Certified Public Accountant

In our previous blog, we discussed the effect of the Federal Estate Tax provisions as a result of the American Taxpayer Relief Act of 2012. In this blog, we take a look at state estate taxes using New York State as an example.

State Estate Tax provisions vary from state to state. In New York State, a single person will be taxed when they pass away if they are worth over $1,000,000. A married couple can exempt $1,000,000 each and exclude $2,000,000 from taxation.

This is where the trouble comes in for transfer of wealth planners, and estate tax planners etc. We set up vehicles in our transfer planning so that each client stays under the federal exemptions of $5,250,000, (single) or $10,500,000 (married) when they die. We use gift planning, charitable giving and the like. For instance, if a couple has a chance of being worth over $10,500,000 by the time of the second spouse’s death, they can give gifts while they are still alive to minimize or eliminate Federal Estate Taxes. All well and good, but we have state estate taxes to deal with and failing to recognize the differences between state estate taxes and federal estate taxes can be costly..

In New York State, the estate of a person worth $2,500,000 minus their $1,000,000 exemption will pay a tax of about $150,000-$170,000, depending upon their final expenses etc. Similar differences between other states and the federal estate tax law apply in most states. There is a planning technique called a “disclaimer clause”. It is very important that clients who are worried about their estate and estate taxes consult their state estate tax guidelines, or their financial planner, or a tax professional in the state in which they reside.

This disclaimer clause or provision gives the surviving spouse the right to disclaim whatever might be coming to them. The disclaimer provision in effect allows the surviving spouse to pass up part of the inheritance and have the executor place those assets in a disclaimer trust. The trust would make those assets exempt under the federal law. The surviving spouse can live off the income of those assets but not own them, so when they die, they are not over the $1,000,000 threshold.

For those reading this blog, if you are worth between $2,000,000 and $10,500,000 as a couple, it may behoove you to speak to your financial planner, attorney or whoever prepares your will, to inquire about this disclaimer provision to eliminate or minimize the state estate tax bite. Disclaimer clauses require specific adherence to rules and regulations, so no shortcuts here.

Overall, the effect of the “fiscal cliff” legislation on Federal Estate Taxes was minimal for the majority of Americans. State Estate Taxes were not affected by the legislation, however, and may affect many more individuals than the Federal Estate Tax.