New York estate tax of $430,050 on the extra $262,500. “We do not believe that this cliff is consistent with the Governor’s objectives of making New York a more favorable environment for New Yorkers during their golden years,” the letter says. Oh well.
Here’s the rundown of 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.
As of January 1, 2019 and after, the exemption amount will be linked 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%. (The original budget and the Senate bill had proposed a top rate of 10%.)
In addition to the cliff, there are other problems with the new law. For one, there is no portability provision like in the federal law—that allows a surviving spouse to shelter twice as much without the use of complicated trusts–notes Sharon Klein, managing director of Family Office Services & Wealth Strategies with Wilmington Trust.
There’s 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.
There are basis questions, depreciation questions, and different treatments of estate planning transactions under federal and New York income tax laws, says Donald Hamburg, an estate lawyer with Golenbock Eiseman Assor Bell & Peskoe in New York City. “What’s troubling is that there are so many open questions. It’s a highly complex set of rules,” he says.