The Trick To Cutting New York Taxes

New York is a pretty expensive place to live, and its harsh estate tax (placing the state among the minority that still impose one) means it can also be a costly place to die.

This is not news to affluent New Yorkers. My colleagues and I, like most financial advisers, have long suggested that older New York clients whose ties to the state are less than ironbound consider establishing domicile in friendlier tax climes, such as Florida. Apparently enough New Yorkers are getting the message to make the state’s leaders want to at least appear more hospitable to the people who pay the lion’s share of Albany’s bills. But the trick seems to be to make the tax laws appear friendlier without actually giving up too much tax revenue.

Notice that I use the word “trick.” Gov. Andrew Cuomo seems to have hit upon an approach that might suit Albany’s needs, coupling a headline-grabbing but long-term cut in the estate tax with a surreptitious, little-noticed provision that would soon revive New York’s long-dormant gift tax. The net effect is to cost the state relatively little tax revenue. In fact, if the estate tax cut is later scaled back, the change might even bring in more money, which New York lawmakers are never at a loss for ways to spend.

Here is how the tax code sleight of hand would work. In his budget proposal released last week, the governor announced his intention to raise New York’s estate tax exemption, currently $1 million, to be in line with the federal estate tax exemption. This would make the exemption $5.25 million by 2019, indexed for inflation (assuming future lawmakers and governors actually allow the phased-in increase to happen, which is not a sure thing). Cuomo also proposed that the state lower the estate tax rate for estates exceeding the threshold, from 16 percent to 10 percent. While 10 percent state tax in addition to the federal tax is not a bargain compared to the states that have no death taxes at all, which is most of them, lowering the rate is at least a step in the right direction. So far, so good.

But here’s where the trick comes in: Cuomo also proposes to impose a deferred gift tax on New York residents for gifts made on or after April 1 this year.

New York has not had a gift tax since 1999. The state has long been concerned about the ability of its residents to shift taxable income out of state via trusts established in other jurisdictions, however. Restoring the gift tax will bolster state coffers in two ways: by discouraging such transfers, thus protecting current income taxes, and by collecting tax on the gifts themselves.

But unlike the federal and most state gift taxes, which are paid by the donor at the time the gift is made, New York’s tax collection would be deferred until the donor’s death. This might help keep the new gift tax off most residents’ financial radar, though the professional community has certainly taken notice of it. The restored gift tax would be collected via the New York estate tax return.

An obvious and common complication will arise if the estate in question belongs to someone who was a New York resident when a gift was made but is a nonresident at death. A nonresident’s estate might still file a NY estate return if the estate includes New York real estate or other property located within the state. Would the state try to collect the tax from a nonresident in that circumstance? We can’t be certain because no law has yet been passed, but it seems likely.

What about a situation in which the gift is made when the donor is a New York resident, but the donor moves out of state and subsequently dies without owning any New York property? Under current law no New York estate tax return must be filed and no tax is due. Will New York take the position that a nonresident’s executor must file a tax return in Albany anyway? If it takes such a position, could it constitutionally enforce it? Would it make a difference if the decedent was a nonresident but the decedent’s executor happened to be a New Yorker, subject to the state’s jurisdiction?

I have no idea how to answer these questions, though I have major doubts about a state’s ability to enforce estate tax against a nonresident decedent who has cut all other New York ties prior to death.

New York already has a reputation for making it hard for former residents to cut such ties effectively. The result is that those who wish to establish domicile elsewhere at all must do so thoroughly, leaving state tax authorities little grounds for argument. The best way, which is exactly what Cuomo seemingly hopes to prevent, is for departing taxpayers to sell their New York homes and any other property they own in the state.

The New York Times reported that, if adopted, the estate tax change would cost the state $33 million in the 2014-15 budget, and an additional $175 million in 2015-16. That the state wants to make up the difference wherever it can is predictable, but this delayed-fuse gift tax may undo the hoped-for effect of encouraging New Yorkers not to move away in their final years.

One piece of advice for wealthy New Yorkers who want to make substantial gifts is to make such gifts before April 1 if possible, and then die as a resident of some other state. The second-best solution would be to move out of New York as soon as possible, waiting to make your gift until you’re re-established elsewhere – but avoid Connecticut, which was the only state to hold on to a gift tax when other states abandoned theirs in the 2000s, or Minnesota, which established a new gift tax last summer.

If moving now is off the table, do what you need to do, including making gifts. Just be careful not to be a New York resident when you die. The state may never actually match the federal exemption, or it could do so and then change course in a future year that finds it in need of more revenue.

My approach when evaluating Albany tax policy is skeptical to the point of cynicism: I assume any new taxes are permanent, any repealed taxes may be resurrected at any time, and any deferred tax cuts may or may not actually occur, with roughly the probability of the Mets winning the World Series. It isn’t scientific and it may not even be fair, but my approach does not let me down too often, either.

About Larry M. Elkin 551 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

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