The Federal Estate Tax

            The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) was intended to alleviate the burden of paying Federal estate taxes for a majority of decedents’ estates.  For the most part, EGTRRA has accomplished this purpose.    However, EGTRRA has had no effect on an independent estate tax system that affects a large number of estates, namely, New York’s estate tax system.  For those of you who think your estates will be shielded from all estate taxes, your families will be in for a big surprise.

            Under EGTRRA, for individuals dying in 2005, the first $1,500,000 of assets are exempt from Federal estate tax with a top tax rate of 47%.   The exemption  will gradually increase until it reaches $3,500,000 in 2009, and the top tax rate will decrease until it reaches 45% in the year 2007.  There will be no Federal estate tax for individuals dying in 2010.   However, these changes will be temporary as the Federal exemption will revert back to $1,000,000 (the same amount prior to the enactment of EGTRRA) in 2011, assuming there is no further legislation passed by Congress prior to that time.

            New York’s Estate Tax

            Even though the Federal estate tax exemption is gradually increasing as indicated above, New York’s estate tax exemption remains at $1,000,000.  New York’s current estate tax system is based on laws which became effective on January 1, 1998 with a top tax rate of 16%.    From January 1, 1998 until the passage of EGTRRA on June 7, 2001, New York’s estate tax system basically mirrored the Federal estate tax system, which created a system where an estate that was subject to estate taxes would have to pay both Federal and New York estate taxes and estates that did not meet certain threshold requirements would pay neither Federal nor New York estate taxes.  The passage of EGTRRA therefore required New York to enact new legislation to conform to the new system.  Unfortunately for residents (and non-residents in certain cases), New York has not enacted legislation to conform its estate tax system with the provisions of EGTRRA.  Thus, an estate can now be non-taxable for Federal estate tax purposes while being taxable for New York State estate tax purposes if it exceeds $1,000,000.

            Estate Planning and New York’s Estate Tax Laws

            The good news is that the estate taxes that would be due to New York State can either be avoided or diminished significantly with proper estate planning.     While it is uncertain at this time whether New York will eventually conform its estate tax system with the provisions of EGTRRA,  what is certain is that you should review your estate plans with your estate planning professionals and make the necessary adjustments and revisions in light of New York’s estate tax system.   If you have any questions concerning this important subject, please feel free to contact the attorneys in our estate planning department.