Tax Cuts and Jobs Act (TCJA) and Estate Taxes

Changes to the federal estate and gift tax exclusion made by the Tax Cuts and Jobs Act (TCJA) effective in 2018 will result in fewer estates being subject to federal estate and gift tax and larger estates owing less federal tax. New York State has a separate estate tax with exclusion amounts different (lower) than the federal amounts. Planning for the differing exclusion amounts must be coordinated carefully. Since New York's exclusion amounts are much lower than the federal amounts, failing to update estate planning documents could easily cause unnecessary state estate tax and could cause unnecessary trusts to be established.

Before the TCJA, the first $5 million (as adjusted for inflation in years after 2011) of transferred property was exempt from federal estate and gift tax. For estates of decedents dying and gifts made in 2018, this "basic exclusion amount" as adjusted for inflation would have been $5.6 million, or $11.2 million for a married couple with proper planning and estate administration allowing the unused portion of a deceased spouse's exclusion to be added to that of the surviving spouse (known as "portability").

Federal Exclusion Doubled. The new law temporarily doubles the amount that can be excluded from federal transfer taxes. For decedents dying and gifts made from 2018 through 2025, the TCJA doubles the base federal estate and gift tax exclusion amount from $5 million to $10 million. Indexing for inflation brings this amount to approximately $11.2 million for 2018, and $22.4 million for a married couple with some basic portability techniques.

New York Exclusion. Beginning April 1, 2014, New York changed its estate tax regime to increase its exclusion amount periodically with the goal of matching the federal exclusion amount starting January 1, 2019 as follows:

For Dates of Death:                                                           Exclusion
On or after 4/1/2014, and on or before 3/31/2015        $2,062,500
On or after 4/1/2015, and on or before 3/31/2016        $3,125,000
On or after 4/1/2016, and on or before 3/31/2017        $4,187,500
On or after 4/1/2017, and on or before 12/31/2018      $5,250,000

The New York exclusion amount is also indexed for inflation after December 31, 2018. Before the TCJA, the New York and federal estate tax exclusions would have been matched perfectly beginning January 1, 2019. Now, barring any legislative action in New York to increase its exclusion, the federal and New York exclusions will remain far apart until 2025. There currently is no indication that New York plans to change its exclusion to match the increased federal amounts, but this is something we will watch for in 2018. The vastly different exclusions, unless intervening legislation is passed in New York, require careful consideration and planning.

For example, assume John Doe had a Will that requires his executor to fund a trust with the maximum amount allowed to pass tax free for federal purposes. This was a common planning technique for many years and worked just fine when the New York and federal exclusion amounts were the same or were very close in amount. Now, however, that plan can cause unnecessary New York estate tax:

Assume that John dies with an estate of $6 million and his Will directs his executor to fully fund a trust for the benefit of his surviving spouse and children with the maximum amount that will result in the estate incurring no federal estate tax. Since the federal estate tax exclusion is greater than the amount in the estate, the entire estate would fund the trust. Unfortunately, the amount funding the trust exceeds the New York estate tax exclusion amount and would cause New York estate tax to be due. Here are the numbers: In 2018, a $6 million taxable estate would cause $510,800 of New York estate tax. As you might expect, the situation gets worse as the size of an estate increases. Had John's Will left his entire estate outright to his wife or in a different trust for her benefit, no tax would have been due.

Assume the same scenario except John's estate is only $1.5 million. There would be no federal OR New York estate tax. However, the entire estate would be forced into a trust that would serve no real tax purpose, and setting up and maintaining such a trust would incur unnecessary costs of formation, administration, trustee commissions, tax return preparation, and eventually termination.

The changes implemented by the TCJA could have a major impact on your current estate plan. Now is the time to review your planning to determine if any changes are required.