Wealth Preservation Strategies

The budget adopted by New York State effective on April 1, 2014 was touted as including reductions in the New York State estate tax designed to keep the wealthiest New Yorkers from leaving New York to avoid estate taxes when they die (for example, moving to Florida).  Unfortunately, however, as adopted, it did no such thing.

What New York did adopt was an increased estate tax exemption which, by 2019, is expected to eliminate New York State estate tax for most single people with assets worth, at death, less than approximately $6,000,000 (the exact amount depends upon inflation adjustments), and to do the same for most married couples with assets that do not exceed double that amount, but only if they design, and implement, their estate plans correctly, and in advance.

Starting on April 1, 2014, the New York estate tax exemption (in addition to amounts passing to, or to a qualifying trust for, a surviving spouse or a charity) was increased from $1,000,000 to $2,062,500.  That exemption is to increase by another $1,062,500 on each April 1st through April 1, 2017, when it is to reach $5,250,000, and is then to increase some more so that, starting on January 1, 2019 it matches whatever the federal estate tax exemption then is (which, due to inflation adjustments, we expect will be about $6,000,000).

The problem, however, is that this new exemption applies to some estates, but not to others.  For taxable estates worth between 100% and 105% of the then applicable New York estate tax exemption, the exemption is phased out, and, once one reaches 105% of the exemption amount, the exemption "falls off a cliff" and effectively disappears.  Thus, wealthier New Yorkers received little or, often, absolutely no benefit from these changes.

If the value of a New Yorker’s taxable estate is a mere $1,000 more than the New York estate tax exemption applicable to his or her estate, the New York estate tax is $1,077.  If the taxable estate exceeds the exempt amount by $100,000 the New York estate tax is $109,729.50.  In fact, as The New York Times recently pointed out, if the taxable estate of a New Yorker who dies between April 1, 2014 and March 31, 2015 is worth $2,165,625, that person’s estate potentially would owe $0.00 in federal estate tax, but it would owe $112,050 in New York State estate tax.  Thus exceeding the New York estate exemption by $103,125 results in a tax of $112,050.  In each of these examples the tax would be more than 100% of the amount by which the value of the estate exceeded the exemption!

Furthermore, for New Yorkers who make gifts (other than to a spouse or a charity) in excess of the annual exclusion amount (now $14,000 per donor per recipient per year), those gifts, which formerly were free of both New York estate and gift tax, will now be subjected to a brand new New York State estate tax, if the gifts were made within the three years prior to death, no matter what the gifts consisted of, no matter why they were made and no matter where the assets which were the subject of the gifts were located (the last part may have Constitutional problems).  Furthermore, although payment of the New York State estate tax typically results in a federal estate tax deduction (but only for estates subject to federal estate tax), thereby usually reducing the out-of-pocket cost of the New York tax by 40%, payment of the new New York estate tax on such gifts does not.

In addition to the above, New York State enacted an income tax on distributions to New Yorkers from certain non-New York trusts, and adopted a highly complex method for calculating that tax. 

The federal government recently enacted the concept of "portability" with respect to estate taxes, so that one spouse's unused federal estate tax exemption could be "ported" (transferred) to the surviving spouse, if a timely federal estate tax return were filed after the first spouse's death.  The idea was to make it easier for couples with assets that do not exceed twice the applicable federal estate tax exemption to avoid federal estate tax without the need to use trusts and similar arrangements that take effect upon or, sometimes, before the death of the first spouse to die.

The New York State legislature was asked to do the same, but did not.  Thus, for New York couples, the New York estate tax exemption is a "use it or lose it" proposition, so that a New York couple with total assets worth more than the New York estate tax exemption of the first spouse to die will lose, for New York estate tax purposes, any part of that exemption that is not used by that spouse's estate.  The result is that more complex estate planning, often including a "credit shelter" or "bypass" trust, but one tied to the New York (rather than merely the federal) estate tax exemption, is still required by those who seek to minimize a couple's aggregate New York State estate tax.