Danger! Don’t Get Too Close to the New York Estate Tax Cliff

Danger! Don’t Get Too Close to the New York Estate Tax Cliff

The term “estate cliff” is used because the effect of your estate going over this cliff is close to the equivalent of your body going over an actual cliff. More specifically, a very tall cliff. Even more specifically, a very tall cliff with jagged rocks and rabid coyotes at the bottom. Let’s find out why that is!

DEFINING THE ESTATE

Before we can calculate the estate tax, we need to calculate the value of the estate. The New York State gross estate of a deceased resident equals his or her federal gross estate after several adjustments, such as reductions for property located outside of New York and increases for certain gifts made by the decedent. This amount is then reduced by certain deductions, and voilà, we have the New York State taxable estate for New York residents.

For deceased nonresidents, the taxable estate is further decreased by the value of intangibles and taxable gifts that were otherwise includible in the decedent’s New York State gross estate.

This description intentionally oversimplifies the calculation. Luckily for you, there are people who will do the calculations for you! And the only thing they ask for in return is money!

EXCLUSION

So now you (or someone else) figured out the value of your New York estate. Great news, not all of it is subject to tax. If a New York estate is less than the exclusion amount, it will not be subject to New York estate tax. Previously, the exclusion amount was $1 million. The exclusion amount is scheduled to increase periodically, as follows:

After January 1, 2019, the basic exclusion amount will equal the federal basic exclusion amount and will be indexed for inflation annually. There is also a credit allowed against estates that exceed the exclusion amount by not more than 5%.

THE CLIFF

Ok, to recap, exclusions, credits, estates, cliffs, coyotes, what were we talking about again? Some examples might put these issues in perspective. Recall that the exclusion amount for dates of death before April 1, 2015 is $2,062,500. Because the current date is prior to April 1, 2015, we will use the current exclusion rate in our examples.

For these examples, we will begin by murdering three people. RIP. Their New York taxable estates are as follows:

Alice’s New York estate of $2,062,000 will pay no estate tax because it is under the exclusion amount. That is pretty easy, right?

Brian’s New York estate of $2,100,000, instead, exceeds the exclusion amount, but not by more than 5%, so it receives a credit. The total estate tax liability for this estate will be $49,308. Trust the math, I’m an accountant.

You’re still following, right? Here’s where it gets confusing. Not confusing as in, difficult calculations, but confusing as in, makes no sense from a policy perspective. But hey, no difficult calculations, so there’s that.

Brian’s estate is worth $38,000 more than Alice’s, ($2,100,000-$2,062,000). The difference in tax paid by Brian’s and Alice’s estate tax paid nearly $50,000, ($49,308-$0). The tax policy concept of horizontal equity calls for taxpayers in comparable positions to be treated similarly. The two hypothetical estates are in very similar situations, but face very different tax liabilities. But, even if you don’t want to use fancy terms like “horizontal equity,” it’s probably somewhat obvious that an increase in tax liability should NEVER exceed the increase in value. Put simply, an extra $1 in value should not trigger a tax of $2. But if it makes you feel any better, Brian and his estate are completely made up for this example. No one got hurt. Yet.

Are you outraged? Oh right, this is a tax article, I’m lucky that you’re not asleep. But prepare to be outraged, because it gets worse. Brian’s estate exceeded the exclusion by less than 5%, meaning it was eligible for a credit. What happens if an estate exceeds the exclusion amount by more than 5%?

Enter Chris, whose estate is valued at $2,165,625. This estate will not be eligible for a credit, and will face a tax liability of $112,052. Chris’ estate is worth approximately $65,000 more than Brian’s ($2,165,625-$2,100,000). However, Chris’ estate pays $60,000 more in estate tax than Brian’s ($112,052-49,038). This means that for almost every dollar of increased value, there is nearly a dollar increase in tax. Compare the amounts left after the estate tax for Brian and Chris’s beneficiaries. I urge you to do the math here, because I can’t even bear to write the numbers on paper. (Hint: The amounts are the same after tax.)

SO WHAT SHOULD YOU DO?

You don’t want to fall off the cliff, right? Oh look! There’s a phone number on this page. Maybe you should call it. Maybe the person on the phone can help you maximize your tax advantage. (Hint: Yes, they can.)

Need More Information?

If you have any questions about this Tax Tip, please contact your WithumSmith+Brown professional, a member of WS+B’s National Tax Services Group or email us at [email protected].

David Springsteen, CPA, MBA
Practice Leader, Tax Services Group
609.520.1188
[email protected]

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