Federal estate tax and New York

Last December, Trump signed into law the Tax Cuts and Jobs Act that took effect this past January. The main feature of the law is that prior to the law being enacted, the federal estate and gift tax exemption was $5.49 million. However, the Act increases the federal estate and gift tax exemption to $11.18 million or $22.36 million for married couples starting in 2018. It also increases the per person “generation-skipping transfer tax” exemption to approximately $11.18 million. Under the Act, the increased exemptions will remain in effect through 2025, after which they will return to the 2017 federal estate tax exemption.

What about New York? In 2017, New York State increased the tax exemption to $5,250,000 which will be in effect until the end of 2018. In 2019 the exemption will increase to over $5.6 million and will increase each year.

A common estate planning trick for married couples is to fund a trust with the maximum amount that can pass free of federal estate tax with the rest of the estate being sheltered by the unlimited marital deduction, resulting in no estate tax due on the death of a spouse. However, New York has decoupled its exemption from the federal exemption, and that forces couples to make a decision. If at death, the he or she wants to put the total amount they are able to pass free of federal estate tax into a trust they will incur a New York estate tax. Or, they can fund the trust with only the amount that can pass free of both New York and federal estate tax in order to not incur any estate tax on the first death. Although decoupling is not new to New York residents, the new laws significantly impact the way New Yorkers decides to structure their estate plan.

With the passage of the new tax law and increased federal estate tax exemption, the cost of decoupling is bigger than ever. An estate plan which directs the full amount that can pass free of federal estate tax into a trust will incur $1,258,800 in New York estate taxes in 2018.