It’s common to hear fans of the estate tax dismiss the concerns of families who might be worried that their estates might one day be subject to the tax. The arguments against such concerns range from the common “it only affects a tiny portion of estates” to “it’s a tax assessed after you are dead, so why do you care?” Given that many people still have concerns about how this tax can affect their estates, it is clear that such arguments do little to put anyone’s mind at ease. For residents of the state of New York, however, those arguments often carry even less weight. After all, even if your estate is not large enough to be impacted by the federal tax, it may still be subject to New York estate taxes.
The Basics: Federal Estate Tax vs New York Tax Rates
It is important to understand why New York residents should not simply assume that they are free from estate tax concerns just because they fall below the federal threshold. That federal limit exempts all estates below $5.45 million from any estate tax obligations. As a result, it is true that only a small percentage of estates will ever be subject to that tax. For people in New York, however, there is an added concern: the state estate tax. And since the state only exempts estates worth less than $4,187,500, some estates which are free from federal obligations may still have to pay New York’s tax.
The only bright spot in that scenario is the difference in the tax rates. While the federal rate is currently 40%, New York’s estate tax is a minimum of 5%, with a maximum rate of 16%. Of course, that will provide limited comfort for those whose estates are large enough to be subject to both. Moreover, there are some variances within the tax scheme that could leave your estate owing even more than that.
The Exemptions in New York
The exemptions that are part of the current law are set to increase through 2019. At that point, the intent is that both the New York exemption amounts and federal limits will match one another – with both taxes exempting close to the first six million dollars of any estate’s value. Barring changes, the exemptions for both will then rise at the same rate so that New York’s estate tax reflects that of the federal tax.
A Major Difference
The current law in New York provides for a very different outcome than the federal law and the estate tax laws of other states. Estate taxes in New York treat estates subject to the tax in a way that those other laws tend to avoid. This is something that estate planners need to take into consideration when dealing with estates subject to New York’s provisions.
Under the federal estate tax rules, estates that exceed the exempt amount will be subject to the tax – just as in New York and every other state. However, unlike New York, the federal law and other state laws only tax the excess amount of the estate’s value. That means that if an estate were worth $5.55 – $100,000 more than the exemption limit, then the federal government would tax the amount that exceeds the exemption. That tax would amount to 40% of the $100,000. A similar system is used in other states that have the estate tax in effect.
New York, however, has a different scheme. Under its plan, an estate that was valued at $100,000 more than the state’s $4,187,500 exemption limit would be taxed on the entirety of the estate. Yes, all $4,287,500 would be subject to the tax. In that example, the estate would be able to save hundreds of thousands of dollars in taxes just by reducing its total value by that excess $100,000 amount. The possibility of that type of outcome makes sound estate planning more important than ever.
Of course, it is also important to remember that all property left to spouses continues to be exempt at both the federal and state levels. This marital deduction can be in any amount, and applies to all married couples.
As you might expect, it is the responsibility of the estate’s named Executor to file the New York estate tax return. This is true for all estates that have values in excess of the exemption amounts, even if legally permitted deductions would cause the estate to be worth less than the exemption amount. This is true for estates of people residing in New York as well as for those who live in other locations but who have real estate or other valuable property in the state.
Executors must calculate the value of the estate by including all of the decedent’s non-exempt assets. That includes the value of any real estate owned in the state, as well as vehicles and personal belongings to which a value can be attached. Financial accounts must also be included: savings and checking accounts, certificates of deposit, stocks, bonds, and other investments, life insurance policies that are not transferred to a trust or other owner, and even the value of retirement accounts. Business interests should be assessed and included as well. When it comes to the estate tax, virtually everything that you own gets added to the state’s calculations.
Making Sense of it All
It is only natural that you might want to take steps to limit your estate’s exposure to the estate tax. After all, every dollar in tax taken by either the federal taxing authorities or those in New York is one dollar less that goes to your heirs or charitable interests. The bad news is that navigating through these tax questions can be a daunting tax for all but the most experienced professionals. The good news is that an experienced estate planning attorney can help you to understand New York estate taxes and properly prepare for them. At the Law Offices of Mary A. Miller, P.C., we can provide the assistance you need and help you plan ahead so that you can address these tax issues the right way. Contact us online or give us a call at (914) 939-6565 today to learn more.