Planning early can pay off in the end
Each life comes with an unspecified expiration date so it’s best to plan your estate as soon as you can. Doing so in New York, though, can be uniquely challenging.
“New York is an expensive place to live and an expensive place to die,” says Carlyn S. McCaffrey, a partner at McDermott Will & Emery in Manhattan.
State and federal estate tax rules have gone up and down for decades—although last year Congress declared the estate and gift tax exemption amount “permanent” at $5 million, adjusted annually for inflation. In 2014, that means you may leave or give away up to $5.34 million without owing any federal estate tax.
This means that roughly 99 percent of all estates won’t be affected.
“But if you have less than the federal exemption amount that doesn’t mean you won’t owe any estate taxes,” warns Sanford J. Schlesinger, managing partner of Schlesinger Gannon & Lazetera in Manhattan. “The laws vary widely from state to state.”
Falling off the cliff
Currently, 19 states and the District of Columbia collect some form of “death tax” (estate, inheritance or gift taxes), and some collect from estates that aren’t big enough to owe federal estate tax. This includes New York.
In March 2014, the state enacted a law that will annually increase its estate tax exemption until it matches the federal exemption in 2019.
New York is also the only state with an estate tax “cliff.”
In other states, and in the federal system, only the amount over the exemption is taxed. New York taxes the entire value of an estate if it exceeds 105 percent of the exempt amount.
“So you morphed rapidly from zero tax to, ‘Oops, you’re dead because you’ve fallen off the cliff,’” says L. David Clark Jr., sole proprietor of his eponymous firm. “State government was on a campaign to make New York more taxpayer friendly, and they accomplished that somewhat. But I don’t think the chamber of commerce would give the legislature an A to the effort.”
Schlesinger gets calls from clients asking about moving from New York to Florida, where there’s no estate tax.
“It isn’t easy,” he says. “New York is aggressive with domicile audits on people who have tried to move but haven’t done it adequately from a tax point of view.”
Singles and doubles
Ultimately, smart strategies are the same for wealthy and middle-class clients. Examples:
“There’s a tendency to go for the long ball for some people,” Clark says. “They come in with fairyland expectations of what an estate planner can do in terms of giving it away and keeping it at the same time.
“But you take a grandfather who’s making direct payments for school tuition and medical expenses for his five grandkids—that doesn’t count against the annual $14,000, which he can put into each of their trust funds every year. Those payments are smart.”
He adds: “Make sure your documents are up to speed. Follow the process and try to be cognizant of the changing rules and opportunities, but not to the detriment of the tried and true. It’s good to be aware of the big-hitter issues, but in real life, most of the time, it’s about singles and doubles. And they add up.”
New York is the only state with an estate tax “cliff.”