Rich New Yorkers Face a Nasty Estate Tax Surprise

If you’re a New York multimillionaire, you now have another incentive to stay alive.A change this month in New York’s estate tax, which was billed as tax
relief for the wealthy, contains a hidden wrinkle that could leave some
multimillionaires with a much bigger surprise tax upon their death.
Certain estates could even wind up with a tax rate of 164 percent on
portions of their estates, according to one tax expert.

The changes were intended to ease the tax bill for wealthy New Yorkers
and prevent them from fleeing to lower-tax states. A report from the Tax
Foundation found that New York had the highest tax burden in the
country as a percentage of state income. It found that New Yorkers spent
12.6 percent of their per capita income in 2011 on state and local
taxes.

“It’s nonsensical,” said Kevin Matz, an accountant and attorney in White Plains, N.Y.

“The governor said this is about making New York a better climate for the wealthy. It’s had the opposite effect.”

On its face, the new law seems like tax relief. Under the previous law,
New Yorkers paid estate taxes of 3.06 percent to 16 percent on the value
of estates over $1 million. The new law raises that exclusion to $2.062
million this year and gradually increases it to more than $5 million by
2017.But because the law also phases out certain credits related to federal
taxes, people who have estates valued just above the $2 million
threshold could get massive estate tax bills. An analysis by U.S. Trust
found that a New York resident who dies today with a taxable estate of
$2,165,625 could have to pay an estate tax of over $112,050. That
represents a tax of over 100 percent on the value of the estate over
$2,062,000.

It gets worse in a few years. Matz said that assuming that the exclusion
rises to $5,250,000, a New Yorker with a taxable estate of $5,512,500
would have to pay an estate tax of $430,050. That’s a marginal tax rate
of 164 percent on the value of the estate above the exclusion.

“It’s a bait and switch,” Matz said.

The solution, he said, is to not phase out the tax credits. Or, the
state could also allow them to phase out over a much longer period of
time.

The New York State Society of CPAs and other groups have sent letters to
New York lawmakers in hopes of getting a quick fix. So far, there has
been little response.

A spokesman for the New York State Division of the Budget said that
while the marginal rates may have changed, “No one’s taxes have gone up.
The dollar amount they pay does not increase.”

He added that the tax change has insured that by the time it’s fully
implemented in 2017, 90 percent of New York’s estates will no longer be
taxed.

Matz, however, said the issue is not just a problem for the so-called
rich. When you add up the value of property, pension plans, 401(k) plans
and other assets, a New Yorker with just over $2 million in New York
“is not exactly super rich. In a state with a high cost of living,
that’s not that unusual.”