New York has always been known as one of the worst states to die in. Estate tax reform is long overdue, and new legislation initially proposed by Governor Cuomo attempts to keep affluent New Yorkers from retiring elsewhere. Unfortunately, the result is a “won the battle, lost the war” scenario in which moderately wealthy taxpayers will be exempt from the tax, while the only change the more affluent will see is an increase in complexity of the law and taxability of certain gifts.
Under the new provisions, the estate tax exemption will increase from $1M to $2,062,500 beginning April 1, 2014. The exemption will continue to increase by roughly $1M per year, until expected to link with the federal exemption in 2019 (projected to be $5.9M). For the middle class currently considering their retirement options, this could be viewed as a victory. The reform will save thousands of families from estate tax, and minimize the need for planning. However, you cannot choose when you die, and $2,062,500 is still a net worth many New Yorkers fall above. But at least you now have an exemption upwards of $2M to soften the blow, right? While the increase to the exemption is a welcome change, it comes with a catch. A “cliff” to be more precise, that kicks in once an estate goes over the exemption, and fully removes any exemption when an estate exceeds the exemption by just 5%. To illustrate, if the value of an estate is $2,165,625 (5% over the $2,062,500 2014 exemption) tax would be levied on the full value of the estate. This small difference in value (approximately $103,000) has big consequences triggering over $112,000 of tax (the same amount of tax as one would incur under the old law). This makes estate planning for an individual teetering around the exemption amount imperative.
One strategy in the past had been to simply gift a portion of your assets to drive the estate below the state filing requirement. The new provisions, in a regressive step, require all gifts made within three years of death be added back to the estate (assuming the decedent was a New York resident at the time the gifts were made). After being commended in 2000 for eliminating the gift tax, New York is facing scrutiny as it now taxes gifts made within three years of death, possibly including gifts of out of state property.
And what has changed for the wealthy residents who need convincing to stay in New York? Nothing. In 2014, an estate worth $5,340,000 (the federal exemption) will incur $431,600 of tax under the new law, exactly as it would under the old law. The top marginal tax rate remains 16% (although it will be revisited next year) and now the add back provision for gifts eliminates a useful strategy to minimize the tax. Where a majority of the country, including a state of great individual wealth in California, and popular destination state, Florida, have no estate or gift tax, it remains difficult for New York to compete under the current legislation. The wealthier residents the reform was originally intended to keep in the state may have just given further assurance they are better off elsewhere, solidifying New York as the “leave to die state”.
Matthew Taus, CPA
Rynkar, Vail, & Barrett LLP