How the New York Estate Tax Exemption May Have Backfired

We’ve already discussed how the New York estate tax exemption has changed from last year to this year, but we haven’t talked about why it’s changed. The new legislation regarding estate taxes was passed in an attempt to keep wealthy New Yorkers from leaving the state upon retiring, but whether that’s actually working is debatable.

Where the New York Estate Tax Exemption Went Wrong

Looking at New York compared to the rest of the country, we are actually one of few states that still collects a state estate tax—most do not levy an independent tax and leave estate taxing to the federal government. In 2014, the federal estate tax exemption rate is $5.34 million. This means that if a person dies after April 1, 2014, and their estate is valued under $5.34 million, their heirs will not owe anything in estate taxes.

In New York State, the exemption rate is not nearly as high, and heirs to estates that are valued over $2,062,500 will be taxed—and quite heavily, at that. While it’s certainly valid to assume that many New Yorkers who retire to Florida do it for the weather and the cost of living, there’s a fair chance it has a little something to do with their estate planning, too.

The plan is for the New York State limit to gradually climb to meet the federal rate, but in the interim, New Yorkers who own estates that fall between one and five million dollars are being hit quite hard.

Due to the fiscal cliff that is in effect as per the new regulations, a heirs of a New Yorker whose estate is valued at $2,165,626 wind up having to pay significantly more in estate taxes than just the amount that is in excess of the limit rate—a heavy blow, financially speaking. If that same New Yorker died in Florida instead, the individual’s heirs wouldn’t owe anything in estate taxes.

As the New York estate tax exclusion continues to rise, remaining in New York will become more favorable to people whose estates begin entering the exclusion limit (estates less than $5 million). For example, now that the exclusion rate has been increased to $2,062,500, if a person’s estate was worth two million dollars last year, she may have wanted to leave New York because of the exclusion limit. However, now her estate’s value falls beneath the exclusion limit, so staying here is fine.

But if the intention in increasing the exclusion rate was to keep wealthy New Yorkers in the state, has this legislation actually succeeded? It really depends on what you consider wealthy. While it’s starting to make staying in New York more attractive to individuals whose estates are worth less than 5 million dollars, the fiscal cliff that’s been established is quite easily the biggest deterrent from staying in New York that could have been introduced. So if keeping the wealthiest New Yorkers here was the goal, it’s looking like this whole plan may have backfired pretty seriously.

What do you think about the new estate tax exemptions in New York? Let us know on Facebook!