Avoiding the New York Estate

Avoiding the

New York Estate Tax Cliff

By Nicholas S. Proukou, ESQ 585-944-9861; nick@kroll-lawoffice.com

New Yorkers with estates greater than $6,110,000 are subject to New York Estate Tax. This poses a problem for married couples with assets that may end up exceeding this figure. Failing to employ estate tax planning can result in falling off what practitioners sometimes refer to as the NYS Estate Tax Cliff. This article will briefly summarize this estate tax risk and use of Disclaimer planning to keep married couples from “falling off the cliff.”

The risk is simple. The spouses never update their estate planning documents, all of the assets fall to the surviving spouse, and the surviving spouse now owns assets that exceed $6,110,000. Since the NYS estate tax exemption is a use it or lose it exemption, the failure to use the predeceasing spouse’s exemption leaves the surviving spouse with all of the marital assets and half the estate tax exemption that was otherwise available to the couple.

This problem is compounded by NYS law because estates that exceed the exemption amount are taxed on the entirety of their value; NOT the value of the estate that exceeds the exemption. As a rule of thumb, you can estimate the estate tax due for an estate that exceeds the NYS estate tax exemption as slightly less than ten percent of the gross value of the estate.

Consider a hypothetical couple with combined assets of $6,500,000 equally divided between them. A simple estate plan, leaving everything to the surviving spouse, would result in $574,000 of NYS estate tax on the surviving spouse’s death.

See illustration 1.

Illustration 1

Illustration 2

There is no tax illustrated on the first spouse’s death because the assets are passing to the surviving spouse. This is a result of the “unlimited marital deduction.” The IRS views the spouses as an economic unit and does not impose tax on transfers between the spouses. On the surviving spouse’s death, however, Spouse 2 has a $6,500,000 estate and an exemption of only $6,110,000. Consequently, Spouse 2’s estate has gone over the tax cliff and is subject to $574,000 of NYS estate tax, which could have been avoided with the proper planning.

Disclaimer will planning is one type of estate tax planning that reduces and sometimes eliminate this tax bill altogether. See illustration 2.

As you can see, on the first spouse’s death the survivor can either inherit outright or disclaim into the disclaimer trust. This is an important distinction because the assets in the disclaimer trust are outside of the surviving spouse’s taxable estate, while assets inherited outright are included in the surviving spouse’s taxable estate. Disclaimed assets can then grow without further exposure to estate tax at the surviving spouse’s death, and help keep surviving spouse’s taxable estate lower. In this example, spouse 2 elects to disclaim the entirety of spouse 1’s estate into the disclaimer trust.

During spouse 2’s lifetime, spouse 2 is in control of the disclaimer trust as the trustee, and may make distributions to him-herself and the children. Thus, during the lifetime of spouse 2, he-she has access to all of the assets in his-her name and the assets of the disclaimer trust.

Spouse 2’s estate is also now less than the NYS estate tax exemption. Consequently, no NYS estate tax is due on spouse 2’s death. This completely avoids the $574,000 estate tax bill that would have otherwise been due at spouse 2’s death under the simple will plan.

There are many ways to deal with the NYS estate tax (for individuals and married couples alike), but this is one common approach. We at the Kroll Law Firm LLP deal with these issues every day as part of our practice and would be happy to counsel your family in these matters. Please feel free to reach out at any time.