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Will changes in estate tax keep you in NY or send you packing?

J Terwilliger 2014
James P. Terwilliger, PhD, CFP®
Retired 2/2022, Senior Vice President, Senior Planning Advisor
[email protected]
(585) 419-0670 x50630
J Weidner
Jennifer N. Weidner, Esq.
Senior Vice President - General Counsel and Corporate Secretary
[email protected]
(585) 394-4260 x36221
In the past 15 years, the federal government has actively modified the laws that dictate how much of a taxpayer’s estate will be subject to federal estate tax. The federal exemption from estate tax is now $5,340,000 per person and is indexed to increase for inflation annually.

Many states abandoned their state estate tax entirely or have tethered their state exemption to the federal exemption. Meanwhile, New York appeared to be “asleep at the wheel,” with no revision to the exemption from estate tax of $1,000,000. Florida, for example, does not have a state estate tax. This made moving out of New York State to a state like Florida an appealing concept: a $5,000,000 estate would save approximately $400,000 that would be otherwise paid in New York estate tax simply by relocating domicile!

In an effort to stem the tide of taxpayer emigration, New York at long last modified its state estate tax exemption. In true New York fashion, however, the laws are complicated and continue to perplex even sophisticated advisors.

For estates of decedents dying between April 1, 2014 and March 31, 2015, the New York exemption is $2,062,500. The following year the exemption increases to $3,125,000; the year after that it increases to $4,187,500; and the exemption increases to $5,250,000 the next year. Starting January 1, 2019, the New York estate tax exemption will be aligned to the federal estate tax exemption, which is then likely to be around $5,900,000. For now, the top tax rate of 16% remains the same as before.

The increase in state exemption will alleviate state estate tax for individuals and couples whose assets are less than the new exemption amounts. However, it’s not a slam dunk for the purpose of encouraging people to remain residents of New York, for two reasons.

First, there is a spousal portability feature in the federal estate tax law, such that a surviving spouse can use the first spouse’s unused exemption as well as the exemption in his or her own estate, effectively doubling the exemption available to the second estate.

The New York exemption is not portable between spouses. Therefore, a surviving spouse who has approximately $10,000,000 of assets can avoid federal estate tax by applying the unused exemption from the first spouse, but that same spouse in New York would be subject to fairly significant New York estate tax.

Second, the New York law provides that if an estate is worth more than 105% of the New York exemption amount, the estate would pay the same tax as if the laws had never been revised and the exemption were still only $1,000,000. (Also, if the estate were between 100% and 105%, the estate would begin to lose exemption value fairly rapidly.) If you’ve heard the term “estate tax cliff” recently, it refers to this particular issue.

You can see, therefore, that once the New York exemption matches the federal exemption, the tax impetus to move out of state will no longer exist for someone who has less than that amount. However, an individual with assets in excess of that amount will still have reasons to consider changing domicile to a more tax-friendly state.

Alternatively, that person may wish to engage in some estate planning strategies to reduce their taxable estate. It’s important to consult your advisors regarding such strategies to ensure they are implemented properly, as the recent New York tax law changes also implemented a few other quirks, such as including certain gifts made by a New York resident between April 1, 2014 and December 31, 2018 in his or her gross taxable estate. Income taxability of certain types of estate planning trusts is affected by the new laws, as is the taxability of certain types of New York property owned by non-residents.

We at the Wealth Strategies Group would be delighted to talk with you further should you have any questions on how the new laws affect your estate planning considerations.

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