Moving to New York to avoid state death taxes? Really. John McManus, an estate lawyer in New Providence, N.J., has a retired client pulling in $500,000 a year in income, with second homes in Florida and the Hamptons, who is planning to change his residence from New Jersey to his New York house in the Hamptons. Driving the decision: the sweeping changes New York made to its estate tax regime this year.
“When your bordering state is telling you, ‘Come on over!’ the pitch is compelling,” McManus says. “If New York has a more welcoming tax scheme, then people will say, ‘Let’s call me a New York resident.’” McManus says that he and his wife might make the New York move in retirement themselves; they already have a place in the West Village they rent out for now.
The tally of death tax jurisdictions remains the same for 2015—19 states plus the District of Columbia–but eight states are ushering in changes in 2015. The states are lessening the death tax bite by increasing the amount exempt from the tax, indexing the exemption amount for inflation, and eliminating “cliff” provisions that tax the first dollar of an estate. Added to the mix, there’s action afoot in New Jersey to keep up with the pack. “[Gov. Chris] Christie can’t run for President with the worst estate tax exemption in the country,” says New York City elder lawyer Bernard Krooks, adding, “He has to say he tried.”
First, here’s the current state of the law. The federal estate tax exemption of $5 million per person, indexed for inflation, is now permanent. For 2015, the exemption will be $5.43 million, up from $5.34 million in 2014, predicts tax research publisher Wolters Kluwer, CCH. That means up to $5.43 million of an individual’s estate will be exempt from federal estate tax, with a 40% tax rate applied to any excess over the exemption amount. By contrast, states with estate taxes typically exempt far less per estate from their tax and impose a top rate of 16%. As in the federal system, bequests to a spouse are tax-free.
New York and Maryland made the biggest changes. The Maryland legislature acted first. The new law gradually increases the amount exempt from the state estate tax from $1 million this year, to $1.5 million in 2015, $2 million in 2016, $3 million in 2017, and $4 million in 2018. Finally, in 2019 it will match the federal exemption which is projected to be $5.9 million.
Still there’s a big catch in Maryland for some: even if no estate tax is due, depending whom you leave your assets to at death, a separate inheritance tax may be assessed. Spouses, children (and their spouses and children), parents, and siblings are all exempt from the state inheritance tax, but a niece or aunt or friend, for example, would owe the inheritance tax at a rate of 10%. Maryland and New Jersey are the only two states that have an inheritance tax in addition to an estate tax.
New York’s sweeping changes were instituted immediately, doubling its exemption amount from $1 million for deaths before April 1, 2014 to $2,062,500 for deaths from April 1, 2014 through April 1, 2015. Like in Maryland but on a faster timetable, the New York exemption is set to rise gradually through 2019 to eventually match the federal exemption. By April 1, 2017 the New York exemption will be $5,250,000.
Other states where the exemption amounts are climbing include Tennessee, Minnesota and Rhode Island. Tennessee’s estate tax is on its way out; the exemption is $5 million for 2015, and it’s repealed as of Jan. 1, 2016. Minnesota’s exemption is climbing steadily; it will be $1.4 million in 2015, going up to $2 million in 2018. Rhode Island bumped its exemption amount from $921,655 this year to $1.5 million in 2015. The $1.5 million will be indexed for inflation. Also a big deal: Rhode Island eliminated a “cliff” so the tax only kicks in on amounts above the $1.5 million exemption amount.
A cliff is one problem with the New York law. If a resident’s taxable estate exceeds the basic exemption amount by more than 5%, the entire taxable estate will be subject to the state estate tax. The New York State Department of Taxation and Finance issued a summary memorandum on the new law last month available here. What’s not spelled out is the dramatic effect of the cliff, says Sharon Klein, managing director of Family Office Services & Wealth Strategies with Wilmington Trust. She provides this example: A taxable estate of $2,062,500 would pay no tax, but a taxable estate of $2.1 million would have a $49,308 tax liability—more than the $37,500 increase in the value of the estate.
Other states indexing their exemptions for inflation like Rhode Island are Washington, with a base exemption of $2 million, and Hawaii and Delaware, which both match the federal exemption amount.
We’ll be watching several bills recently introduced in New Jersey to eliminate the state’s estate and inheritance tax. New Jersey has the lowest state estate exemption amount at $675,000. “It’s time for New Jersey to get back to reality that these taxes are burdensome on so many levels,” says Daryn Iwicki, New Jersey state director for Americans For Prosperity, which pushed for the phase-out and 2016 repeal of the Tennessee estate tax. “Folks who own a $500,000 home, a 401(k) and a car don’t realize they’re affected until it’s too late,” he says, adding, “You can get sucked into this estate tax trap is what it boils down to.” Reality check: the two taxes combined bring in nearly $760 million of the $32.5 billion state budget.
Anti-death tax advocates in Rhode Island are vowing to do more in their state, buoyed by this year’s initial victory. “We’re happy with this first step, but we’d like to see the complete elimination of the tax,” says William Felkner who sums up the opposition’s position on RIestatetax.com.
There is precedent for repeal: North Carolina and Indiana did it in 2013; Kansas, Ohio, Oklahoma did it in 2010.
What’s certain is that there will be more changes on the state death tax map for 2016, if not before.