The recent news of the announced departure of Carl Icahn and his 75 employees from New York State generated a few calls from interested snowbirds. Usually, calls like these are from potential snowbirds to learn more about leaving New York to tax-advantaged states like Florida and they tend to revolve around income tax planning. However, this raft of calls didn’t involve income taxes. Instead, they brought up issues related to estate tax planning- more specifically state estate tax planning in New York. This leads us to an issue that isn’t new. However, it can be significant to families trying to deal with an (expensive) quirk in New York’s estate tax system.
THE NYS ESTATE TAX “CLIFF” . . .
2014 brought significant federal estate tax changes. New York state changed its estate tax structure as well. Previously, the estates of deceased New York State residents had an exclusion of $1 million before being subject to the state estate tax. In 2014, New York State changed its laws so that estates of deceased New York residents worth less than $5 Million (currently $5.74 million) are no longer subject to estate tax. That is the good news.
However, the New York law instituted the “estate tax cliff.” When an estate exceeds the exempted amount (currently $5.74 million) by 5% or more, the entire estate is subject to New York State estate tax. This tax has a graduated rate that starts at 3.06 percent for the first $500,000, and the maximum is 16 percent for estates with a value of $10.1 million or more. This is important because not all states impose this type of tax. This importance is amplified because people with more than $5.74 Million have more choices about where they want to retire and spend the end of their lives.
WHAT CAN THIS MEAN IN REAL TERMS?
Take this example:
X dies in 2019 with a taxable estate of $5,740,000. Since she is not over the NYS exemption amount, there is no NYS estate tax due and $5,740,000 will pass to her heirs.
However, if X died in 2019 with a taxable estate of $5,900,000, she would be over the NYS exemption amount by $160,000. This would trigger an NYS estate tax of $356,800.
After payment of the NY estate tax, ($5,900,000 – $356,800), only $5,543,200 would pass to her heirs.
X’s heirs would inherit $196,800 less, even though X’s taxable estate was $160,000 more
The effects are steeper as the taxable estate increases.
Another peculiarity in New York law that is important to remember: any unused spousal estate tax exclusion amount is not transferrable to the surviving spouse, as it is for federal estate tax purposes. This can have significant ramifications for New York State married couples’ estate tax planning.
WHY CAN’T YOU JUST GIVE YOUR ASSETS AWAY BEFORE YOU DIE?
New York eliminated its gift tax in 1999. The Federal estate and gift tax exemption is $11.4 million for 2019. That distinction looks like an opportunity for New Yorkers to use gifting as a way to avoid the NYS estate tax cliff. The New York Legislature recognized this as well. Legislators added a provision that looks back 3 years from the date of death and adds the value of any gift made during that time to the total value of the estate. This provision is currently set to expire in 2026.
Two types of gift are not subject to the look-back provision:
· Charitable gifts.
· Real and tangible property located in another state.
· Additionally, gifts made while the decedent was not a resident of New York State.
THREE STRATEGIES TO DEAL WITH THE THREE YEAR LOOKBACK:
- Make significant charitable contributions to reduce the value of your taxable estate.
- Purchase tangible property—such as real estate—in states with more favorable tax environments.
- Change your domicile from New York to a state that does not have death transfer taxes.
On the last point, New York is famous for challenging domicile, especially for tax reasons. Therefore, extra care is required in “dotting the I’s and crossing the t’s” when establishing a home in a new state. This includes titling assets correctly, switching registrations and other indicia of domicile and ensuring that you spend the necessary amount of time away from New York State. If you are able to firmly establish your domicile fact pattern, any property you maintain in New York will be subject to your new state’s tax laws.
It’s well established that it is expensive to live in New York City. What Carl Icahn and others have discovered is that with the New York Estate Tax “Cliff”, it can be just as expensive to die in New York! That said, there are steps you can take to reduce this tax liability and maximize the amount you heirs will inherit. While the “Cliff” isn’t new, knowing its effects on one’s estate plan should be on every New Yorker’s to-do list when reviewing their estate plan with their advisors.