The State of Estate Taxes

The current exemption from New York estate taxes is 5.93 million, indexed for inflation. For example, last year it was 5.85 million. For the majority of our clients this presents no issue – their estates will never approach the exemption.

However, for the fortunate few who have assets, including life insurance, that may exceed roughly six million dollars, there is a significant tax liability. Changes in New York estate tax law in the last few years introduced a "fiscal cliff". Whereas formerly New York only taxed the amount over the exemption, if you exceed the limit today they tax the whole estate. You're over the cliff!

The tax is surprisingly large. On a roughly six million dollar estate, the taxes payable to New York exceed five hundred thousand dollars. An estate over ten million would owe over a million in estate tax.

These New York estate taxes are avoidable if you have a spouse and you create an estate plan using two trusts – one for each spouse. By setting up two trusts, over which you and your spouse both have complete control, you may double the exemption and would not have to pay estate taxes unless you exceeded the two exemptions. This planning must be done before the first spouse dies.

While the Federal estate tax exemption of 11.7 million is "portable", i.e. if the first spouse doesn't use their exemption or any part of it, it passes to the surviving spouse, New York does not allow for portability. It's use it or lose it.

The Federal exemption is expected to be reduced from the 11.7 million exemption passed by the Trump administration to the 5.93 million that New York uses, under the Biden administration. Current thinking is that this will not occur in 2021 but more likely in 2022. For larger estates, there remains a planning opportunity by making gifts while the higher exemption is in place for one more year. You may use any of your estate tax exemptions to make gifts while you are living. These gifts are reported to the IRS and get subtracted from what you may give at death.

One added attraction to gifting is that New York does not tax gifts -- so that gifts also avoid onerous estate taxes at death. There is a minor exception that gifts made within three years of the death of the donor are brought back into the donor's estate for estate tax purposes.