In New York, estate tax is imposed on gross estates with a value of more than $5.93M in 2021 and $6.11M in 2022. $5.93M (as of 2021) and $6.11M (as of 2022) are called the basic exclusion amounts.
If your estate falls below the basic exclusion amount, your estate is not subject to estate tax. If your estate is higher than the basic exclusion amount, your estate is subject to estate tax in excess of the basic exclusion amount. For example, if your estate is worth $6.2M in 2022, only $0.09M is subject to estate tax because this is the amount in excess of the basic exclusion amount.
New York, however, has an estate tax cliff. If your estate is higher than 105% of the basic exclusion amount, your entire estate (and not just the excess) will be subject to estate tax.
What is gross estate?
To know whether your estate is subject to estate tax, you must compute for your gross estate. Gross estate is different from probate estate. The probate estate is generally smaller than the gross estate. The probate estate are the decedent’s assets that can pass through intestacy or will. Gross estate, on the other hand, includes all real and personal property of the decedent, including all property which decedent has an interest in or a power of appointment over, at the time of death.
For example, there are properties that are not included in the probate estate, but included in the computation of gross estate, such as jointly held property with rights of survivorship or property in Totten trust accounts. Although these properties will not pass through the probate estate, they will be included in the gross estate for purposes of computing estate tax.
New York gross estate
Under New York Tax Law § 954, the gross estate of a deceased resident is the federal gross estate, as defined by the internal revenue code, less the value of real or tangible personal property outside New York, plus the value of all property in New York passing under a limited power of appointment exercised by the decedent by will or deed.
The federal gross estate under the Internal Revenue Code (26 U.S.C. § 2031) is determined by the value at the time of death of all property, real or personal, tangible or intangible, wherever situated, including property in which decedent had an interest at the time of death.
Treatment of real property in gross estate
If the estate includes real property, this property needs to be appraised so a value can be assigned to the real property. This value also serves as the stepped up basis of the heirs or beneficiaries when they receive the real property.
If the real property is subject of a mortgage, the mortgage will be deducted from the appraised value in order to arrive at the adjusted gross estate because estate tax will not be imposed on property that is not considered part of the decedent’s assets. The adjusted gross estate is the basis for the estate tax.
Treatment of jointly owned property
As a general rule, under Treas. Regs. § 20.2040-1, the entire value of jointly held property is included in decedent’s gross estate unless the executor submits facts sufficient to show that the property was not entirely acquired with consideration furnished by the decedent or was acquired by the decedent and other joint owner by gift, bequest, devise, or inheritance.
New York estate tax cliff
New York has an estate tax cliff which imposes estate tax on your entire estate and not just the excess. The estate tax cliff is 105% of the basic exclusion amount. In 2021, the New York estate tax cliff was $6.2265M. In 2022, the estate tax cliff is now $6.4155M.
Application of New York estate tax cliff
The New York estate tax cliff can spell the difference of hundreds of thousands of dollars in estate tax, even if the difference in value of two estates is small. For example, if your estate in 2022 is $6.4M, your marginal rate is 3.06%. That rate is imposed on $290K, the difference between $6.4M and the basic exclusion amount of $6.11M, giving an estate tax of $8,874. However, if your estate is $6.5M, which is an amount above the estate tax cliff of $6.4155M, you will pay a base tax of $522,800 plus 12.8% of the amount in excess of $6.1M (or $400K), for a total estate tax of $574K.
Based on above, a difference of $100K in estate ($6.4M and $6.5M) can result to hundreds of thousands of dollars in estate tax difference ($8,874 vs. $574K) due to the New York estate tax cliff.
For high value estates, it is important to engage an experienced estate planning lawyer to minimize estate taxes. Although one’s gross estate includes all property of the decedent at the time of death, estate planning lawyers use different types of irrevocable trusts to reduce a person’s gross estate on paper, minimizing the imposition of estate tax. Should you need assistance, the Law Offices of Albert Goodwin are here for you. We have offices in New York, NY, Brooklyn, NY and Queens, NY. You can call us at 718-509-9774 or send us an email at firstname.lastname@example.org.