June 01, 2015

New York’s Revised Estate Tax Exemption: Real Change?

Martin B. Cowan

In 2014, New York modified its estate tax. The governor claimed the changes would conform the New York estate tax exemptions to the federal amounts and reduce estate taxes for most decedents. But for many of us who have studied the actual changes, the governor’s claims appear to have been more political spin than anything else.

It is true that, prior to this change, the New York exemption was only $1 million, that it was boosted up to $2,062,500 in 2014, and that it will increase annually until, by the year 2019, it will be approximately equal to the federal exemption ($5.34 million in 2014 and increased annually by a cost-of-living (COL) adjustment. However, there are at least two very significant problems.

First, New York did not adopt “portability.” If the first spouse dies in 2020 with an estate of $1 million and the survivor dies a short while later with an estate worth $6 million (plus the COL adjustment), the survivor’s estate will be subject to tax. (Except for Hawaii, no other state allows portability, so this is not just a New York problem.) So estate planners are still going to be forced into using credit shelter trusts and possibly other devices to attempt to preserve the unused portion of the exemption of the first spouse to die. These efforts are not always effective and can be very complicated even when they are.

The second major difficulty is that this particular surviving spouse probably won’t even get the $5 million exemption. On these facts, her exemption actually will be zero. The reason is that the exemption is phased out at the rate of 20 percent for each one percent that the estate exceeds the exemption amount; if the estate exceeds the exemption amount by five percent, the exemption is reduced to zero. As another example, if the estate in the year 2014 was $2,165,625, the exemption for that year was zero, not $2,062,500. Similarly, in 2018, the New York exemption will nominally be $5,250,000, but if the estate turns out to be $5,512,500, the New York exemption is zero and the entire estate, starting with dollar one, is fully taxable. The maximum rate in New York is 16 percent, which kicks in at $10,040,000.

The governor claimed that the amendments to the New York law would halt the exodus of wealthy (and even not-so-wealthy) retirees to states like Florida in order to avoid the estate tax. (Actually, only the surviving spouse has to leave the state, since the tax on the first to die can be eliminated by using the marital deduction.) However, because of other changes, such as the re-imposition of the estate tax on gifts made within three years of death and between April 1, 2014, and December 31, 2018, the new law actually increases the pressure on high net worth individuals to leave the state after retirement (if not before).

A useful summary of the estate taxesin every state can be found at http://wills.about.com/od/stateestatetaxes/a/stateestatetaxchart.htm.

Martin B. Cowan

Martin B. Cowan practiced law in the tax department at Milbank Tweed Hadley & McCloy in New York City, and from time to time taught tax courses at New York University, Florida State University, the University of Miami, and Quinnipiac University. He is a past chair of the Real Estate Tax Committee of the ABA Tax Section, and is currently chair of the Senior Lawyer Division’s Task Force on Protecting the IRA Accounts of the Elderly.