One potential estate expense which demands attention is estate, or inheritance, taxes. Both the Federal and State governments have enacted laws which tax the value of property owned at death. For purposes of estate taxation, it does not matter how title to property passes at death. Whether it passes by operation of law, by contract or according to your will or trust, it is all generally part of the taxable estate if you retain any right, title or interest in it at death. Fortunately, the amount one has to own or control at death must exceed fairly high amounts before there is any estate tax at all.
The Federal Tax Relief Act of 2010 increased the amounts that each person can die owning before any federal estate tax is due to $5 Million. It also unified the federal estate and gift tax rules so that each individual can either make taxable gifts of up to $5 Million during life or die owning up to $5 Million before any federal gift or estate taxes are due. If a person makes a $2 Million taxable gift (gifts in excess of the annual exclusion of now $15,000/donee) during their lifetime, however, their estate will be taxed on any assets valued at more than $3 Million as of their date of death.
While these basic rules still hold true, the Federal Tax Cuts and Jobs Act passed by Congress in 2017, increased the amount each person can own or control at death, before the estate is taxed, to $11.2 Million per person, or $22.4 Million per couple. Clearly most people no longer have to worry about federal estate taxation.
The new act also maintains the “portability” of the federal estate tax exemption between married parties so that the second spouse to die can use, without any further planning, the unused portion of the exemption of the first spouse provided an IRS Form 706, Estate Tax Return, is filed upon the death of the first spouse.
New York State, while “generous’ with its estate tax rules, is not as generous as is the IRS. New York State requires that an estate tax be paid on the value of any assets owned by a decedent who dies on or after April 1, 2017 but before January 1, 2019, valued in excess of $5.25 Million. Please note, however, that NYS estate tax exemptions are scheduled to equal the Federal exempt amounts for NYS residents dying after January 1, 2019.
Its important to remember that, even for those high net worth individuals who still need to be concerned about this issue, there is a unlimited spousal exemption so that assets left unqualifiedly to a spouse do not count towards the taxable estate under either the federal or NYS rules.
A similar rule applies for gifts between spouses for Federal gift tax purposes.
It is important to note that N.Y.S. no longer has a gift tax. Even though there is still a Federal Gift tax, as explained above, Federal gift tax rules allow each person to make annual gifts of up to $l5,000.00 to any number of people without any gift tax or returns due. If an annual gift exceeds that amount, (called the annual gift tax exclusion), Federal rules require that an informational gift tax return be filed, so the IRS can keep track of total lifetime gifts, which reduce the estate tax exempt amount.
Although the recent changes in the federal estate and gift tax laws mean that most people no longer have to do any federal estate or gift tax planning, it is still important for some very high net worth individuals and anyone having an estate in excess of $5.25 Million to consider N.Y.S. estate tax planning. Also, the recent changes to federal estate tax law will expire at the end of 2025 unless Congress acts to extend the current $11.2 Million exemption. If Congress fails to extend the current law, the federal non-taxable limit will be reduced to $5.25 Million and under current NYS rules, the NYS exempt amount will be the same.