November 21, 2017, 7:38 PM

New York Estate Taxes and the Estate Tax Cliff

By Brian F. Sheahen, CPA, CFP®, MST

In April 2014, New York State enacted a budget bill that changed several areas of the state’s estate tax law.  Some changes took place immediately, while others were set to take effect over several years.  After three years, the changes have been almost fully phased in; however, many New York residents are not at all familiar with how the changes may impact their financial legacy.  While the estate tax regime is intended to apply a tax on only the wealthiest of estates, many modestly high-net-worth taxpayers could be exposed to this tax more easily than they realize.  A New York State resident with several million dollars of net-worth to her name should at least be considering the current landscape of the New York estate tax, especially if she could be subject to the state’s new “estate tax cliff.”

The 2014 New York State budget bill introduced several key changes, but the change that has gained the most attention has been the increase in the state’s exemption.  As a brief refresher, similar to how the federal estate tax provides a lifetime gift and estate tax exemption that can shield assets from wealth transfer taxes, New York also has its own exemption for estate taxes (New York does not currently have a gift tax).  From 2000 to 2014, New York’s exemption had been only $1 million, leaving many exposed to potential estate taxes.  Since 2014, however, the exemption has increased to $2,062,500, $3,125,000, $4,187,500 and now to $5,250,000, effective through December 31, 2018. The New York exemption amount is scheduled to increase again as of January 1, 2019 to match the federal exemption amount.  This alone has been a positive development for taxpayers because many will now avoid potential state estate taxes which previously could only be achieved by using intricate and complex planning techniques.  In other good news, the state also removed its generation skipping tax and also allows for non-citizen spouses to benefit from the unlimited marital deduction, which was previously not permitted.

Despite the positive developments, the new law creates serious new risks for high-net-worth residents of New York and their financial legacies.  In particular, the new law introduced an estate tax “cliff” which previously did not exist.  This rule means that rather than only the value in excess of the exemption being subject to tax, excess amounts actually phase out the exemption.  In fact, taxable estates that exceed the exemption amount by 5% or more will cause the entire estate to be taxed!  This effectively means that certain larger estates may not receive any exemption at all, and the resulting tax liability may be harsher than it was when the exemption was only $1 million, before the exemption increased.

For example, a decedent who passes away in September 2017 with a taxable New York estate of $5,250,000 would have zero New York State estate tax liability thanks to the new rules.  If the decedent had passed away at the same time with a taxable estate of $5,512,500, a tax liability of over $450,000 would be owed to New York in estate taxes.  Any amount in between the exemption figure and the 5% excess limit triggers some estate tax as the exemption is phased out.  Therefore, any wealthy New York resident taxpayer without a formal estate plan who experiences a simple 5% rise in net worth due to any number of events (e.g., market rally, real estate appreciation, inheritance) could go from owing taxes of zero to nearly half a million – a tax bill greater than the appreciation of the estate itself.  It is worth noting that despite some of these changes, New York maintained the state estate tax rates, and the highest rate is currently 16%.

An additional consideration that did not previously exist for New York residents is the gift tax add back.  This rule adds back any “includable gifts” made within three -years of a death occurring between April 1, 2014 and April 1, 2019.  For New York purposes, includable gifts are those considered taxable under Section 2503 of the Internal Revenue Code.  However, gifts of real property that occurred during this three-year period do not count if the property was not located in New York and was made when the decedent was a nonresident.

New York residents who may be exposed to this tax should be aware that unlike federal estate tax rules, New York does not allow the portability of a deceased spouse’s unused exemption.  The federal rule is that if a spouse passes away, the surviving spouse can take the deceased spouse’s unused federal estate tax exemption and add it to his or her own by making an election on a properly filed federal estate tax return.  This rule provides the surviving spouse with a great amount of flexibility and protection against federal estate taxes.  Unfortunately New York does not allow this.  Not only does this mean that a surviving spouse in New York can’t use this additional exemption, but it also means if an individual does not use up his or her own exemption for New York purposes, the benefit is lost forever.  As the New York exemption has grown from $1 million to now over $5 million, the impact of losing the use of the exemption is that much more impactful for wealthy residents.  New York still allows the unlimited marital deduction, which means one spouse can leave value to the surviving spouse at no estate tax cost, but this merely defers potential estate tax to the second spouse’s death and without a further plan in place, may result in a significant tax bill.

What do all of these developments mean?  Wealthy New York individuals and families with estates nearing or in excess of the thresholds discussed may want to seriously consider reviewing their estate plans.  Specifically, New York couples who plan to leave their legacy to their children or other non-charitable beneficiaries will want to ensure a well-designed estate plan has been developed.   Overall, it is vital to consult an experienced financial advisor and estate planning attorney to ensure that your financial legacy is preserved in accordance with your wishes, rather than those of the state.

Disclosure: Modera Wealth Management, LLC (“Modera”) is an SEC registered investment adviser with places of business in Massachusetts, New Jersey, Florida and Georgia.  SEC registration does not imply any level of skill or training.  Modera may only transact business in those states in which it is notice filed or qualifies for an exemption or exclusion from notice filing requirements.  For information pertaining to Modera’s registration status, its fees and services and/or a copy of our Form ADV disclosure statement, please contact Modera or refer to the Investment Adviser Public Disclosure Web site (www.adviserinfo.sec.gov).  A full description of the firm’s business operations and service offerings is contained in our Disclosure Brochure which appears as Part 2A of Form ADV.  Please read the Disclosure Brochure carefully before you invest or send money.

This article contains content that is not suitable for everyone and is limited to the dissemination of general information pertaining to Modera’s financial planning, investing and wealth management services.  Past performance is no guarantee of future results, and there is no guarantee that the views and opinions expressed in this presentation will come to pass.  Nothing contained herein should be interpreted as legal, tax or accounting advice nor should it be construed as personalized financial planning, tax, investing, wealth management or other advice.  For legal, tax and accounting-related matters, we recommend that you seek the advice of a qualified attorney or accountant.  This article is not a substitute for personalized financial or tax planning from Modera.  The content is current only as of the date on which the article was written.  The statements and opinions expressed are subject to change without notice based on changes in the law and other conditions.  

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November 16, 2017, 11:27 AM

Cohabitation Considerations

By Michael Gibney, CFP®, AIF®

As a financial planner, I would recommend evaluating the potential financial considerations of unmarried cohabitation and possibly speak with an attorney to prepare any appropriate legal documentation.  One should consider how they want to title the new property, as each option...

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