New York Estate Tax

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On March 31, 2014, broad changes were made to the New York estate and gift tax laws.  In addition to increasing the New York basic exclusion amount for taxable estates, a New York estate tax “cliff” was introduced that phases out the New York basic exclusion amount for taxable estates between 100% and 105% of the exclusion amount.  As a result, taxable estates that exceed 105% of the New York basic exclusion amount will lose the benefits of the exclusion entirely.

In 2019, the New York basic exclusion for taxable estates is $5,740,000 per person.  In addition, as of January 1, 2019, taxable gifts made within three (3) years of death are no longer included in a New York decedent’s estate for estate tax purposes.  The combination “cliff” and elimination of the three-year look back has created a valuable gifting opportunity available to New Yorkers.

Below is a chart indicating various New York taxable estates, the amount of New York State estate tax due, the amount that would ultimately pass to beneficiaries, the total benefit from gifting, and the generated savings (i.e. the amount that would be saved in taxes that exceeds the amount that would be gifted).

New York State Taxable Estate New York State
Estate Tax		 Applicable Credit Total Passing to Bene-ficiaries Without Gifting Amount Gifted Total Passing to Bene-ficiaries With Gifting Total Benefit from Gifting Generated Savings
(Savings From Taxes Less Gift)
$5,740,000 $0 $479,600 $5,740,000 $0 $5,740,000 $0 $0
$5,740,100 $219 $479,393 $5,739,881 $100 $5,740,100 $219 $119
$5,750,000 $25,170 $455,630 $5,724,830 $10,000 $5,750,000 $25,170 $15,170
$5,800,000 $146,746 $340,054 $5,653,254 $60,000 $5,800,000 $146,746 $86,746
$5,850,000 $259,774 $233,026 $5,590,226 $110,000 $5,850,000 $259,774 $149,774
$5,900,000 $356,804 $141,996 $5,543,196 $160,000 $5,900,000 $356,804 $196,804
$5,950,000 $434,397 $70,403 $5,515,603 $210,000 $5,950,000 $434,397 $224,397
$6,000,000 $493,493 $17,307 $5,506,507 $260,000 $6,000,000 $493,493 $233,493
$6,001,960 $495,709 $15,326 $5,506,251 $261,960 $6,001,960 $495,709 $233,749
$6,027,000 $514,040 $0 $5,512,960 $287,000 $6,027,000 $514,040 $227,040
$6,100,000 $522,800 $0 $5,577,200 $360,000 $6,100,000 $522,800 $162,800
$6,150,000 $529,200 $0 $5,620,800 $410,000 $6,150,000 $529,200 $119,200
$6,200,000 $535,600 $0 $5,664,400 $460,000 $6,200,000 $535,600 $75,600
$6,250,000 $542,000 $0 $5,708,000 $510,000 $6,250,000 $542,000 $32,000
$6,286,697 $546,697 $0 $5,740,000 $546,697 $6,286,697 $546,697 $0
$6,300,000 $548,400 $0 $5,751,600 $560,000 $6,300,000 $548,400 $0
$6,400,000 $561,200 $0 $5,838,800 $660,000 $6,400,000 $561,200 $0
$6,500,000 $574,000 $0 $5,926,000 $760,000 $6,500,000 $574,000 $0
$6,600,000 $586,800 $0 $6,013,200 $860,000 $6,600,000 $586,800 $0
$6,700,000 $599,600 $0 $6,100,400 $960,000 $6,700,000 $599,600 $0
$6,800,000 $612,400 $0 $6,187,600 $1,060,000 $6,800,000 $612,400 $0
$6,900,000 $625,200 $0 $6,274,800 $1,160,000 $6,900,000 $625,200 $0
$7,000,000 $638,000 $0 $6,362,000 $1,260,000 $7,000,000 $638,000 $0
$7,500,000 $705,200 $0 $6,794,800 $1,760,000 $7,500,000 $705,200 $0
$8,000,000 $773,200 $0 $7,226,800 $2,260,000 $8,000,000 $773,200 $0
$8,500,000 $844,400 $0 $7,655,600 $2,760,000 $8,500,000 $844,400 $0
$9,000,000 $916,400 $0 $8,083,600 $3,260,000 $9,000,000 $916,400 $0
$9,500,000 $991,600 $0 $8,508,400 $3,760,000 $9,500,000 $991,600 $0
$10,000,000 $1,067,600 $0 $8,932,400 $4,260,000 $10,000,000 $1,067,600 $0

As detailed in the above chart, the beneficiaries of a New York decedent in 2019 with a taxable estate of $5,740,100 would actually receive less in assets than if the decedent died with an estate of $5,740,000. If such decedent had gifted $100 the day before he/she died, his/her beneficiaries would have received an additional $119 in assets.  The total benefit in this case would therefore be $219 (which equals the estate tax that would have been due to New York State on his/her death).  These potential savings increase exponentially as the taxable estate increases.  In fact, a New York decedent in 2019 with a $6,001,960 taxable estate could save $495,709 by gifting $261,960 the day before he/she died.  The result is a realization of $233,749 in generated savings.

Lifetime gifting, as described above, not only permanently removes such gifted assets from the donor’s taxable estate without any loss to the ultimate amount inherited by his/her beneficiaries, but also eliminates the future appreciation on such gifted assets from the donor’s taxable estate.  With the 2019 federal estate exemption of $11,400,000 ($22,800,000 for married couples), many New Yorkers could take advantage of this gifting opportunity.

The gifting described above works best when done with cash or cash equivalents.  Using highly appreciated assets for such gifting may offset any gains achieved from such gifting as a result of the loss of a stepped-up cost basis in such assets on the donor’s death.  Individuals should always consult with a tax professional prior to any lifetime gifting to ensure that such gifting would not result in adverse gift or income tax consequences.

