Why You Might Pay Estate Tax After All...

Since the passage of the Tax Cuts and Jobs Act, I’ve had a lot of conversations with both clients and financial professionals about the estate tax. Riveting conversations to be sure, they typically go something like:

Them - So the estate tax is now like $11 million?

Me - Well, the federal exemption is now like $11 million

Them - So I don’t need to worry about that at all

Me - That depends!

Upon what does it depend, you may ask in an exercise of pure masochism? Well, that’s because New York estate tax rules differ significantly from the federal rules.

To briefly review - the federal estate tax, that being a tax on one’s net estate when they pass away - is basically 40% of every dollar over $11 million (indexed for inflation).  That $11 million exemption is ‘portable’ - meaning that, with proper planning, spouses can share their unused portion with a surviving spouse. In this way, couples won’t get a federal estate tax hit unless they have over $22 million.

Here’s an example: John and Jane are married. John has $5 million in his estate. Jane has $14 million in hers.  When John passes away, he only uses $5 million of the $11 million federal exemption. If done properly, John can then pass his unused portion of the exemption to Jane. So, even though Jane is $3 million over the $11 million exemption, she gets to use John’s extra $6 million, bringing her total exemption to $17 million, and saving her approximately $1.2 million of federal estate tax.

In New York, things are not so generous.

New York’s 2019 estate tax exemption is $5.74 million - still a large sum to be sure. However, that sum is NOT portable between spouses. This means that if John dies with $5 million, Jane does not get that $740k carried over for her own use - she still only has a $5.74 million exemption herself.


Bear with me, and I apologize because this is (perhaps intentionally) rather convoluted and complex.

In New York, we have what’s called an estate tax “cliff”. That means, instead of being taxed only on amounts over the $5.74 million exemption, if you’re more than 5% over that limit, or $6.027 million, you “fall off a cliff” and pay tax on every dollar you own, NOT JUST THE AMOUNT ABOVE THE EXCEPTION.

So, for example, if you have an estate worth $5.73 million, you’ll pay no estate tax. If you have an estate worth $6.028 million, you’ll end up paying something slightly over $400,000. That’s a big deal!

What assets count toward the estate tax?

This too can be a little complicated.

First, the value of everything you own either outright or jointly, minus outstanding mortgages on real estate.

Next, if you own life insurance on yourself, the death benefit will be added to the value of your estate when you die.

Third, certain gifts can be taxable. Each year there’s another exemption for gifts made in a year. For 2019 it’s $15,000. So, any gifts made in excess of that annual exemption over the course of your life get added toward your estate value.

If that number is even close to $5.74 million, you should absolutely have your estate plan reviewed.

Is this problem solvable?

That depends!

There are lots of different tactics that a knowledgeable professional can take to minimize tax exposure. Like all legal issue, problems are highly individualized. If you think this may be an issue you’re facing, I highly recommend emailing me here for a consultation.

I know this can be complicated, but it really doesn’t have to be.  $5.74 million is a lot of money, but in New York, particularly around the City, it’s really easy to hit that number. If you own a home, have a decent portfolio, 401k, IRAs, and some life insurance, you could easily exceed that threshold. And, if you’re married, without a proper estate plan in place it’s possible that you could inherit from your spouse, parent, or someone else which inflates your estate over the limit.

Personally, I think it’s always important to get an estate plan reviewed. It’s particularly important if you’re approaching or in retirement and care about what happens with your family once you pass away.

Again, if you’d like to chat about your specific situation, please email or give me a call. I’d love to help you deal with this or any other problem I can solve.