Estates of Confusion

In 2014, the New York Legislature made big changes to estate tax laws, and this year Governor Cuomo’s 2015-2016 executive budget added changes to those changes. Several tax attorneys, however, are surprised not so much by what’s been done but by what hasn’t been done.

Before we dig into the details, two caveats. The provisions mentioned below tend to apply to the wealthy, so most of us will remain unaffected.

The second caveat comes from estate planning & probate attorney L. David Clark, Jr. “Explaining the technical stuff,” he admits, “makes clients’ eyes glaze over.” 

You’ve been warned. 

The first contentious provision is the so-called estate tax “cliff.” Although New York’s estate tax exclusion amount—the amount that can be excluded before taxes are assessed—rose to $3.125 million this year, and will continue to rise to $5.25 million in 2018, there is a catch. If the estate is worth more than 105 percent of that exclusion, the individual loses his or her entire tax break. So if, in 2015, your estate is worth up to $3,281,250, you pay no taxes. But if it is one dollar more, you pay tax on the entire estate, not just the overage. 

“If you respect laws that are sensible and logical, this would stand as an example in law school of how not to do things,” says Clark. “When Aunt Tillie finally understands this, she says, ‘You have to be kidding.’”

There’s also a difference in how the state and the feds view portability. The federal tax code for married couples asserts that if one spouse dies, and the value of the estate does not require the use of all of the deceased spouse’s federal estate tax exemption, the unused exemption may be transferred to the second spouse. (Hence: portability.) Which means when the second spouse later dies, their exemption is their own plus what’s left over from the partner’s exemption. But the state says no.

“The IRS allows a portability election for federal estate tax purposes, so a surviving spouse can take advantage of the deceased spouse’s unused credit amount,” says estate planning & probate attorney Marianna Moliver of Moliver Law. “But New York does not do that, and it has not been fixed.” 

Clarks adds, “To my mind, [portability] is so sensible even our federal government allows it.”

Tax attorneys see other issues as well, including a recapture provision on any lifetime gift given within three years of a person’s death. “This is a particularly unpleasant tax for New Yorkers,” says Carlyn S. McCaffrey, a tax and estate planning & probate attorney with McDermott Will & Emery. “People will need to approach deathbed gifts more cautiously.”

Overall, says Clark, “New York is still struggling with the age-old problem of how to stem the flow of people to places like Florida,” and its more generous tax benefits. 

Moliver agrees that the state’s laws may motivate some wealthy people to leave New York for states with more favorable tax climates. “Having said that, none of my clients have said they will move because of this,” she says. 

Besides, she adds, “Nothing is set in stone. Things could change again. You should always plan with flexibility and uncertainty in mind, because we just don’t know what is going to happen with estate taxes in the future.”