Note: On January 15, 2019, Gov. Andrew Cuomo released his proposed 2019 Executive Budget which would revise the New York Tax Law to reinstate the three-year look back for taxable gifts made within three (3) years of death in a New York decedent’s estate for estate tax purposes for gifts made before December 31, 2025.

Many New Yorkers who want to move to Florida still desire to retain a home, an apartment, or some other type of property in the place where they grew up.  What many of the newly minted Florida residents may not consider are the estate tax consequences of continuing to own property located in New York.  In light of the changes to New York’s estate tax laws in the past two years, we set forth some important rules that the old New Yorker / new Floridian should keep in mind.

A primer on New York estate tax law is helpful before considering the issues associated with being a Florida resident who owns property located in New York.  New York imposes an estate tax at rates ranging from 4% to 16% on its residents (and also nonresidents, as will be explained below).  However, New York law also provides that anyone owning less than $4,187,500 in assets is exempt from New York estate tax.  This exemption increases to $5,250,000 on April 1, 2017 and finally increases again on January 1, 2019 to equal the federal exemption (which is currently $5,450,000 as adjusted for inflation).

Therefore, if an individual’s total estate is less than the New York exemption amount, that individual need not be concerned with New York estate tax.  In addition, if the total value of a Florida resident’s New York assets is under the New York exemption, that individual also need not be concerned with New York estate tax.  But, what if a Florida resident’s New York assets are valued over the New York exemption?

New York’s estate tax applies to nonresidents owning real or tangible personal property located in New York.  It does not apply to intangible property owned by Florida residents.  Tangible personal property is defined in the negative, meaning New York law sets forth assets that are considered intangible, and therefore not subject to New York estate tax, including bank deposits, shares of stock, bonds, mortgages, debts and receivables.  Tangible personal property includes assets that (i) are movable,  (ii) have physical characteristics, and (iii) are capable of being possessed – boats, cars, artwork, jewelry, antiques and other collectibles.

New York’s estate tax also applies to any gifts made within three years of an individual’s death.  For the individual who has recently moved to Florida, this means that the value of any gifts by that individual while he or she was a New York resident of real or tangible property located in New York or intangible personal property relating to an active business, trade or profession in New York will be considered for determining whether the Florida resident is subject to New York estate tax.  This three year add-back only applies to gifts made after April 1, 2014.  The rule will not apply to estates of individuals who die after January 1, 2019.

To illustrate how New York estate tax law operates, take for example a Florida resident who owns a vacation home in the Hamptons valued at $6,000,000. That individual would be subject to New York estate tax because the value of the home ($6,000,000) is greater than the current New York exemption ($4,187,500).  Also note that, unlike federal estate tax law, once an individual’s estate exceeds the New York exemption, the value of the individual’s entire estate is subject to New York estate tax, not just the amount over and above the New York exemption. Therefore, in our example, the entire $6,000,000 would be subject to New York estate tax (not just $1,812,500).

What if that same Florida resident instead owns a cooperative apartment in New York City and does not own the Hamptons home? That Florida resident would not be subject to New York estate tax because that individual owns shares in the cooperative apartment, which is considered an intangible asset.

Now assume that the Hamptons home is valued at $1 million and the rest of the Florida resident’s assets, which are all located in Florida, are valued at $5 million.  Then the Florida resident would not be subject to New York estate tax because the $1 million Hamptons home is less than the current New York exemption of $4,187,500.  It is irrelevant that his or her total estate is greater than the New York exemption.

So how does the Florida resident avoid New York estate taxation on his or her $6,000,000 Hamptons vacation home?  One option is forming a special residence trust and then gifting the property to that trust.  This removes the property from the individual’s taxable estate.  There are advantages and disadvantages to this option, which are not discussed in this blog post.

Another option is to place the home in a Limited Liability Company.  By placing the home in a LLC, the interest in the home converts to an intangible asset, which is not subject to New York estate tax (so long as the LLC is not carrying on an active NY business).  The potential savings from transferring the $6 million Hamptons home to the LLC? A few hundred thousand dollars ($510,800 to be exact).  One caveat to transferring the home to a LLC is that the LLC should be a multi-member LLC, as New York takes the position that if a LLC is disregarded for federal tax purposes (i.e., it only has one member), then it will be disregarded for New York estate tax purposes in determining whether the property is intangible or not.  This is based on a decision made by the NYS Department of Taxation and Finance in May 2015.

If there is valuable artwork or other collectibles in that home, then the Florida resident may want to consider moving that property to Florida, gifting that property, or transferring those assets to the LLC.  He or she could also lend that art to a museum or public gallery in New York for exhibition.  All of these options would remove the property from the New York taxable estate.

Also important in determining whether a Florida resident will be subject to New York estate tax are the deductions allowable for New York estate tax purposes.  In determining what expenses are deductible in order to determine the value of a Florida resident’s New York estate, any deductions directly related to (i) real and tangible property located outside New York and (ii) intangible property are disallowed.  For example, property taxes on a New York home would be deductible, but property taxes on a Florida home would not be deductible.  Funeral expenses, Executor’s commissions, and other federal deductions that are not directly related to real or tangible property located outside New York or to intangible property would be partially deductible based on a percentage equal to the value of property outside of New York compared to the total value of the estate.

After moving to Florida, make sure you know the value and quality of the assets you are leaving behind in New York. If it is determined that those assets are real or tangible assets and their value exceeds the New York exemption amount, then plan accordingly to move those assets outside of New York, gift those assets, or convert the assets to intangible assets.  The savings could amount to hundreds of thousands of dollars for your family.