What is the Estate Tax? How Tax Reform Altered the NYS and Federal Estate Tax in 2018

As a NY estate lawyer with twenty years of experience probating the most complicated estates in New York I am amazed at the evolution of the estate law.  When I began practicing NY estate law two decades ago the Federal Estate Tax Exemptions, the amount of wealth you could pass to your heirs free of the dreaded estate tax, was a paltry $675,000.00 per individual. However, if your estate was greater than the above-mentioned limit, your entire NY estate would be subjected to the 48% tax at the federal level and another 16% at the New York State level.  That resulted in a whopping combined sum of 64% estate tax liability.  Seeing that kind of transference of wealth go out the window was painful regardless of how much money you already had.  In fact, these death taxes were an insult to the aggrieved family already suffering the loss of their loved one.  If their loss was not hard enough these families were only then realizing they were about to be relieved of their inheritance as well.  The individuals most often penalized by these byzantine estate laws were the less savvy who often lacked access to quality legal counsel.

In 2013, the Federal Estate Tax underwent a substantial overhaul when Congress passed the American Taxpayer Relief Act.  This piece of legislation permanently lifted the federal estate tax exemption to $5 million dollars per individual and $10 million dollars for married couples.  Furthermore, Congress lowered the effective federal estate tax rates from the onerous 45% to 35%.  As such any and all estates greater than the allotted amounts would be subjected to the 35% tax rate as opposed to the inordinate 45% rate.  This was the estate tax’s equivalent of coming out of the stone age and into the 21^st century.  After all, most estates that include real property easily pierce the prior $675,000.00 threshold.

I can honestly say as a NY estate lawyer that The Taxpayer Relief Act is one piece of legislation that actually lived up to its name.  In fact, each year the amount of tax exemption at the federal level under this legislation automatically increases to adjust for inflation.    The only issue with this law was that it did not address the issue of New York State’s estate tax.  In 2013 NYS maintained a progressive estate tax scale on any and all assets above $1 million dollars.  This meant that while estates could enjoy $10 million dollars of tax exemption at the federal level, the same estate would still be penalized with New York’s 16% tax rate at the state level.  As such, if you passed away in 2013 with $10 million dollars, your estate would not be taxable at the federal level, but would still incur a $1.6 million estate tax liability at the New York State level.  This disparity was not the intended estate tax consequence of the Taxpayer Relief Act.   After all what good was the benefit of the increased estate tax exemptions at the federal level if NY estates would still be penalized at the state level?  This discrepancy often resulted in an unfair tax consequence for New York families who failed to properly plan their estates.

Recognizing this incongruence between the Federal and NYS estate tax exemptions, Governor Cuomo raised the NYS exclusion amounts in 2014 and enacted a progressive gradual annual increase of New York State’s estate tax exemption.  As of April 1, 2017, the New York State estate tax exemption was $5,250,000.00 per individual and $10,500,000.00 for married couple.  In New York State, these are the current exemption levels and will remain in effect until January 1, 2019.  After January 1, 2019 the New York State estate tax exemption was scheduled to match the federal exemption levels.

Estate Tax Exemptions in 2018

As If previous estate tax exemptions were not helpful enough, Congress’s Tax Reform Act of 2017 raised the federal estate tax exemptions even further.  In December of 2017 Congress decided to more than double the existing rates to $11,200,000.00 of federal estate tax exemption per individual and $22,000,000.00 for married couples effective 2018.  And since New York’s estate tax exemptions are scheduled to mirror federal levels as of January 1, 2019, the New York State levels will follow suit, right?  WRONG.  At the New York State level if your estate is above $5,600,000.00 then your entire estate may still be subject to the 16% NYS estate tax.  This is where there is some confusion.  While in 2014 New York’s Estate Tax was scheduled to mimic the Federal Estate Tax exemptions which in 2019 would be $22 million dollars, the laws did not count on the recent hikes at the federal level.  As such, New York State’s Estate Tax exemption is only scheduled to be $5,600,000 this coming year per individual and possibly $11,200,000.00 for married couples.  I say possibly because unlike their federal counterpart which provides for portability New York State does not.  What this means is for a married couple to avail themselves of the full $11,200,000.00 estate tax exemption at the NYS level they will have to preplan with the formation of a will that includes Generation Skipping Trust language, also known as an Exemption Trust.

While the current administration fell short of a complete repeal of the federal estate tax, as a New York estate lawyer I would say they came pretty close.  $22 million dollars in estate tax exemption at  the Federal level is a lot of money for the vast majority of families.  These inflated levels alleviate tax liability concerns for all but the super wealthy.

However I do have many reservations with the NY estate law’s failure to either repeal its estate tax completely or match the federal exemption levels.  I also take exception to the lack of portability that currently applies to NY estates.  While the only concern with the Tax Reform Act at the federal level I have as a NY estate lawyer is its January 1, 2026, sunset provision.  The Act’s sunset provision resets the tax exemptions back to their previous levels if Congress does not vote to extend them past the 2026 deadline.

One additional Estate Tax benefit from the Tax Reform Act is its increase of the Gift Tax Exemption amounts from $14,000.00 to $15,000.00.  The Gift Tax Exemption is the amount of money you can gift to someone without incurring any gift tax liability.

As a NY estate lawyer I can honestly say the current Estate Tax Laws are offering hard working families access to an unprecedented transference of wealth from one generation to another with very little estate planning required.  Heirs of individuals who were not savvy and failed to plan their estates can now take advantage of these increased exemption rates preserving the wealth that would have been previously lost.  However, some minimal steps and estate planning solutions should still be taken to protect estate assets from both litigation and the NYS estate tax.  The easiest way to protect an estate from protracted, costly litigation is with a simple will.  Under the above-mentioned exemption amounts, a simple will can currently transfer vast amounts of estate assets free of any estate tax liability at both Federal and NYS levels.

If you or someone you love is thinking about planning their NY estate, you may want to start with a simple will.  Feel free to call an experienced NY estate lawyer at The Law Offices of Jason W. Stern & Associates, at (718) 261-2444 for a free consultation.  Our Queens estate lawyers have nearly 50 years of combined NY estate law experience handling some of the most complex estates in the counties of Queens, New York, Kings, Bronx, Westchester, Rockland, Nassau, Richmond, Orange, Dutchess as well as in the State of New Jersey.