We are going to look at a couple of the unusual provisions that are part of the New York state estate tax parameters in this post. However, before we proceed, we should explain the basic framework for the federal estate tax so you are fully informed.
High Net Worth Individuals
This tax only applies to very wealthy people, because you can transfer a certain amount before the estate tax would kick in. The threshold is called the credit or exclusion, and after a tax cut was enacted for 2018, the exclusion was essentially doubled to $11.18 million
Since then, there have been adjustments to account for inflation. During the 2020 calendar year, the exclusion is $11.58 million, and it will be somewhat higher next year when another inflation adjustment is applied.
You do not have to be concerned about your spouse paying a tax if you leave them a great deal of property. There is a marital deduction that allows you to transfer unlimited assets to your spouse free of taxation, as long as you are married to a citizen of the United States.
The estate tax has been portable between spouses since 2011. As a result, if your spouse was to predecease you, you would be able to use your exclusion and your spouse’s exclusion.
There is a gift tax in our country as well, and it exists to stop people from giving gifts to avoid the estate tax. The two taxes are unified under the tax code. Because of this, the $11.58 million exclusion that we have this year encompasses significant gift giving along with the estate that will be transferred after you are gone.
New York State Estate Tax
Now we can move on to the peculiarities of the New York state-level estate tax. The exclusion is about half of the federal exclusion at $5.85 million, but this lower exclusion is in line with other states that have estate taxes.
The rate of the tax is graduated depending upon the size of the estate. It starts at 5 percent, and it maxes out at 16 percent.
Estate Tax Exclusion Cliff
One of the oddities that we have here in New York is a provision that has been dubbed the “estate tax exclusion cliff.” If the value of your estate is more than 5 percent over the amount of the exclusion, the entirety of your estate would be subject to the estate tax; you not get to use any exclusion at all.
The first question you would logically ask when you learn about the existence of the state-level estate tax would be about lifetime gift giving. As we have stated, there is a federal gift tax, but there is there a New York gift tax?
In the good news department, the answer is no, but there is a caveat that is a very significant. If you give gifts within three years of your death, the value of the gifts would be added to your estate for tax purposes. This is called a “claw-back” provision.
So even though there is no gift tax per se, the claw-back maneuver is essentially tantamount to a gift tax.
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If you are exposed to any type of estate tax, there are steps that you can take to gain tax efficiency. The ideal course of action will depend upon the circumstances, and we are well-positioned to give you the advice that you need.
Our attorney can gain understanding of your situation and help you position your assets optimally with estate tax efficiency in mind.
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