NY's estate tax from hell

Albany reaches for more than 100% of taxable portion

By Thornton McEnery

Apr 9, 2014 @ 5:43 pm EST

Buck Ennis

Estate-tax changes unveiled in Albany last week were billed as a reprieve for estates worth up to $5 million and sustaining the status quo for larger ones, with the state's top rate remaining 16%. But when Kevin Matz did the math on the new law, he could not believe what he found.

The White Plains-based attorney and certified public accountant discovered that when wealthy New Yorkers die, the taxable portion of their estates could be slammed by a 164% tax. The number was so absurd that when he posted it on a LinkedIn page for estate-planning professionals, the first colleague who replied asked if Mr. Matz had forgotten the decimal point.

"I hadn't," he said. "There is a serious cliff problem in this reform."

The new law could drive aging New Yorkers to lower-tax states — the opposite of what Gov. Andrew Cuomo was trying to achieve.

The main thrust of his effort was to increase what New Yorkers could pass to their heirs tax-free, thus eliminating the tax for 90% of the estates that were larger than the old $1 million exemption. The threshold will rise by $1.0625 million annually through April 1, 2017, saving New Yorkers (and costing the state) $380 million over three years. On Jan. 1, 2019, the exemption will jump to the inflation-indexed federal level, which by then will be about $5.8 million.

For estates worth more than that, however, experts like Mr. Matz say a massive predicament looms. A nearly impenetrable patch of code in the new law could impose bills higher than the taxable portion of an estate.

"It creates a problem where if you're just a little bit above the exemption, you could pay $1.64 in taxes for every dollar you go over," he said. "If it's not a mistake, it's somewhat laughable."


Mr. Matz posited the hypothetical case of a New Yorker who in 2017 leaves an estate worth $262,500 more than the $5.25 million exemption. His calculations show the estate would pay $430,050, a marginal tax rate of 164%.

A spokesman for the state's budget office did not dispute that the legislation could produce such a result. "Above the new exemption level, that dynamic does exist," he said.

The New York State Society of CPAs has already fired off a letter to Albany lawmakers suggesting ways to fix the law, which was largely hashed out behind closed doors and passed in a rush on March 31.

The group identifies as a major culprit the law's accelerated phase-out of a tax credit that the well-off have long used to shrink the size of their estates. Because of the steep timetable under which the credit will disappear, New Yorkers with estates worth up to 5% more than the exemption level will find it increasingly difficult to use the credit. Those with estates larger than that will lose the credit entirely, exposing them to an arguably punitive level of marginal taxation.

"It's bad tax policy," said Ronald Weiss, a partner at Skadden Arps Slate Meagher & Flom who specializes in trusts and estates. "The governor's message was, 'Wealthy New Yorkers are leaving New York, and we need to get them some tax relief.' This bill is not consistent with that message."

Mr. Cuomo is taking heat from advocates on the left, too. "These reforms are just part and parcel of the wider approach to favor the wealthy through tax cuts," said a spokesman for the Working Families Party. "The governor's budget fails to provide relief to the working middle class."

But liberal groups' criticism is flawed, some estate-planning experts say, especially given how the first few years of the new law will play out. Many New Yorkers who didn't consider themselves rich but found themselves facing unexpected estate taxes under the old law will now be spared. Estate-law professionals say their clients are often surprised to learn how much they are worth.

"We live in a place where housing prices are high," said Brit Geiger, a partner at Dentons who specializes in estate planning and wealth preservation. "A home in many parts of New York City is worth millions."


Mr. Weiss added that 401(k) accounts and sundry other investments, when combined with property values, push the estates of many downstate New Yorkers into the $2 million range and higher. They will be the primary beneficiaries of the first few years of the reforms.

As those millionaires come off the estate-tax rolls, however, the industry that has been protecting them from the tax man will begin to lose clients. More than just estate-planning lawyers will be affected: Sellers of life insurance also market their product as an estate-planning tool. Life-insurance benefits can pass outside the government's reach if the policy is housed in an irrevocable trust, and many people buy policies so the death benefit can be used to defray estate taxes.

"One of the drivers in selling life insurance is wealth enhancement," said Mr. Weiss. "With the exemptions going up, I would surmise there would be less need for life insurance."

But Mr. Weiss' concern remains the revenue loss facing New York as the state's richest residents flee a perceived confiscatory tax. Some studies have found that estate taxes drive migration more than income taxes do.

"For the wealthiest New Yorkers, moving to Florida may be nothing more complicated than moving your domicile," he said. "If you're well-off, it doesn't take a lot of effort to reorient your life, especially if New York is still an unfriendly place to die."

A version of this story first appeared in Crain's New York Business.

Most Popular

Affluence Influencers