New York Estate Tax: Avoid “the Cliff” with a Life Insurance Trust

Anyone from New York knows it’s not a cheap place to live. Unfortunately, even death isn’t a reprieve from the costs. The state levies an estate tax that affects many in New York, even those at the low end of the wealthy spectrum.

Something that makes this problem even bigger is “the cliff.” New York residents who exceed the state estate tax exemption, even by just a little, could wind up paying tax on the bulk of the estate, not just the amount over the exemption. This also applies to nonresident owners of real or tangible property in the state. To avoid falling off this “cliff” and facing a massive tax, New York residents need to plan in advance.

What You Need to Know About New York Estate Tax

The exemption in New York isn’t terribly low, but it isn’t particularly high either. Currently,it sits at $4,187,500, but it will increase again in April 2017 to $5.25 million. It will go up a final time in 2019 until it’s equal to the federal exemption, whatever that is at the time. After that, it will follow the federal tax rules. Estate taxes are based on the overall value of the estate and can go as high as 16%.

Now, here’s the part where New York is different from anywhere else — the cliff. Most other states consider the exemption amountexempt from taxes. That means that if your estate is worth $4,187,510, then you would pay taxes on $10 because the $4,187,500 would be exempt.

New York doesn’t work that way. Instead, the second someone’s estate value is over the exemption amount, theentire amount of their estate is taxable. So in the last example, the estate would be taxed on $4,187,510. The difference of a few dollars creates a tax bill that costs thousands or even hundreds of thousands of dollars. That’s why you should plan ahead to get around these New York taxes.

The strategy we recommend is one that is designed to reduce the overall value of your estate throughirrevocable life insurance trusts (ILIT).

Using a Tax Shelter Trust in New York

ILITs are an ideal option for our clients who live in New York because they help you reduce the overall size of your estate. In this case, you could set up an ILIT, and the trust would be used to purchase a life insurance policy on you, which would pay out income and estate tax free to beneficiaries upon your death.

Because this trust is held outside of your name, it offers the following protections:

  • Funds paid out to beneficiaries are not taxable as part of the estate.
  • Beneficiaries receive proceeds without having to wait through probate.
  • You can transfer value out of your estate using yourfederal annual gift tax exclusion of $14,000 per person.
  • There’s no limitation on how many individuals you can gift that $14,000 per year to, so the trust can be used to fund many beneficiaries.
  • The trust structures the payments out, so you can create payment schedules to control the spending of younger heirs.

More than a few of our clients are Florida retirees with properties in New York, so we know how difficult it is to cope with the costs in that state. We recommend that you be proactive by structuring your estate through ILITs. That keeps New York out of your net worth and allows you to provide for your heirs.

A Howard Kaye advisor can help if you are a New York resident or property owner who’s facing New York’s estate tax cliff. We’ve helped many clients plan out their estate strategies anddiscount estate tax costs by up to 90%. For more information,contact us today at 800-DIE-RICH.
Source:“New York Estate Tax Rules,” Tax.ny.gov, New York Dept. of Revenue, 2017, <https://www.tax.ny.gov/pit/estate/etidx.htm>.