Each year, there are updates to certain figures that are relevant to estate planning because adjustments are made to account for inflation. Now that we are in a new year, there has been a relatively minor increase in the amount of the federal estate tax exclusion.

The exclusion is an amount that can be transferred before this death tax would be imposed on the remainder of an estate before it is transferred to the heirs. It was essentially doubled when the tax laws were changed for the 2018 calendar year. At that time, the exclusion was set at $11.18 million.

In 2019, it was raised to $11.4 million, and we have another adjustment that will apply for the remainder of 2020. The current estate plan exclusion stands at $11.58 million. If you are married, with proper planning the surviving spouse would be able to use both exclusions, bringing the number up to $23.16 million.

Speaking of the estate tax as it applies to married Americans, there is an unlimited marital estate tax deduction. Spouses can transfer any amount of property between one another free of taxation. However, relying on this deduction alone can result in the loss of one spouse’s exclusion amount.

This tax carries a 40 percent maximum rate, so it can take a hefty bite out of your legacy if you are among the relatively few with an estate large enough to trigger the tax.

It would be logical to resolve to give gifts to your loved ones to avoid the estate tax. This would essentially be an exercise in giving them their inheritances in advance.

The powers that be put a stop to this for good in 1932 when a gift tax was established. This was 16 years after the estate tax was originally enacted.

During the 1970s, the gift tax and the estate tax were unified under the tax code. As a result, the exclusion is a unified exclusion. It applies to large gifts that you give during your life along with the estate that will be transferred after you are gone. However, with proper planning lifetime gifting can be leveraged to pass a large estate free of the tax.

New York Estate Tax

Most states in the union do not have state-level estate taxes, but there are some that do, and New York is one of them. To add to the bad news, the exclusion in our state is much lower than the federal exclusion, but it did go up a bit in 2020. Last year, it was $5.74 million, and it is currently $5.85 million.

When we were looking at the federal estate tax, we touched upon the fact that a surviving spouse could use the exclusion that was allotted to his or her deceased spouse. This dynamic is called “portability” in this context. Unfortunately, the New York State estate tax exclusion is not portable. Proper planning can preserve each spouse’s exclusion amount.

On the other side of the coin, there is a difference between the two taxes that is positive for taxpayers in New York. There is no state-level gift tax to contend with, so you can give money to your loved ones before you pass away if you are going to be exposed to the death tax.

One caveat to this would be that there is a “claw back” rule in the Empire State. To avoid the estate tax, you would have to complete the gift giving at least three years before you pass away.

Another unique thing about the New York state estate tax exclusion is the so-called “cliff.” If the value of your estate is more than 5 percent above the exclusion amount, the entirety of the estate would be subject to taxation. You would not be able to use any of the exclusion to defray your liability.

Attend a Free Workshop!

If you would like to learn more about a wide range of different estate planning topics, we have some great opportunities coming up in the near future. Our attorneys are conducting a series of workshops, and we are getting a lot of great feedback from people who attend these sessions.

There is no charge at all, so you have everything to gain and nothing to lose. To see the schedule and obtain registration information, visit our estate planning workshop page.