A number of important tax changes made in passage of the New York State budget last week were highly publicized by the Governor and legislative leaders. While the estate tax law amendments were not mentioned in the government's press releases (despite earlier indications of their possibility), the State Legislature has made some of the most significant revisions to New York’s estate tax law in decades.
On the positive side of these revisions, Tax Law section 952 was amended to gradually phase-in higher estate tax exclusion amounts. The amount was previously pegged at $1 million (a relatively low figure when all the different types taxable estate property are considered), but will increase each year starting this year, until January 1, 2019, when it will be $5 million plus the federal cost-of-living-adjustment (COLA). In essence, New York’s estate tax exclusion will (eventually) be the same as the federal amount, and will increase with inflation.
However, as some news outlets (and the New York State Society of CPAs) have pointed out, there is a down-side to these amendments as well. In fact, some reports have stated that, for people leaving a taxable estate above the exclusion amount ($2,062,500 until April 1, 2015), their estates will face a “a marginal New York estate tax rate of nearly 164%.” This sounds like a shocking – even mathematically impossible – figure. But we must bear in mind that, as they are talking about a marginal tax rate, it is the tax rate for the value of property above the exclusion amount. This still, of course, means that estate taxes can (and may) eat into the value of the excluded property. How can this be?
It appears to me that the State Legislature has fundamentally revised some of the basic estate tax presumptions that many of us have worked with for several years. Primarily, the new, higher monetary thresholds listed in Tax Law section 952(c)(2) are exclusions used to calculate a tax credit rather than exemptions. Under prior New York law, the $1 million figure represented an exemption from New York estate tax. If you had an estate less than or equal to $1 million, you paid no tax; but if your estate had a taxable value of $1,000,100, you owed estate tax just on the value of that $100 in excess of the exemption. Under the Tax Law that took effect April 1, 2014, the entire taxable value of an estate is subject to estate tax. However, section 952(c) builds in a “credit” against the estate tax - which is the entire amount of the tax for estates with a taxable value less than or equal to the applicable exclusion (i.e. $2,062,500 this year), and a lesser “credit” for estates valued at up to 5% more than that exclusion. However, “no credit shall be allowed to the estate of any decedent whose New York taxable estate exceeds [105%] of the basic exclusion amount.”
Let’s look at some examples. Let’s say Bill dies on March 1, 2015 with a taxable estate valued at $2,062,500. As this is the exclusion amount, his estate receives a credit for the entirety of any estate tax due, and his estate owes $0 of New York estate tax. In contrast, if Jill dies on March 1, 2015 leaving an estate valued at $2,167,687.50 her heirs might have a problem. That figure is 5.1% more than the applicable exclusion, and so her estate would owe the applicable estate taxes listed in the table found in section 952(b) of the revised Tax Law. In this case, that tax would be $106,800 plus 8% of the excess value over $2,100,000 (i.e. $5,415), for a total estate tax burden of $112,215. Since Jill’s estate is actually only $105,187.50 above the exclusion amount ($2,062,500), her estate is paying a 166% marginal tax on that amount above the exclusion. But again, we must bear in mind that this exclusion/credit is not an exemption. This may be why some have begun to refer to this as New York’s estate tax cliff: if you are at or under the exclusion figure, your estate owes nothing (via the credit), but if you are over 5% above the exclusion amount, your estate will be taxed on the full value of the estate at the amount listed in the law. Nevertheless, the $112,215 estate tax payable by Jill’s estate in this example represents no more than 5% of the actual total value of the estate.
Whether your future estate resembles more Bill’s or Jill’s can depend on many factors. Thus, with this extremely significant change to New York’s estate tax law, if you want to avoid falling off the Estate Tax Cliff, it would be advisable to review – and revise as need be – your estate plans over the next few years.
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