February 28, 2021
There are a few things to keep in mind as taxes for FY 2020 are being compiled, particularly when it comes to high-net worth estates.
For one, it should be understood that the New York Estate Tax is a “cliff tax.” That is, the value of the entire estate will be subject to the New York Estate Tax, with no available exemptions, if its value is over 105% of the current Estate Tax exemption. As it stands, the “cliff” for estates in New York this year is at US$5.85 million, therefore estates that are valued at over approximately US$6.143 million or over would not be entitled to any Estate Tax exemption. Note that the exemption amount (which the New York State Department of Taxation and Finance refers to as the “Basic Exclusion Amount”) has increased to US$5.85 million from the 2019 amount of US$5.74 million. Also note that the exemption will increase again on January 1, 2022, this time from US$5.85 million to US$5.93 million.
There are differing tax rates for these kinds of estates, and they range from 3.06% to 16%. The entire value of estates includes taxable gifts that were made by the decedent while he/she was a resident of New York State within three (3) years of their passing. Note that the federal gift tax may be applicable in this scenario, and could apply if an estate gift is above a certain financial threshold (for example, in 2017, the federal gift tax applied for gifts of over US$14,000.) Estates whose entire value is at or over US$10.1 million are subject to the highest Estate tax rate of 16%. The effective value of such estates can be lower, depending on the deductibility of New York Estate taxes paid for purposes of federal estate taxes, and that could take the New York estate tax rate down to the 3.06% tier for an estate.
Below is a chart of the New York Estate Tax Rates and tiers.
| NEW YORK ESTATE TAX RATES | |||
| Taxable Estate* | Base Taxes Paid | Marginal Rate | Rate Threshold** |
| $1 – $500,000 | $0 | 3.06% | $1 |
| $500,000 – $1 million | $15,300 | 5.00% | $500,000 |
| $1 million – $1.5 million | $40,300 | 5.50% | $1 million |
| $1.5 million – $2.1 million | $67,800 | 6.50% | $1.5 million |
| $2.1 million – $2.6 million | $106,800 | 8.00% | $2.1 million |
| $2.6 million – $3.1 million | $146,800 | 8.80% | $2.6 million |
| $3.1 million – $3.6 million | $190,800 | 9.60% | $3.1 million |
| $3.6 million – $4.1 million | $238,800 | 10.40% | $3.6 million |
| $4.1 million – $5.1 million | $290,800 | 11.20% | $4.1 million |
| $5.1 million – $6.1 million | $402,800 | 12.00% | $5.1 million |
| $6.1 million – $7.1 million | $522,800 | 12.80% | $6.1 million |
| $7.1 million – $8.1 million | $650,800 | 13.60% | $7.1 million |
| $8.1 million – $9.1 million | $786,800 | 14.40% | $8.1 million |
| $9.1 million – $10.1 million | $930,800 | 15.20% | $9.1 million |
| Over $10.1 million | $1.082 million | 16% | $10.1 million |
There are a number of maneuvers that can be used to either avoid or mitigate the impact of New York Estate taxes on an estate.
One could move themselves, or their assets, out of New York. However, it may be difficult to relocate oneself, either due to family ties, job commitments, financial constraints, or the prevailing socio-political situation at the destination. One should consider the applicable estate taxes and laws for the destination to which he/she considers moving.
One could also make gifts in excess of the exemption or “Basic Exclusion Amount” to reduce the size of their taxable estates. This is made easier by the fact that New York does not have a gift tax. However, one should be mindful of the gift they choose to make, especially of low-basis or low value assets that could accrue in value prior to the time of the giftor’s passing.
One could also make charitable contributions through adding charitable bequests to their wills or trusts. This would work especially if it reduces the size of the overall estate to the “Basic Exclusion Amount” (or otherwise bring the estate back from the “cliff” described above), and allow for more assets to pass through to the estate’s heirs.
Married couples should be aware of the Spousal Lifetime Access Trust (SLAT) if they are worried about gifting in excess and want to ensure that gifted amounts are available to be distributed to their spouses. They should also be aware of other trust options, such as a “credit shelter trust” (or a “bypass trust”), and a disclaimer trust. The former would allow for assets to be sheltered from taxation, and can be funded up to the exclusion amount – thus locking in the benefit of the exclusion amount in the event of the passing of one spouse before the other. The latter would allow the surviving spouse to assess the circumstances at the time of the first spouse’s passing, and determine whether a trust to shelter the estate’s “Basic Exclusion Amount” is advisable at the time of its creation. They should also reposition assets between them to resolve any asset/wealth disparities that exist, such that it would allow one to take advantage of the New York exclusions.
These strategies and techniques can be used for high-net worth estates, but they should be considered as well for other estates. Particularly in the event of windfalls, positive changes in financial circumstances, or otherwise. They would be of benefit to those that need to consider solutions for heirs in the event that there are issues with the passing through of assets. They would also benefit spouses that desire solutions for their assets passing through without estate tax difficulties.
Disclaimer: This Blog provides general information and a general understanding of the law, but does not provide specific legal advice. By using this site, commenting on posts, or sending inquiries through the site or contact email, you confirm that there is no attorney-client relationship between you and the Blog publisher. The Blog should not be used as a substitute for competent legal advice from a licensed attorney in your jurisdiction.
Kelechi Onwuchekwa Esq. 