Happy New Year! As we now move on to 2024, it is important to be aware that the increased Federal gift tax annual exclusion has been indexed for inflation to $18,000 per donee (up from $17,000 in 2023).
Additionally, the Federal estate/gift tax exemption is now indexed for inflation to $13,610,000 (up from $12,920,000 in 2023). Estate values can be taxed as high as 40 percent on amounts in excess of these limits. Married couples can utilize what is known as the “portability” option to effectively double this amount. After the first spouse dies, the estate’s executor elects portability to pass any unused exemption to the surviving spouse.
However, New York residents should know that although this high exemption level helps reduce Federal estate taxes, it will not help with the New York estate tax. New York is one of many states that still taxes estates. The 2024 New York State estate tax exemption is $6,940,000 (up from $6,580,000 in 2023) and continues to be indexed for inflation. You can see that there is a large taxation discrepancy between the New York and Federal estate tax exemptions.
In addition to the taxability difference, New York also has two additional rules unfavorable to estates when compared to the Federal code.
- First, the ability for surviving spouses to claim the portability option does not exist for the New York estate tax.
- Second, there is what is known as the tax cliff. If the value of the estate passing to beneficiaries other than a spouse or charity exceeds that year’s exemption amount, the exemption begins to phase out and is fully phased out if the taxable estate is 5% over the exemption amount. That means the exemption is $0 for a taxable estate exceeding $7,287,000 in 2024 and every dollar is subject to New York estate tax.
For married couples, care also needs to be taken to avoid wasting at least one of the spouse’s NY estate exemption. Certain provisions can be put in your will such as a credit shelter trust, assets can be retitled between spouses and beneficiary designations can be structured in certain ways, if appropriate for your situation.
New York doesn’t have a gift tax, so you may be able to reduce your estate by making gifts during your lifetime – if you can afford it. Note however that any gifts made within 3 years of death are pulled back into the estate, subject to possible estate tax. That said, the gift is pulled back at the gift value, so any appreciation since then is still effectively removed from your NY estate.
As 2025 approaches, current federal law under the Tax Cuts and Jobs Act is set to expire at the end of 2025 where the estate/gift exemption will cut in half. Let’s assume that the estate and gift tax exemption amount has increased to $14 million by this time (due to adjustments for inflation). In that case, if Congress does not act, the exemption amount would decrease to about $7 million per person or $14 million per married couple. This loss of the “bonus” amount could increase overall transfer taxes for certain families by millions of dollars.
If you can afford to, make large gifts exceeding ~$7M, so they dip into the bonus amount, or even use it all up, before it goes away December 31, 2025. If you use more exemption during your lifetime than is available at death (due to this anticipated decrease), the IRS cannot impose estate tax on those excess gifts when you pass (with minimal exceptions to this rule for certain types of gifts made within three years of death). Gifting also removes future appreciation from compounding your estate.
Always remember, for your estate plan to work as you intend, the make-up of your assets and beneficiary designations (including a transfer-on-death (TOD) beneficiary designation) need to align with your estate planning documents and vice versa. You can have well-designed wills and still not have everything play out as you mean for it to if the asset titling and beneficiary designations aren’t properly structured.
If you need further guidance or have any questions on this topic, the Bonadio Estate & Trust Team is here to help. Please do not hesitate to reach out to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.