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New York’s estate tax exemption increasing to federal levels

This spring Governor Andrew Cuomo signed into law a measure that will increase the state's estate tax exemption amount incrementally through 2019 until it matches the federal estate tax exemption. For the long-term the law is intended to lower estate taxes. In the short term, it can create complex estate tax laws that require planning in order to avoid high estate taxes.

Currently, federal law allows the first $5,250,000 of an estate to pass to heirs untaxed. For 2014, New York taxes any estate valued at just over $2 million. This is up from the $1 million it was in 2013, but still an amount that many New Yorkers meet.

Importantly, estates at or above 105 percent of the exemption amount will face a "cliff" under the new law. While many more people will have their estates exempted for death taxes, those estates above the exemption amount will have their entire estate taxed. As an illustration, if an individual's estate is worth $1,000, over the exemption amount, he or she will be taxed for $1,077. If the estate is $100,000 over, he or she is taxed $109,729.50. So an estate valued at $2,165,625 in 2014 owes $112,050 in state death taxes.

If that resident moved to Florida he or she would need an estate of $5.34 million in order to reach the same amount of tax.

And the top rate for estate taxes in New York is 16 percent - a much higher average than other states in the nation. The combination of the estate tax cliff and a high estate tax rate has led many wealthy New York residents to "move to die," a phrase Governor Andrew Cuomo used when describing why the change in the law was needed.

In addition to changes to the estate tax, New York will also begin taxing certain resident trusts that have traditionally not been subject to the state income tax.

Estate planning

Many New Yorkers have an estate valued higher than they expect. Real estate, retirement benefits and other illiquid assets can pile up quickly.

Fortunately there are ways to reduce an estate to minimize taxes. For example, an individual can make annual gifts up to the exclusion amount. However, New York has a three-year "look back" period. This means that gifts made three years prior to death are considered as part of the estate.

Charitable gifts, irrevocable trusts and other tools may help reduce estate taxes. Individuals who have much of their wealth tied up in real estate or a business may wish to create a life insurance trust in order to have the cash to pay estate taxes.

A good estate plan depends highly upon individual circumstances and the desires of the person creating the estate plan. New Yorkers concerned with how their estate will be divided and taxed should consult with an experienced estate planning attorney to discuss their options.

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