There are many high net worth individuals that reside on Long Island, and of course, it is a good feeling to reach your financial goals. This being stated, there are some looming threats to your legacy if you have been able to accumulate a significant store of wealth in the form of death taxes.
Since we are in a new year, there has been a federal estate tax inflation adjustment. In addition to this, a long-awaited change in the state level parameters that was decided upon years ago became active at the beginning of 2019.
Federal Estate Tax
In 2011, a $5 million federal estate tax exclusion was implemented as a result of a piece of tax legislation that was signed into law. Other tax measures were passed during succeeding years, but this base figure was retained with ongoing adjustments to account for inflation. After a series of cost-of-living increases, the exclusion was $5.49 million in 2017.
During that year, there was a major tax overhaul that impacted the estate tax parameters. The estate tax exclusion went up to $11.18 million for 2018, and this is the benchmark going forward unless it is changed via legislative mandate. An adjustment that was applied for this year upped the estate tax exclusion to $11.4 million. The maximum rate of the death tax is 40%.
We should provide some information about how the estate tax applies to married couples. There is an unlimited marital estate tax deduction. This allows you to transfer any amount of money to your spouse free of taxation. Now that same-sex marriages are federally recognized, as long as you are legally married in the eyes of all, you can use this deduction.
In fact, the matter made its way to the Supreme Court because a lawsuit that was filed by a New York woman named Edith Windsor. She was legally married to her partner Thea Spyer in Canada, and when Spyer died and left Windsor a large inheritance, she was required to pay the estate tax. She took the matter to court, and she eventually won out.
There is one caveat to the unlimited marital deduction rule. It only applies to citizens of the United States. There is however an estate planning technique that can be used to mitigate estate tax exposure if you are married to a citizen of another country. We will look at that strategy in a future blog post.
Another benefit that married couples can take advantage of is portability. To explain through the utilization of an example, if you predecease your spouse, the survivor would be able to use your exclusion and their own exclusion.
There is one more facet to cover before we wrap up our explanation of the federal estate tax. To prevent people from giving gifts to avoid the estate tax, there is a federal gift tax in place. It is unified with the estate tax, so the exclusion is a unified exclusion that encompasses your estate along with large lifetime gifts that you give to others.
New York State Estate Tax
The vast majority of states do not have state-level estate taxes, but unfortunately for us, there is an estate tax in New York. It is quite possible to be exposed on the state level even if you are exempt on the federal level, because the New York exclusion is considerably lower than the federal estate tax exclusion. Last year, it was $5.2 million. In 2019, it is $5.74 million, and this is the figure that we utilize going forward. Just like the federal estate tax, there will be adjustments on an annual basis to account for inflation.
There is one major difference between the state and federal estate taxes that is not positive for residents of the Empire State. The federal tax is only levied on the portion of your estate that exceeds the exclusion amount, regardless of the total value of your estate.
Things are entirely different on the state level. If the value of your estate exceeds the exclusion amount by more than 5%, the entirety of your estate is subject to taxation. The rate is graduated, and it maxes out at 16%.
Download Our Estate Planning Worksheet!
We have some great resources that you can tap into on this website, and one of them is our estate planning worksheet. It is being offered free of charge at the present time, and you can click the following link to obtain access to your copy: Smithtown, Long Island Estate Planning Worksheet.