Estate Tax Repeal Take 2? A look at the Federal and New York Estate Tax Systems Then and Now

During the rollout of his economic plan, Donald Trump announced his intention to push for a repeal of the federal estate tax. Trump claimed to have known many families who were “destroyed by the death tax.” If this proposal and the associated rhetoric sounds familiar, there is a reason for that: the proposal and rhetoric is identical to that of George W. Bush when he took over the presidency in 2001.

It is helpful then to compare where things stand today versus fifteen years ago to see if today’s estate tax environment is comparable to that of 2001:

Federal exemption, then and now. When President Bush took office, the federal estate tax exemption sat at $675,000 per individual or $1,350,000 per married couple. The maximum tax rate was 55%. Bush and Congress passed sweeping tax cuts once he entered the office including temporary repeal of the estate tax in 2010. By the time 2010 came along, both the Presidency and Congress had switched to the Democratic Party and in order to avoid a return to the exemptions of 2001, Congress and President Obama agreed upon two compromises.

First, in 2010, the estate tax was reinstated with an exemption of $5,000,000.00 and a maximum tax rate of 35%. Second, in 2012, as part of the fiscal cliff negotiations, the reinstated exemption of 2010 was made permanent with yearly adjustments for inflation and a maximum tax rate of 40%. In 2016, the exemption currently stands at $5,450,000.00 per individual or $10,900,000.00 per married couple.

Portability. The 2010 compromise also added a new concept known as portability to the federal estate tax system. Previously, if a married individual died leaving a portion of their estate tax exemption unclaimed, the remaining exemption was lost. The advent of portability changed this to allow a surviving spouse the ability to claim the remaining portion of their deceased spouse’s exemption by filing a federal estate tax return.

New York exemption, then and now. At the time of the enactment of the federal estate tax repeal, New York’s estate tax exemption was increased from $675,000 to $1,000,000.00. In addition, New York and other states decoupled from the federal estate tax system and continued to tax estates at or above their exemption amount. This led to many estates being subject to New York estate tax but not federal estate tax.

In 2014, Governor Andrew Cuomo enacted the first change to estate tax exemption in New York in over a decade. Through the end of 2018, the New York estate tax exemption would increase several times before being tied to the federal exemption starting in 2019. This change greatly reduced the number of New York estates subject to any estate tax liability.

The Tax Cliff. The changes to the New York estate tax system were not all beneficial to taxpayers. Beginning in 2014, estates valued at 5% or more of the applicable exemption would be subject to estate taxation on the entire value of the estate. Estates at or less than 5% of the exemption would continue to be taxed only on the value of the estate above the exemption.

This change created a further burden on large estates while alleviating smaller estates of any estate taxation. The New York system, unlike its federal counterpart, does not provide for the use of portability for any unused portion of a deceased spouse’s exemption. This continued discrepancy between the New York and federal systems requires individuals with estates at or near the exemption to be ever more vigilant about their planning.

Additional Changes. The changes to the exemptions and tax rates are not the only ways that the tax system has improved for taxpayers and their families. Along with increasing the federal estate tax exemption, the 2010 compromise also increased the federal gift exemption from $1,000,000 to $5,000,000 and subsequently the same amount as the federal estate tax exemption. This allows wealthy families to transfer highly appreciable property during their lifetime to their heirs.

Same sex married couples have also benefited from these changes as a result of the decision in Obergefell v. Hodges. With the federal estate tax marital deduction and exemptions now available to all married couples, even more taxpayers are able to protect their estates from taxation.

Then vs. Now. At the federal and New York levels, the past fifteen years have seen unprecedented growth in the amount of assets individuals can pass to their heirs estate tax free. The amount of estates owing any estate taxes have declined dramatically with only approximately .02% of estates being subject to federal estate tax.

In the eyes of the opponents of the estate tax, none of this matters. Their objections to this so-called “death tax” does not concern itself with these facts. But, regardless of one’s politics and beliefs, the reality of the estate tax system in the United States and New York is very different today than it was when we heard Donald Trump’s current policy views spoken by President Bush in 2001.

Please contact info@levyestatelaw.com for more information about your and your family’s estate planning and estate administration needs.

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