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New York Estate Tax: The Cliff
An applicable credit (the so-called Basic Exclusion Amount) is allowed against the estate tax when a New York taxable estate (including gifts) is not greater than 105% of the basic exclusion amount. The amount of the credit cannot exceed the tax imposed.
If the New York taxable estate is less than or equal to the basic exclusion amount, the applicable credit amount will be the amount of tax that is computed on the taxable estate.The applicable credit is phased out as the New York taxable estate approaches 105% of the basic exclusion amount. If the New York taxable estate is greater than the basic exclusion amount but not greater than 105% of the basic exclusion amount, then the applicable credit is equal to the estate tax that would be due on an amount computed by multiplying the basic exclusion amount by one minus a fraction. The numerator of the fraction equals the New York taxable estate minus the basic exclusion amount, and the denominator equals five percent of the basic exclusion amount.
Thus, if the value of an estate exceeds the exemption amount by more than 105%, the exemption is lost and the taxes on the full value of the estate are due.
John died in 2019 with a taxable estate of $5,740,000.
Since he is not over the New York state exemption amount, there is zero New York state estate tax due and $5,740,000 will pass to his heirs.
On the other hand If John died in 2019 with a taxable estate of $5,900,000, he would exceed the 2019 New York state exemption amount by $160,000 In this case there would be a New York state estate tax due of $356,800, leaving $5,543,200 to pass to her heirs
Because of the cliff, John’s heirs would inherit $196,800 less, even though John’s taxable estate was $160,000 more!