Why You Need an Estate Plan Post-2013 Tax Act in New York 2024

The 2013 Tax Act significantly altered estate planning, particularly for residents in New York. While it increased estate tax exemptions on a federal level, the impact of estate taxes on New York residents remains considerable, especially with New York’s separate state-level estate tax. If you have not revisited your estate plan post-2013 or if your family and financial situation have changed, now is the time to ensure your estate plan meets both federal and New York State requirements.

Understanding the 2013 Tax Act and Its Implications for Estate Planning

In 2013, Congress passed the American Taxpayer Relief Act (ATRA), which substantially changed estate, gift, and generation-skipping transfer (GST) taxes. The most significant change was the establishment of a permanent $5 million federal estate tax exemption per person, indexed for inflation, which has now increased to over $12 million per individual. However, New York’s state estate tax laws remain distinct from federal laws, and they can affect families with modest estates that may not reach the federal exemption level.

Federal Estate Tax Benefits

The federal estate tax exemption has allowed many high-net-worth individuals and families to transfer assets without paying federal estate taxes, provided their estates fall under the exemption threshold. Portability, introduced under ATRA, also allows a surviving spouse to utilize any unused exemption from the deceased spouse, potentially protecting up to $24 million per couple from federal estate tax.

New York’s Estate Tax Structure

New York’s state estate tax exemption threshold is significantly lower than the federal level, currently around $6.58 million in 2024. Moreover, New York employs a “cliff” system, meaning if the estate exceeds the exemption limit by more than 5%, the entire estate becomes taxable, not just the amount over the exemption. This structure makes New York estate planning uniquely challenging, particularly for individuals with estates close to or slightly above the threshold.

The Importance of Estate Planning Under New York State Law

Given New York’s estate tax policies, estate planning for New York residents should be both strategic and tailored to individual circumstances. Here’s why proactive estate planning is crucial under New York State law in a post-2013 Tax Act environment:

• Tax Optimization: Effective planning can minimize estate taxes at federal and state levels, protecting more of your assets for future generations.
• Asset Protection: Properly structured trusts can shield your assets from creditors and reduce your estate’s lawsuit vulnerability.
• Family Financial Security: A comprehensive plan ensures that your beneficiaries receive the maximum benefit from your estate, with clear instructions on the distribution of assets.

Key Estate Planning Strategies in New York Post-2013 Tax Act

Due to New York’s distinct estate tax policies, certain strategies can be highly beneficial. An experienced estate planning attorney familiar with New York law and federal tax implications can help you navigate the best options for your situation.

1. Gifting Strategies

The annual federal gift tax exclusion allows individuals to gift up to $17,000 per recipient per year in 2024 without incurring a gift tax. While federal law permits unlimited gifting under the annual exclusion, New York does not have a state gift tax. However, gifts made within three years of death may be included in the taxable estate under New York’s “add-back” rule. Therefore, a structured gifting plan can reduce your taxable estate but should be implemented with careful consideration of timing.

2. Creating Trusts for Tax Efficiency

Trusts are powerful tools for reducing estate tax liability, particularly in New York. By establishing an irrevocable trust, you can transfer assets out of your estate, potentially lowering your estate’s taxable value. Common trusts for New York residents include:

• Credit Shelter Trusts: These allow married couples to double their New York exemption, providing for the surviving spouse while reducing the taxable estate.
• Irrevocable Life Insurance Trusts (ILITs): An ILIT removes life insurance proceeds from your estate, reducing estate tax liability. This can be a valuable tool for high-net-worth individuals in New York.

3. Reviewing and Updating Beneficiary Designations

Beneficiary designations on retirement accounts, insurance policies, and payable-on-death (POD) accounts should be reviewed regularly, particularly after tax changes or significant life events. Designating beneficiaries on these accounts ensures they pass directly to your heirs, bypassing probate and minimizing estate tax exposure.

Addressing Portability and the Generation-Skipping Transfer Tax

The 2013 Tax Act made portability permanent, allowing a surviving spouse to claim any unused portion of their deceased spouse’s federal estate tax exemption. This can be particularly useful in avoiding or minimizing federal estate taxes. However, New York does not recognize portability, making planning for the New York estate tax exemption even more important for married couples with estates near the New York exemption threshold.

For families with substantial wealth, the Generation-Skipping Transfer (GST) tax applies to transfers made to grandchildren or beyond. A generation-skipping trust can be used to transfer wealth while bypassing both estate and GST taxes, preserving more wealth for future generations.

Strategies for Blended Families and Charitable Giving

The 2013 Tax Act also affects families with complex dynamics, such as blended families, or those wishing to make charitable contributions. Estate planning allows you to designate specific distributions to both family members and charitable organizations, potentially reducing estate taxes through charitable deductions. An estate planning attorney can help craft a plan that balances the needs of all family members, provides for children from previous relationships, and honors charitable intentions.

Implementing a Qualified Personal Residence Trust (QPRT)

If you own a valuable residence, a QPRT can reduce your taxable estate by removing the value of your home from your estate while allowing you to live in it for a specified period. At the end of this term, the residence passes to beneficiaries, potentially free of New York estate taxes, depending on how the trust is structured.

The Role of an Estate Planning Attorney

Considering the complexity of New York’s estate tax structure post-2013 Tax Act, working with an experienced estate planning attorney is essential. An attorney can guide you in selecting the right combination of tools—wills, trusts, and beneficiary designations—to minimize taxes and ensure your estate is distributed according to your wishes. Regularly updating your estate plan with the guidance of a knowledgeable attorney helps you adapt to changes in tax laws and personal circumstances.

Conclusion: Estate Planning in a Post-2013 Tax Act World

While the 2013 Tax Act offers considerable federal estate tax benefits, New York State’s distinct estate tax rules require tailored strategies to protect your assets. Proactive estate planning can optimize tax efficiency, ensure family financial security, and allow you to pass on a legacy that aligns with your goals. Partnering with a qualified estate planning attorney will allow you to craft a strategy that addresses both federal and state requirements, giving you peace of mind in a complex tax environment.