The Greatest Generational Wealth Transfer in History Could Leave New York Families Facing an Unexpected Estate Tax Bill
America is experiencing what financial researchers describe as the greatest generational wealth transfer in history. According to Cerulli Associates, approximately $124 trillion in wealth is projected to change hands in the United States through 2048, including approximately $105 trillion expected to pass to heirs.
Much of this wealth belongs to Baby Boomers and older generations who have spent their lifetimes accumulating homes, investments, retirement savings, and other assets.
As these individuals pass away, their wealth will transfer to surviving spouses, children, grandchildren, and other beneficiaries.
But for New York families, there is a potentially expensive obstacle standing between a lifetime of accumulated wealth and the loved ones intended to inherit it.
New York’s Estate Tax Cliff.
And for many families, that cliff may be closer than they think.
Your Loved One’s Estate Could Owe Taxes Even When No Federal Estate Tax is Due
Many people assume estate taxes affect only extraordinarily wealthy families.
They hear about the substantial federal estate tax exemption and conclude that their estates will never be large enough to owe estate taxes.
Unfortunately, New York has its own estate tax, with an exclusion amount substantially lower than the federal exemption.
Consequently, when a New York resident dies, the estate may owe significant New York estate taxes even though absolutely no federal estate tax is due.
Consider someone who purchased a home decades ago. Over the years, the property appreciated substantially. Add retirement accounts, investment portfolios, life insurance proceeds, and other assets, and the person’s estate may be worth considerably more than anyone anticipated.
That individual may never have considered himself or herself particularly wealthy.
Nevertheless, upon death, the estate could face a substantial New York estate tax liability.
And that tax generally must be addressed during estate administration, reducing the assets ultimately available for distribution to beneficiaries.
What Makes New York’s Estate Tax Cliff So Dangerous?
New York provides a basic exclusion amount – or a threshold – below which an estate generally will not owe New York estate tax.
However, the exclusion operates differently from what many people expect.
Most assume that if an estate exceeds a tax exemption, only the amount exceeding the exemption becomes taxable.
That is not how New York’s Estate Tax Cliff works.
When a taxable estate exceeds the applicable exclusion amount – or, the threshold, the estate tax credit begins to disappear.
Once the estate exceeds 105% of the exclusion, the credit disappears entirely.
At that point, New York estate tax is calculated on the estate’s full taxable value, rather than merely the amount exceeding the exclusion.
The consequences can be dramatic.
An estate valued just below the exclusion may owe no New York estate tax.
Yet an estate modestly above the cliff may face a substantial tax bill.
That means a relatively small difference in estate value can result in a disproportionately large tax liability.
And the people who ultimately bear the economic consequences are the beneficiaries, because the estate tax reduces the inheritance available to them.
The Great Wealth Transfer Makes This an Urgent Concern
As trillions of dollars pass from older generations to their families, more New Yorkers may discover that their loved ones’ estates are exposed to New York estate taxes.
The concern is particularly significant because estate values have grown over time.
A family residence that was once relatively modest may now represent a substantial portion of an estate. Retirement accounts and investments may have appreciated considerably.
When the owner dies, the combined value of these assets may push the estate beyond New York’s exclusion and potentially over the cliff.
Imagine a parent who worked hard, saved carefully, and intended to leave everything to the children.
The children may reasonably expect to inherit the accumulated estate.
Instead, they could discover that a substantial New York estate tax must be paid before the remaining assets can be distributed.
This is not necessarily a problem reserved for the ultrawealthy.
It is a potential concern for families whose accumulated assets place them near New York’s estate tax threshold.
Married Couples Face an Additional Planning Challenge
For married couples, New York’s Estate Tax Cliff can be particularly surprising.
When the first spouse dies, there may be little or no concern about estate taxes. Assets passing to the surviving spouse generally qualify for the estate tax marital deduction, often allowing the estate to pass without an immediate estate tax liability.
The surviving spouse may then continue living in the family home, managing investments, and enjoying the financial security the couple worked together to build.
But when that surviving spouse dies, the situation can change dramatically.
The assets accumulated by both spouses are now concentrated in one estate, which must pass to the next generation.
A family that encountered no estate tax problem when the first spouse died may suddenly discover that the surviving spouse’s estate exceeds New York’s exclusion and falls over the Estate Tax Cliff.
Compounding the problem, New York does not recognize the federal concept of estate tax portability. Consequently, the unused New York estate tax exclusion of the first spouse does not automatically transfer to the surviving spouse.
Without appropriate planning, the family may lose the opportunity to utilize both spouses’ available exclusions.
The result can be particularly frustrating: A couple may have accumulated their wealth together over a lifetime, encountered no estate tax liability at the first death, and nevertheless leave their children facing a substantial reduction in their inheritance when the second spouse dies.
Estate Planning Can Help Protect Your Family’s Inheritance
Fortunately, there are strategies that may help reduce New York estate tax exposure.
Depending upon individual circumstances, these may include irrevocable trusts, charitable planning, appropriate life insurance ownership arrangements, lifetime gifting, and estate plans designed to maximize available exclusions for married couples.
However, planning requires care.
Certain taxable gifts made within three years of death may be included in calculating New York estate taxes. Additionally, lifetime transfers of appreciated assets can create income tax consequences that must be considered.
The objective is not simply to reduce estate taxes at any cost.
It is to develop a coordinated plan that protects financial security during life while preserving as much wealth as reasonably possible for loved ones after death.
Don’t Let New York’s Estate Tax Cliff Reduce Your Family’s Legacy
New York’s Estate Tax Cliff could substantially reduce what families ultimately receive.
The time to address the cliff is while the person whose estate may be taxed is still alive and planning opportunities remain available.
At the Law Offices of Jeffrey A. Asher, PC, we help individuals and families evaluate potential estate tax exposure and develop Estate Planning, Trust, and Asset Protection strategies designed to preserve wealth for future generations.
Contact our office to schedule a complimentary estate planning consultation.
Because the wealth you worked a lifetime to accumulate should pass to the people you love, not unnecessarily disappear over New York’s Estate Tax Cliff.