22 January 2018

How the new federal and New York estate tax exemption could affect your estate plan


Current federal and state estate tax exemption:

Federal law: On December 22, 2017 the President signed into law legislation that represents the most sweeping tax reform in decades (the “Act”), and generally takes effect on January 1, 2018. Prior to the Act being signed into law, the federal estate and gift tax exemption was $5.49 million for 2017. However, the Act increases the federal estate and gift tax exemption to $11.18 million ($22.36 million for married couples) starting January 1, 2018. In addition, the Act also increases the per person generation-skipping transfer (GST) tax exemption to approximately $11.18 million. Under the Act, absent additional legislative action, the increased exemptions will remain in effect through 2025, after which the exemptions will return to the 2017 federal estate tax exemption (adjusted for inflation).

New York law: On April 1, 2017 the New York estate tax exemption increased to $5,250,000 and this will be effective through December 31, 2018. Starting January 1, 2019 the New York estate tax exemption will be greater than $5.6 million and is scheduled to increase annually for inflation.

How this could affect your estate plan:

A very common estate planning technique for a married couple is to fund a trust with the maximum amount that can pass free of federal estate tax with the rest of the estate being sheltered by the unlimited marital deduction, resulting in no estate tax due on the death of the first spouse. However, New York has decoupled its estate tax exemption from the federal exemption, and therefore, New York residents are forced to make a decision. If at death the taxpayer wants to put the total amount they are able to pass free of federal estate tax into a trust they will incur a New York estate tax. Alternatively, the taxpayer can fund the trust with only the amount that can pass free of both New York and federal estate tax in order to not incur any estate tax on the first death. Although decoupling is not something new to New York residents, the new laws significantly impact the way a New York family decides to structure their estate plan.

With the passage of the new tax law and increased federal estate tax exemption, the cost of decoupling is bigger than ever before. An estate plan which directs the full amount that can pass free of federal estate tax into a trust will incur $1,258,800 in New York estate taxes in 2018.

What should you do:

Structuring your estate plan to minimize New York estate tax will depend on the value of your estate, your age, and your family situation. There are a number of options available that forgo the full use of the federal estate tax exemption and will result in no New York estate tax being incurred on the death of the first spouse. This is likely a desirable option for young families or families that have an estate of less than $30 million. Various types of marital trusts, outright marital bequests and devises, and federal portability can be effectively used to avoid New York estate tax on the first death.

An alternative option is to fund a trust with the amount that can pass free of federal estate tax, which is $11.2 million in 2018. This is likely more advantageous for families with estates significantly larger than the couples' combined* federal* estate tax exemption.

New York does not have a gift tax, and therefore, a family could make gifts during their lifetime to avoid the New York estate tax. However, it should be noted that gifts made within three years of the taxpayer's death will be added back to the taxpayer's estate if the taxpayer dies prior to January 1, 2019.

Next Steps:

This Tax Alert cannot effectively address or even summarize the myriad of changes imposed by the Act and does not cover many other changes that might affect your particular situation. Because your situation is unique, this Tax Alert also does not provide tax or planning advice tailored to your exact circumstances. We therefore invite you to contact us to review your estate planning and discuss tax planning considerations with you in light of the Act. To determine what impact tax reform will have on you and what opportunities exist, you should speak with your Withers Bergman attorney.

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