What is the New Estate Tax “Fiscal Cliff”?

In our last post, we started examining the changes being made to the New York estate tax exemption, as the limit was raised from $1,000,000 to $2,062,500 on April 1 of this year. Our initial overview discussed the effects of the previous exemption on New Yorkers. In this post, we’re going to look at how the previous exemption differs from the new exemption.

What’s All This Talk About a Fiscal Cliff?

Let’s note, for starters, that before March 31, 2014, any amount that you gifted in the past was not considered in the calculation of your estate as it pertains to the amount due in taxes. New York State does not levy a gift tax, meaning that when you give away money, property, or other assets, neither you nor the recipient are required to pay a tax on the transaction.

In addition to the new exemption of $2,062,500, the legislation also includes components that pertain to gifts given. As of April 1, 2014, there is a three year “look back” period, in which the gifts you’ve given in the past three years are assessed, and the value of those gifts is calculated into the value of your estate.

That means that even if your estate is valued at $2,000,000 upon your death (after April 1, 2014), which falls beneath the exemption limit, but you’ve given $100,000 away per year for the last three years, your estate is considered to be valued at $2,300,000, triggering the estate tax.

Perhaps the most tremendous difference in the new legislation from the preceding exemption limit is the “fiscal cliff” that’s been established. It’s being called a “fiscal cliff” because if you go over it, you end up hurting pretty badly.

This is likely one of the most difficult to understand aspects of the new tax rules. As we previously explained, when the New York estate tax exemption was $1,000,000, the heirs to your estate would only be taxed on the amount that was in excess of one million dollars. Under these new rules, if your estate exceeds 5% of the exemption amount, your heirs will be taxed on the full value of your estate, not just the excess.

Five percent of the current exemption amount ($2,062,500) is $103,125. This means that if an estate is worth $2,165,625, the estate’s heirs owe $0 in taxes. If the estate is worth $2,165,626, just one dollar more than 105% of the exemption, the estate will owe $112,050 in New York estate taxes.

You read that correctly. Prior to this new legislation, the heirs of an estate would owe taxes on the amount that exceeded the limit—in this case, that amount is $103,126. Under these new rules, the heirs would owe more than 100% of that excess!

Check back with us next week as we continue to explore the effects of the new New York estate tax exemption.