How can I avoid the estate tax?
New York recently raised the amount of property that can pass free from the estate tax to $5.25 million. Previously, the exclusion was $4,187,500. After January of 2019, New York’s exclusion will match the federal exemption amount. However, high earners in New York need to be aware of several important exceptions to the basic estate tax exclusion. New Yorkers will want to carefully structure their estate plan so that they can avoid entirely the amount of their assets that may be subjected to the estate tax.
The Estate Tax
The estate tax is a tax paid on your right to transfer property upon your death. The federal estate tax is imposed on all property of the deceased that is transferred to their heirs when the estate is valued in excess of $5.49 million per person (or $10.98 million per married couple).
Each state has the right to pass its own estate tax that may or may not correlate to federal law. New York’s exclusion amount has traditionally been lower than the federal amount. Four years ago, the N.Y. legislature passed the 2014-2015 Executive Budget, which significantly altered existing estate tax laws. Changes were intended to prevent the wealthy from leaving the state to a jurisdiction with more friendly tax laws, but it is unclear whether the law will have that effect.
High Value Estates Under the New Estate Tax Laws
While New York has raised its estate tax exemption significantly, high earners need to be aware that estates valued at more than 105% of the basic exclusion will be subject to the estate tax on the entire estate amount. For example, let’s say a New York resident died in January of 2018 with an estate valued at $5.8 million. The estate exceeds 105% of the basic exclusion amount ($5.25 X 105%= $5,512,500). As such, the entire $5.8 million estate will be subject to the estate tax. If instead the estate had been valued at $5.1 million, then the estate would not owe any New York estate taxes.
New Yorkers should take the time to create a comprehensive estate plan now so that their estate can escape the estate tax. Individuals with substantial assets may want to explore the possibility of using a trust or taking advantage of gifting during their lifetime to allow their assets to pass to their heirs tax free.