Speaker: Federal Estate Tax Cut All But Certain, But Don't Count Out State-Level Taxes

Chris Gaetano
Published Date:
Dec 7, 2017
Estate Tax Return

Kevin Matz, a tax partner at Stroock & Stroock & Lavan LLP, said it was almost certain that the tax reform bill will pass, which at the very least means significant cuts in the federal estate tax, if it's not repealed entirely. But at the same time, he said, CPAs need to remember that states collect estate taxes too, and they won't necessarily follow every aspect of the federal law. 

Speaking at the Foundation for Accounting Education's Trust and Estate Taxation Conference on Dec. 7, Matz noted that both the House and Senate versions of the bill contain provisions that dramatically cut the federal estate tax, meaning that people should prepare for much lower rates regardless of what bill is ultimately signed into law. 

Under current law, the exemption for estate taxes (as well as generation-skipping taxes and gift taxes) is $5.6 million for individuals and $11.2 million for married couples. Both the House bill and the Senate bill increase this exemption to $11.2 million for individuals and $22.4 million for married couples. Where the two versions part is that the Senate bill provisions sunset in 2025, at which point rates return to the levels they're at now, while the House bill repeals the estate and generation-skipping tax entirely (though it keeps the gift tax). Both versions retain a a step-up in the basis for inherited property to its fair market value at the time of the decedent's death.

"There is so much political pressure in D.C. to get something done before Christmas, it could be they negotiate and say it's better to pass something than pass nothing at all, and then just pass one version," he said. "So figure that that's going to happen, since both the House and the Senate are in agreement [when it comes to the exemption increase."

But Matz said that it would be a mistake to look at federal law in a vacuum: States, including New York, have estate tax laws too. He said that New York's estate tax is very similar to the federal tax right now, with a $5.2 million exclusion versus the federal $5.4 million one. He said that this was by design, as the state law was written to track the federal one. Should the federal estate tax exemption double, however, New York's estate tax would still remain the same. This is because the state law, for the most part, models itself after the Internal Revenue Code as it was in 2014, with the exception of the basic exclusion amount, which is tied to the amount in effect in 2010 (a $5 million exclusion with inflation indexing). 

"So the fact [that] the federal amount is shooting up to ... $11.2 million will not have any effect on New York state and their exclusion," he said. 

He also noted that New York's law has a provision whereby estates that exceed the exclusion amount by more than 5 percent at the time of the decedents' deaths cannot take advantage of any of New York's exclusion at all. Such estates are subject to New York estate taxes entirely starting from dollar one. Matz said he is confident that this provision would not stand up in court, but until that happens, "it is what the law is," 

This provision means that if a CPA has a New York-based client, and that client has a will with instructions to fund a credit shelter trust or AB trust with the largest amount that could pass free of federal estate tax, that client must understand that, since this amount is over $5.6 million, the entire estate would be subject to New York estate tax. 

Matz also spoke briefly about the state and local tax deduction, which both the House and Senate bills would eliminate, with the exception of a $10,000 deduction for real estate taxes. This provision, he said, affects people in New York disproportionately compared to people in other parts of the country, which is why the State Society has been advocating for Congress to reconsider the repeal. 

With this in mind, he said clients might want to consider prepaying their taxes to make use of the deduction before it disappears entirely, though said this can't be done cavalierly. 

"Are we advising our clients to prepay taxes? To the extent it constitutes a reasonable estimate--you can't just try to prepay a couple of years' worth--but to the extent you can, and to the extent you're not subject to the [alternative minimum tax], that absolutely makes sense since there is a very good chance that deduction will be worth nothing Jan. 1, 2018, so use it or lose it," he said. "You have to crunch the numbers, and the AMT could stand in the way of getting any benefit from that... but if the numbers indicate you will derive tax benefit, I think it is a wise strategy." 

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