As we all know from the recent articles and news reports, the new Tax Cuts and Jobs Act of 2017 has many aspects. Although the new law did not repeal Federal estate and gift taxes, it has temporarily doubled the exemption amount applicable to each person. But be warned, the disparity between the Federal estate tax exemption and New York’s estate tax exemption requires careful estate planning and an examination of existing estate plans.

Temporary Increase of the Federal Estate Tax Exemption

Every U.S. citizen has a Federal estate and gift tax exemption which allows a specified value of lifetime gifts and assets to pass to their beneficiaries tax free. As of January 1, 2018, the exemption is now $11,200,000. With proper planning, married couples can exempt up to $22,400,000 of assets from Federal estate and gift taxes. However, this exemption is temporary and reverts to 2017 levels in 2026, bringing the federal exemption back to $5,490,000.

New York State Estate Tax

In addition to Federal estate and gift taxes, there is a separate New York estate tax with its own exemption. Presently, the New York estate tax exemption is $5,250,000. On January 1, 2019, New York’s estate tax exemption is slated to match the federal exemption under the prior Federal law, not the new law. This means that New York’s estate tax exemption in 2019 will be $5,600,000.

The significant difference in the Federal and New York estate tax exemptions creates a trap for the unwary, and requires careful planning to minimize tax liability. Further, existing estate plans based upon lower exemption amounts may produce unintended consequences. For example, a credit shelter trust could be over-funded, and a surviving spouse may receive less assets outright then was intended. Overfunding a trust may also cause the loss of a step-up in basis on the death of the surviving spouse that could otherwise be preserved, leading to increases in future capital gains taxes.

What Should You Do:

  • Review Credit Shelter Trust provisions in Wills and insure that the funding formula still works or replace it with disclaimer trusts.
  • Consider making lifetime gifts of the annual exclusion amount, now $15,000 per recipient per year (which can be doubled to $30,000 for gifts given by a married couple).
  • If feasible, make gifts above the annual exclusion amount while the Federal Estate Tax exemption is at its current level, before it possibly reverts to the 2017 amount.
  • Explore other ways to financially benefit your heirs without incurring gift or estate tax consequences, such as investing in education savings plans or making direct payments of tuition and/or medical expenses on behalf of your heirs.
  • Consider making significant gifts of real estate or operating businesses and taking advantage of available valuation discounts.

Drastic changes in estate and gift tax laws like those enacted at the end of 2017 merit close examination of your existing estate plan to determine what adjustments, if any, are warranted.

Please contact us if you have any questions about the new tax law and how it may impact your current estate plan or if you think that you need to do any planning.

For more information on estate planning, read our related post on Estate Planning Documents Needed To Avoid Family Conflict When You’re Gone.