Double New York’s $1 Million Estate Tax Exemption.
Each of us has a $1 million estate tax exemption from New York State Estate Tax. We’ll leave the federal estate tax exemption of $5.34 million for 2014 aside in this discussion.
The estate tax law holds a surprise - you cannot use your estate tax exemption if you leave your property directly to a spouse. Two spouses = two exemptions. But leave all of your assets directly to your spouse, and your estate will (and has to) qualify for a full marital deduction. It’s a free pass on estate tax from spouse to spouse - no exemption is needed, or can be used. This is a typical simple Will.
Sure, the first estate pays no estate tax, but the second spouse is now “loaded up” with assets from both spouses and has only one estate tax exemption to use when he or she dies.
The first spouse’s estate tax exemption was lost due to the mandatory marital deduction. If that first spouse’s lost exemption could have been used, it would have sheltered $1 million from estate tax. With the second spouse’s exemption, the couple could have passed $2 million estate tax free.
With everything passing to a surviving spouse, only one exemption - that of the survivor - is left, and only $1 million will pass estate tax free.
It is fairly easy to have both exemptions available if needed. Instead of “forcing” a marital deduction when the first spouse dies, we let the survivor decide whether the first spouse’s exemption will be used.
If the exemption is used, it will shelter up to $1 million in additional assets from estate tax. And that will save your estate from paying New York almost $100,000.00 in estate tax needlessly.
Click on the chart to the left to see how a surviving spouse can decide to use a deceased spouse’s exemption. The survivor decides whether to “disclaim” (choose not to accept) assets passing to him or her. If a disclaimer is made, the deceased spouse’s Will already says how the assets will otherwise pass - they go to a Trust for the benefit of the survivor that is as liberal as we can make it without violating the tax law. The assets that are disclaimed are estate taxable, and use some or all of the deceased spouse’s exemption to eliminate the tax. The Trust assets are sheltered from estate tax in the survivor’s estate and are not estate taxable when they pass to the final beneficiaries. Keep in mind that the disclaimer is optional, and changes in the estate tax exemption levels will never dictate the outcome - a properly drafted disclaimer Trust provides truly flexible and optional planning after the fact.