April marks the one-year anniversary of sweeping changes that took effect for New York State’s estate and gift-tax laws. New York effectively doubled its exemption from $1,000,000 to $2,062,500 for deaths occurring between April 1, 2014, and April 1, 2015. This year, the exemptionis adjusting the applicable exclusion amount from $2,062,500 to $3,125,000.

The exemption amount will continue to rise annually, through January 1, 2019, when it will be pegged to the federal estate exclusion, which is projected to be around $5,900,000, and indexed for inflation moving forward.1 This would all seem to be positive news, but as they say, “The devil is in the details.”

Ad

New York is one of only 15 states2 with an estate tax, but it also happens to have one of the most onerous ones. The exemption level is among the lowest, and the tax rate is the highest, currently set at 16 percent. The law also outlines a graduated slope, which phases out the applicable credit amount for taxable estates and eliminates the exemption altogether for the estate of any decedent whose New York taxable estate exceeds 105 percent of the basic exclusion amount. A New York State Society of Certified Public Accountants report illustrates how this change, effective in April 2017, could impact you.3

Assuming a basic exclusion amount of $5,250,000, a decedent with a NewYork taxable estate of $5,512,500 would result in New York estate tax of $430,050. In effect, that is an estate tax of $430,050 on the additional $262,500 in estate value, in excess of the basic exclusion amount.

The writer is describing a marginal estate-tax rate of nearly 164 percent. And if that does not give you sticker shock, other problems a rise: For one, all taxable gifts not otherwise included in the federal gross estate and made during the three years ending at the decedent’s death will be included in one’s gross estate to calculate the estate tax. Moreover, the new law fails to come into parity with the federal law when it comes to portability for the surviving spouse.

This is a prime example of where ignorance of the law can hurt you.

Does your state have a separate estate-and gift-tax regime? It is important to be conscious of local estate-tax laws. New York trust and estate attorney Daniel Faizakoff of Daniel B. Faizakoff P.C. adds, “Estate plans are living, breathing entities, and they need to adapt not only to changes in one’s life, but to the constantly evolving complex tax laws. An ongoing close relationship with an estate-planning attorney and a qualified financial planner is essential to minimize tax exposure and to keep hard-earned money in the family and away from the IRS.”

Ad

1 New York State Society of Certified Public Accountants, “Memorandum Concerning Certain Aspects of the 2014–2015 New York State Executive Budget,” January 20, 2104. http://www.nysscpa.org/commentletter/budget14.pdf;

2 Emanuel, Liz, Scott Drenkard and Richard Borean, “State Estate and Inheritance Taxes in 2014,” Tax Foundation, May 28, 2014. http://taxfoundation.org/blog/state-estate-and-inheritance-taxes-2014;

3 New York State Society of Certified Public Accountants, Memorandum, ibid. http://www.nysscpa.org/commentletter/budget14.pdf

This article is not intended as legal or tax advice. Financial representatives do not give legal or tax advice. Taxpayers should seek advice based on their particular circumstances from an independent tax advisor.

Michael S. Schwartz offers advisory services as a representative of Northwestern Mutual Wealth Management Company (WMC), a limited purpose federal savings bank, and a wholly owned subsidiary of The Northwestern Mutual Life Insurance Company, Milwaukee, Wis., (NM). Northwestern Mutual is the fleet name for NM, its subsidiaries and affiliates. Investments held with or managed by WMC are not insured by the FDIC, are not deposits or other obligations of, or guaranteed by WMC or its affiliates and are subject to investment risks, including loss of the principal. Michael S. Sch wartz is an insurance agent of NM (life insurance, annuities and disability income insurance), and Northwestern Long Term Care Insurance Company, a subsidiary of NM, and a registered representative of Northwestern Mutual Investment Services, LLC (NMIS), an NM subsidiary, broker-dealer, investment advisor, member, FINRA, SIPC. Pioneer Financial is a marketing name used by a group of Northwestern Mutual representatives (not all of whom are affiliated with WMC) including Michael S. Schwartz (referred to as the “firm”), and is not a legal entity, partnership, investment advisor, broker-dealer or affiliate of NM. The information contained in this article is not a solicitation to purchase or sell investments or securities. The views expressed herein are those of the author and may not necessarily reflect the views of Northwestern Mutual.

This article was originally published in the April/May 2015 issue of Worth.