There are a lot of great things about living here in New York, but as we all know, taxes can be a bit stifling. Of course, there are the taxes that you must pay throughout your life, and people that have enjoyed a high level of financial success have to be concerned about death taxes.
On the federal level, the estate tax carries a 40% flat rate, and this is a figure that is high enough to get your attention. It is applicable on asset transfers that exceed $11.4 million. This amount is called a federal estate tax credit or exclusion.
Where does this number come from? When the new tax package went into effect in 2017, there was a change that impacted the estate tax. The exclusion was essentially doubled to $11.18 million. This is the benchmark, and there are annual adjustments to account for inflation. Next year, we will probably see a figure that is a bit higher than $11.4 million.
There is an unlimited marital deduction that allows you to transfer any amount of property to your spouse free of taxation, as long as your spouse is an American citizen. Since same sex marriages are recognized by the federal government, this applies to all legally married people. In fact, the case that turned the tide in this regard was initiated by New Yorker Edith Windsor, who passed away in 2017.
The federal estate tax was initially enacted in 1916, and, at that time, people that were exposed gave gifts to their loved ones to avoid the tax. In 1924, gift tax legislation was signed into law to close this window of opportunity. This tax was repealed in 1926, but it was reenacted in 1934. It has been in place ever since then.
Because of the existence of the gift tax, you cannot give everything to your loved ones to avoid the estate tax, but you can give some tax-free gifts. The $11.4 million exclusion is a unified exclusion that applies to large lifetime gifts and the estate that will be passed along to your loved ones after you die. However, there is also an annual gift tax exclusion that is separate from this unified exclusion.
At the time of this writing in 2019, the amount of the annual exclusion is $15,000 per person. You can give this much to any number of gift recipients in a given year tax-free, and there is no limit on the total amount, as long as you do not give more than $15,000 to any one person.
There are a couple of other types of gifts that can be given free of taxation on the federal level. If you want to pay college tuition for others, there is no gift tax liability. This also applies to medical bills that you pay for other people, including health insurance premiums.
State-Level Estate Tax
It is the exception rather than the rule, but there are some states in the union that impose state level estate taxes, and New York is one of them. As it compares to the federal estate tax, there is good news, and some bad news. The exclusion is just $5.74 million, so you could be exposed on a state level even if you are federally exempt.
Plus, there is a New York State estate tax exclusion “cliff” that can enter that picture. If the value of your estate exceeds the exclusion by more than 5%, the entirety of your estate would be subject to the tax—not just the portion that exceeds $5.74 million.
Now for of the good news: there is no state-level gift tax in New York. As a result, you could give gifts to your loved ones to get around the state level estate tax.
Attend a Free Estate Planning Workshop!
You reached this website because you are looking for information about estate planning, and there are many published resources right here that you can use to build on your knowledge. In addition to this, our Rochester estate planning attorneys offer workshops on an ongoing basis.
There is no charge to attend these sessions, but we do ask that you register in advance, because space is limited. To get all the details, visit our workshop page and follow the simple instructions to register for the session that works for you.