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What you need to know about the changes to New York’s estate tax

Estate taxes in New York are changing. A new plan is designed to bring the state’s $1 million exception amount in line with the federal amount just over $5 million over a span of four years. Although it seems promising at a first glance, there are some caveats that could lead to surprising tax rates.

New York is changing its estate tax in 2014. Prior to April 1 of 2014, New York’s State Department of Taxation and Finance allowed for residents of the state to pass up to one million in assets without the need to pay taxes. Beginning on April 1, 2014, the amount jumps to $2,062,500. Although this change may seem beneficial at first glance, there are some important provisions to be aware of when putting together or reviewing an estate plan.

Four year span

The plan begins with a jump from a one million dollar exception amount to $2,062,500. Ultimately, over the span of four years, the plan is designed to result in a total exception amount of $5.25 million. This is scheduled to occur by April 1, 2017 and would put the state’s estate tax rate approximately in line with the current federal rate.

The plan begins with the current jump from $1,000,000 to $2,062,500 through April 1 of 2015. After that date, the exclusion amount jumps to $3,125,000 for one year. After April 1, 2016 the amount is $4,187,500 and after April 1, 2017 the exclusion amount jumps to $5,250,000. The amount taxed by the state from January 1, 2019 forward is designed to link to the federal rate set by the IRS (currently $5,340,000).

The cliff

In addition to being aware of the plan’s timeline, it is also wise to take note of what financial experts are referring to as “the cliff.” A recent article in Forbes addressed this issue, noting that estates that pass amounts over the exemption level may face surprising tax rates.

The potential for massive taxation is so concerning that New York State’s Society of Certified Public Accountants wrote a memo explaining the danger of this cliff. The memo, titled the Report of the New York State Society of Certified Accountants Memorandum Concerning Certain Aspects of the 2014 – 2015 New York State Executive Budget Dated January 20, 2014, provides a specific example. This example looks at the exemption amount of $5.25 million that is to be effective in 2017. Those that leave an estate with $262,500 over this exemption amount face an estate tax of $430,050. That’s a tax rate of 164 percent of the value of the estate above the exclusion amount. This means the tax applies not just to the amount that is over the exemption amount, but to the entire estate.

Legal counsel can help navigate estate planning issues

This most recent change provides an example of how estate taxes are often evolving. Since they are constantly changing, it is wise to seek the counsel of an experienced estate planning attorney. This legal professional will help guide you through the process, better ensuring a more favorable result.

Keywords: estate tax
New York