New York estate tax structure revamped effective April 1, 2014

Why is a Florida estate planning lawyer writing about New York estate taxes?  Because (1) a fair percentage of my clients hail originally from New York; (2) some of them may end up as New York residents again; and (3) New York, unlike Florida, has its own estate tax. It is one of 19 states (plus the District of Columbia) that does.

Many people do not realize that even if their estate is not subject to federal estate tax, it could be subject to state estate tax if they return to live in a state like New York that imposes its own estate tax. This is the reason our estate planning attorneys always discuss possible future relocation with clients. Most clients say they will never return to the cold, and most don't. But some do. For example, a surviving spouse may decide he/she wants to be closer to family, or the kids up north may want their parents and grandparents near them so they can be of greater assistance. Client relocation is a possibility that must be discussed because of its potential legal and tax implications.

New York State revamps its estate tax structure

So what's up with New York State's estate tax? A lot. Tired of losing residents and revenue to Florida and other states that have no estate tax, New York State has recently overhauled its estate tax guidelines. The changes are designed to incentivize retirees to remain in (or return to) the Empire State. Here are the changes in brief:

Effective April 1, 2014, New York State's estate tax exemption for an individual increased from $1,000,000 to $2,062,500. Over the next five years, the exemption will increase annually until, in 2019, it matches the federal estate tax exemption (currently $5,340,000.)  From that point forward, New York's tax exemption will align with the federal exemption. 

Here is what the New York State exemption will be through 2019:

April 1, 2015: $3,125,000

April 1, 2016: $4,187,500

April 1, 2017 through Dec. 31, 2018: $5,250,000

Jan. 1, 2019: The tax will match the federal exemption, which, indexed to inflation, is projected to be around $5,900,000.

Problems with the overhaul

Now all this may look very appealing to a New Yorker, and to a Florida resident who may be a New Yorker in the future. But dig deeper and you'll see that not all that glitters is gold!

First, New York's top estate tax rate remains unchanged at a very hefty 16%. That is high compared to other states that levy estate tax.

Second, beware the "cliff." Federal estate tax applies only to that portion of an estate that exceeds the exempted amount. But if a New Yorker passes away and leaves a taxable estate that is 5% or greater over the exempt amount, the state will tax the entire value of the estate, not just the amount that exceeds the taxable threshold. The potential disaster this "cliff" poses can be demonstrated with the following example. The exemption amount in 2017 and 2018 will be $5.25M. Let's say a decedent leaves an estate 5% over that amount -- that would be an estate valued at $5,512,500, or $262,500 above the exemption threshold. In our example, the state estate tax would be $430,050 -- creating the absurd situation in which the tax is greater than the dollar amount of the estate that exceeds the threshold. 

Third, New York's revised tax code does not include portability. A surviving spouse may not use any unused portion of the deceased spouse's exemption, as is the case with federal estate tax.

Lastly, from now through Dec. 31, 2018, New York residents will have to contend with the "look-back." For New York estate tax purposes, this means that any gifts made within three years prior to death will be added back into the estate for tax purposes, so long as the decedent was a resident of New York when the gift was made.

And...one must still factor in that Florida has lower property taxes and sales tax, no income tax - and NO SNOW! Even with New York's modified estate tax structure, Florida still looks like a contender for retirees.