Our recent blog post, “2020/2021 Unified Tax Credit and Lifetime Gift Tax Exclusion” explained that the lifetime gift tax exclusion was expanded under the Tax Cuts and Jobs Act, and with an inflation adjustment in 2020 increased to $11.58 million for individuals and $23.16 million for a married couple. This means that the federal tax law applies the estate tax to any amount above $11.58 million for individuals and $23.16 million for married couples. The exclusion amount in 2021 increased to $11,700,000. This is different however from the New York State estate tax exemption.
The unified tax credit is designed to decrease the tax bill of the individual or estate, which can be as high as 40% on amounts over $11,180,000. It can be used by taxpayers before or after death, integrates both the gift and estate taxes into one tax system, is adjusted for inflation, and has no income limit.
In addition, married couples can exercise a “portability” option using Form 4768. The portability option is a federal exemption that allows a surviving spouse to take the remaining estate tax exemption, up to $11,180,000, including past gifts. In other words, the surviving spouse can add their deceased spouse’s unused estate tax exemption to their own, effectively doubling the exemption. While this can be an effective tactic to reduce federal estate taxes when the second spouse passes, it does not help with state estate taxes.
NY Estate Tax
New York estates may be subject to federal and state taxes. New York has a state estate tax that applies to deceased individuals who are a resident of New York, or who have property physically located in New York. Federal estate tax may also apply to estates that exceed the federal exemption. Currently, the top New York estate tax rate is 16% and the estate tax exclusion is $5,930,000.
There are two important areas of New York estate tax law to take note of, first, there is no portability option available to effectively double the exemption. Second, New York has a rule that prevents some estates from taking advantage of the estate tax exclusion. Often referred to as the tax cliff, the rule applies when an individual dies and their estate’s taxable amount is more than 5% of the exclusion amount. These estates are subject to paying taxes up to 16% in New York estate tax on the entire amount of the estate.
Estate Planning Strategies for Reducing Estate Taxes
The “tax cliff” could impact you if your taxable estate is currently equal to or over the exclusion amount or will be at the time of your death. There are many estate planning strategies that enable the transfer of wealth from one generation to the next while significantly reducing estate taxes. Different types of trusts can be effective in reducing estate taxes including credit shelter trusts and bypass trusts, which can be used in certain situations to protect the exclusion amount of the first spouse to die. Additional benefits of trusts include:
- Reducing gift taxes
- Ensuring children and grandchildren under 18 will be beneficiaries of an estate.
- Safeguarding the financial future of family members with special needs
- Protecting assets from lawsuits
- Protecting assets from creditors
If you have questions regarding New York estate taxes, portability, trusts, or potential steps you might consider to reduce estate taxes, please reach out to our office at (914) 228-7448.