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Estate Tax: The Basics

Estate Tax: The Basics by Tom Sciacca

{Read in 4 minutes} Many people have heard of estate tax, but not everyone understands whether or not it would be applicable to them.

In its simplest form, the estate tax is a death tax. Any assets that change hands by reason of one’s death is subject to the estate tax. It does not matter if the assets pass under the Will as part of the probate process or pass automatically by operation of law to named beneficiaries. For example, a person’s condo, which usually passes according to the terms of their Will, is equally subject to the estate tax as are their retirement accounts that names beneficiaries who inherit directly.

Whenever someone dies, the Estate’s Executor should have a conversation with his or her attorney about potential estate tax liability. For example, as discussed below, not every Estate meets the threshold at which it is required to file an estate tax return or at which any taxes would be due. If the Estate is required to file such a return, it is due 9 months after a person dies. It is important to identify immediately whether or not the Estate owes taxes and plan accordingly.

Example: If a person dies on February 1, 2016, the estate tax return would be due on November 1, 2016. If the Estate owes a significant amount of taxes, knowing that at the earliest possible time will allow the Executor to liquidate assets on their own schedule rather than having a “fire sale” to come up with cash quickly. If the Estate does not file a timely estate tax return, interest and penalties begin to accrue. Like any other tax return, one can obtain an automatic 6-month extension to file an estate tax return. Extensions which give time to pay are also sometimes available; however, interest begins accruing at the 9-month deadline, regardless of whether or not the Estate receives an extension of time to pay.

New Yorkers’ Estates are subject to 2 different levels of tax. There is a different exclusion amount from each of these taxes. The exclusion amount is the amount which the deceased may pass to anyone he or she wishes, free of any estate tax liability. There are presently different exclusions for purposes of the Federal estate tax. The exclusion amount is $5,000,000 indexed for inflation. It has been $5,000,000 since 2011. Currently, for those dying in 2017, the exclusion amount is $5,490,000 (up from $5,450,000 in 2016).

For the New York State estate tax, we have seen quite a lot of flux in recent years. After being parked at $1,000,000 for over 15 years, we have recently seen some dramatic increases. For example:

-For those people who die before March 31, 2017, the estate tax exemption amount is $4,187,500.

-For those dying from April 2017 through December 2018, the exemption amount is $5,250,000.

-Beginning on January 1, 2019, the New York State estate tax exemption will match the Federal estate tax.

It is important to note that all of these amounts reflect current law; it is possible that these exemptions may increase or decrease. It is important to consult an attorney to stay abreast of the current state of tax law.

Some states, like Florida, have no estate tax. Other states have an inheritance tax instead of an estate tax. Some states have both a state-level estate tax and an inheritance tax. So getting the right information here is crucial. Finally, it’s important to note that there are certain beneficiaries one can favor without incurring ANY estate tax liability. For example, a client can leave their entire estate to charity regardless of the amount of the Estate. Charitable bequests carry no estate tax liability.

Similarly, the client can leave their entire estate to a surviving US citizen spouse. If the client does that, their Estate incurs no estate tax liability, regardless of the amount of money the spouse receives. It’s also helpful to know that these special beneficiaries (charities and spouses) can be used as part of a plan involving the exemption amounts described above.

For example, if I had a $6,000,000 estate, it is presently subject to both Federal and New York State estate taxes. If I were to leave $2,000,000 to my spouse or to a charity, and the balance of my Estate to other beneficiaries, such as children or relatives or friends, my Estate would have zero estate tax liability. Why? Because using the charitable or marital deductions brought the taxable balance of my Estate below the exemption amounts. My Executor will file an estate tax return indicating a tax liability of zero.

Not only is it important to keep abreast of changes in tax law, but it’s also helpful to remember that this article is just the basics. One could spend hours a day for several weeks in a row to learn everything there is to know about the estate tax. It’s important to speak with a lawyer who can advise you directly as to whether or not your Estate will face estate tax liability. Your attorney can also advise you of certain things that you can do during your lifetime, such as creating trusts or making lifetime gifts to your ultimate beneficiaries, that will reduce the total amount of estate tax liabilities.