If you have been successful from a financial standpoint, you are in a favorable position when you are crafting your legacy. On the other side of the ledger, you have to address looming forms of asset erosion. There are death taxes that can take a toll on your family, and they can be considerable.
Why do we use the term “taxes” in the plural? There is a federal estate tax that can impact people all over the country. At the time of this writing, it carries a whopping 40 percent maximum rate.
The reason why the estate tax is only a factor for high net worth individuals is because there is a robust exclusion. This is the amount can be transferred before the tax would be applied. For the rest of 2018, the exclusion is $11.18 million, but there are annual adjustments to account for inflation. As a result, you may see a somewhat higher figure next year.
Most states in the union do not have state-level estate taxes. However, as luck would have it, there is an estate tax In New York. That is part one of the bad news, and part two is the fact that you can be exempt on the federal level and exposed at the state level. The state exclusion has been $5.25 million in 2018, but there will be a change when the new year rolls around.
About three years ago, incremental adjustments to the estate tax parameters were installed in the state of New York, and the trajectory is coming to a conclusion in 2019. The New York State Department of Taxation and Finance has released the exact amount of the estate tax exclusion for next year. It is going to be $5.74 million. New York has a graduated estate tax rate that starts at 3.06 percent, and it tops out at 16 percent for the estates that are valued at more than $10.1 million.
New York State Estate Tax Cliff
On the federal level, the first $11.18 million that is transferred would not be subject to taxation. This is true even if your estate is valued at $10 billion or $12 million. Unfortunately, things are very different when it comes to the New York state estate tax, because there is an element that is referred to as a “cliff.”
If your estate’s value is more than five percent over the exclusion amount, you would have no exemption at all. The entirety of your estate would be subject to taxation. To provide a head scratching example, if you die with an estate that is worth exactly $5.74 million next year, there would be no taxation all. Five percent of this figure is $288,000, so all of your estate would be taxed if your estate’s value was just over $6 million.
Are Estate Taxes Fair?
Without question, it is virtually impossible to justify the fairness of the New York state estate tax cliff. This being stated, many people make the argument that all death taxes are unfair. They content that we all pay taxes throughout our lives at every turn. There are state and federal income taxes, FICA or self-employment tax, property tax, sales tax, capital gains tax, taxes on hotel rooms and gasoline, and on and on.
The assets that comprise your estate represent the remainder that you have left over after you pay all of these taxes for decades. Why should the act of dying be a taxable event? This argument make sense to many, but regardless of the way that you feel about death taxes, they are a fact of life.
Estate Tax Efficiency Strategies
If you are exposed to the estate tax on the federal level, the state level, or both, you have options with regard to the implementation of estate tax efficiency strategies. There are a number of tools that can be utilized effectively, including the family limited partnership and certain irrevocable trusts.
The ideal course of action will depend upon the circumstances, and we would be glad to explain your options to you in person. You can send us a message to request an appointment, and we can be reached by phone at 518-389-6020.
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Our doors are open if you would like to have a one-on-one discussion, and we also have additional resources on this website. One of them is our estate planning worksheet, and you can get your copy right now if you visit our worksheet access page.
Geoffrey Rafalik
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