Under current law, the Federal Estate Tax will apply at the rate of 40% to assets owned by a decedent (including life insurance proceeds on the decedent's life) exceeding $5,450,000.00 upon a decedent's estate. In the case of a surviving spouse, if properly elected, the surviving spouse can utilize the unused amount of the $5,450,000.00. That said, not all estates will be taxed while the estate tax is in effect. First, spouses can leave any amount of property to their spouses, if the spouses are U.S citizens, free of federal estate tax. Second, the estate tax applies only to estates valued at more than $5,450,000.00 in 2016. The federal government allows you this tax credit for gifts made during your life or for your estate upon your death. Third, gifts to charities are not taxed.
The Federal Estate and Gift tax rules for 2016 are summarized as follows:
Estate & Gift Applicable Exclusion Amount $5,450,000
Annual Gift Tax Exclusion
Per Donee $14,000
Split Gifts by Spouses $28,000
Gifts to Noncitizen Spouse $148,000
Maximum Estate & Gift Tax Rate 40%
Most states also have an estate or inheritance tax. But more and more have moved to a so called "sponge" tax, which ultimately doesn't cost your estate. The way this works is that the states take advantage of a provision in the federal estate tax permitting a deduction for taxes paid to the state up to certain limits. The states simply take the full amount of what you are allowed to deduct off the federal taxes.
Prior to April 1,2014, New York had an estate tax exclusion of $1,000,000 and taxed estates that were over $1,000,000 at progressive rates, with the top rate being 16% in 2014, the New York law increased that exclusion to $2,062,500 for decedent's dying after April 1, 2014 and before April 1, 2015, with an increase each year after that until it reaches the federal exclusion. For decedents dying after January 1,2019, the exclusion amount will be equivalent to the then federal exclusion amount which increases every year due to inflation. It is estimated that for decedents dying after January 1,2019, the exclusion amount, both federal and NYS, will be approximately $5,900,000.
A couple of twists to consider with the new New York State Estate Tax Law. Gifts that were made by the decedent within three years of death are added back to compute the taxable estate for NYS estate tax purposes, except for gifts that were made when (1) the decent was not a resident of NYS, (2) before April 1, 2014, or (3) after January 1,2019.
But here's the shocker! The benefit of the NYS estate tax exclusion is phased out for taxable estates between 100% and 105% of the exclusion amount. Once the taxable estate is greater than 105% of the exclusion amount, no exclusion is allowed! The entire taxable estate will be subject to the NYS estate tax, at progressive rates. The old law afforded the $1,000,000 exclusion to all estates; the new law throws the large estates off the estate tax cliff. Therefore, it is crucial to have your estate planning documents drafted properly so that this risk can be minimized.
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