Tax Trap For Middle Class New Yorkers: The Estate Tax

Middle class New Yorkers might not know that they are exposed to New York’s estate tax. This gap in their knowledge can be a costly blind spot.

New York’s Sneaky Estate Tax

Two state estate tax maps show the same fact: New York imposes a state estate tax on estates over $1 million. The tax rate is between 0.8% to 16% for amounts transferred over this exemption. See the maps at Forbes.com and Tax Foundation.

The New York estate tax is a problem because it impacts not just wealthy New Yorkers, but also middle class New Yorkers. For example, in the neighborhood in which my office is located — Bay Ridge, Brooklyn — a single family house is easily valued at over $800,000. This asset plus some savings and retirement accounts can put middle-class homeowners well over New York’s estate tax exemption.

Workaround: Gifting

What makes New York’s estate tax a tax trap for the unwary is that it can be minimized (possibly completely avoided) with proper estate planning. New Yorkers can take advantage of a gap between federal wealth transfer rules and New York’s wealth transfer rules: New York does not impose a gift tax.

The federal government imposes a gift tax on the gratuitous transfer of wealth, but current federal law gives a generous $5.25 million lifetime exemption for individuals ($10.25 million for couples). In addition, several other federal gift tax exemptions are available. These exemptions mean that the federal gift tax does not impact middle class Americans.

The purpose of the gift tax is as a back-stop to two other taxes — the income tax (more on that in a future post) and the estate tax. The gift tax protects the estate tax because it prevents large transfers of wealth that are made while a person is alive.

With a generous federal gift tax exemption and no New York gift tax, middle class New Yorkers can make large gifts that can reduce (even eliminate) their exposure to New York’s estate tax.

Useful Resources

Gifting is an important loophole around New York’s estate tax, but there are others. For more information, see my post on Forbes.com: How To Cut State Death Taxes — Without Moving (7/13/2011). Also see, Ashlea Ebeling, Four Ways To Beat State Death Taxes, Forbes.com (1/28/2013).

While the federal estate tax (which has an exemption of $5.25 M for individuals, $10.50 M for couples) might not motivate you to do your estate plan, New York’s estate tax should. Please do not hesitate to contact me with your questions.

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