Now that we are halfway through 2013 and the federal estate tax debate is far behind us, it is a good time to remember that as New York State residents, we are still subject to the state estate tax.  A common phrase is, “Estate tax, I’m not wealthy enough to have to worry about that!” Unfortunately, the NYS exemption is far lower than the federal government exemption and can cost families that do not prepare for it.

Do I Need to Worry About Estate Taxes?

Reaching the New York estate tax limit of $1m is easier than most people think.  An individual’s estate includes much more than just investment assets.  The estate calculation also includes property owned, life insurance contracts, and even pensions payable after death.

Federal vs. New York State Estate Tax Differences

Federal and New York State have rules that differ and those differences greatly affect financial planning.   The individual estate tax limit for New York is far lower than the federal estate tax limit.  Additionally, the lower New York State exemption limit does not allow for portability (The ability to transfer unused estate tax exemptions to a surviving spouse.  Portability essentially doubles the estate tax limit for a couple.)  The table below shows the key differences between the two estate tax laws.

.                                                                                               Federal                                  New York

Individual Exemption Limit (2013)                        $5.25m                                  $1.00m

Taxation Percentage Above Exemption                   40%                                        5%-16%

Portability                                                                              Yes                                          No

Annually Adjusts For Inflation                                      Yes                                          No

Gift Tax Limit                                                                     $5.25m                                  None

Double Trouble

If potentially owing New York State estate taxes leaves a sour taste in your mouth, then the knowledge of double taxation compounds the flavor.  When pre-tax retirement assets are left in an estate (Traditional IRA, 401(k), 403(b), etc), not only are they included in the estate tax total due, but the recipients of the pre-tax accounts will also have to pay ordinary income taxes on the account when the money is withdrawn.

Potential Solutions

An AB Trust is no longer needed to avoid most federal estate taxation issues; however it still has a very important place in New York State estate taxation.   Since New York does not allow for portability between spouses, having each spouse fully utilize the $1m exemption can avoid $99,600 (2013) of estate taxes due.

Family gift planning can also reduce the New York estate tax by establishing a plan of distributing estate assets prior to death. For the federal tax system, every individual is allowed to gift up to $14,000 per person in a calendar year (2013).  In a case of a couple with 4 married children, they may exclude $224,000 annually from their potential estate.    (2 in the couple X 8 children and spouses * $14,000)

In addition to the $14,000 per personal annual gift, New York State does not impose a taxation limit on gifts, only on estates.  Toward the end of an individual’s life, there is a possibility to gift up to the federal estate tax limit ($5.25m) without federal or New York State taxation.  Gifting above $14,000 per person annually will reduce the federal estate tax limit upon death.

When In Doubt, Ask!

Estate taxes can be a very complex issue and should be looked at in conjunction with an entire financial plan.   If you believe you are in an estate tax scenario, please contact us and we can help you determine the best course of action.