January 22, 2018
By: Edward B. Becker
The increased federal estate tax exemption under the Act can have a significant and unintended impact on the taxation of estates at the state level for New York residents.
In 2014, New York significantly amended its estate tax by adopting a new exemption structure designed to match the federal structure then in effect. Accordingly, the current New York exemption of $5.25 million (adjusted annually for inflation) will continue to apply notwithstanding the change in federal law unless the New York State Legislature enacts an amendment to adopt the now higher federal exemption.
Wills and other dispositive estate planning instruments often contain formula clauses to fund trusts with an amount up to the federal estate tax exemption amount in effect at death. With the doubling of the federal exemption, these trusts may now be funded with significantly larger amounts than what was originally intended and generate an unexpected New York estate tax liability. Moreover, the New York estate tax liability can be especially severe since New York eliminates the benefit of its exemption for taxable estates that exceed the exemption amount by more than 5%.
Consider the following example of a married New York resident that died on January 1, 2018 with a taxable estate of $10 million. The decedent's will included a formula clause to eliminate the imposition of federal estate tax by funding a trust ("credit shelter" or "exempt" trust) up to the then applicable federal estate tax exemption with the remaining estate passing to the surviving spouse estate tax free by way of the marital deduction. Under the new law the estate would incur a New York estate tax liability of $1,067,600. If the decedent's will instead directed that the credit shelter trust be funded only up to the then applicable New York estate tax exemption, the estate would completely escape both federal and New York estate tax on the first spouse's death. Thus, one small change can result in significant estate tax savings.
Since New York does not impose a gift tax on lifetime gifts one way to insure benefiting from the increased exclusion amount and not lose the benefit of the state exemption is to make lifetime gifts of up to the federal exclusion limits.1 If you wish us to review your particular situation please contact us.
1For decendants dying before January 1, 2019 gifts made within three years of death are taken into account for New York estate tax purposes.