Forbes has dubbed New York one of the worst places to die in 2014. The reason for the moniker is the estate tax which is a tax on your right to transfer property at your death. New York, along with only thirteen other states, still levies the tax. The state estate tax is in addition to the federal estate tax.
The liability threshold in New York is $1 million dollars, whereas the federal threshold is $5 million – indexed for inflation to $5.34 million. In New York, the estate tax can be up to 16% of an individual’s taxable estate. To determine if an estate tax return is due in New York, the gross estate must be determined. The New York State Department of Taxation and Finance defines the gross estate to include all property that a person owned, had control over, or had an interest in on the date of his or her death. It is not just limited to what a person leaves, or bequests, in their will. It can include life insurance policies, half of the house one owned with their spouse, a stock portfolio and beyond.
At first blush, one may consider this threshold would not apply to them, perhaps believing that if annual income does not exceed $1 million their estate will be exempt. In actuality, individuals subject to the estate tax are not just the big annual wage earners, but those who have more than $1 million in assets, no matter the source. New York had 429,153 households with $1 million or more in 2013, that composes 5.79% of all households in New York State, the 12th largest share of any state. The report is based on liquid assets and does not include real property. The number is underestimated as real estate has risen in value over time owned. This is especially true in and around New York City where owning an apartment or home worth close to $1 million may only get you 900 square feet on the Upper West Side.
As a result, New York has seen its residents establish domicile, or permanent residence, in a state that has more favorable estate tax treatment. Florida is a perfect example of this, as Florida has no estate tax liability. Those that have often been referred to as ‘snowbirds’ not only avoid the harsh New York winters, they may also have another motivation for compiling significant time in states like Florida. An individual can avoid the inhospitable estate tax as well (provided the steps taken to change residence can withstand a New York State Department of Taxation and Finance tax audit).
New York State may be catching on. This year has seen a strong proposal from Governor Andrew Cuomo to raise the estate tax to match the federal threshold by the year 2019. There would still be an estate tax, just at a higher threshold and a lower percentage. Not only would it match the federal level of $5 million, indexed for inflation, the top tax rate would be reduced from 16% to 10%.
As one can imagine, this incites strong opinions from both sides of the fiscal coin. There are those who purport the only people who would benefit are the wealthiest 2% of New Yorkers, and others who say it would incentify New Yorkers to keep and invest their wealth in their home state. Although the outcome is difficult to predict, it is clear that raising the New York State threshold would permit New Yorkers to have more control over a greater value of their assets upon death in New York. Fear not if there is no Boca condo, for there are numerous estate planning techniques that can permit an individual to retain their assets for distribution to the people and things they value that do not include relocating to another state. However, a higher estate tax threshold in New York may serve to lessen the time one has to sit down and think around the problem by eliminating it.