No, An NYC Mayor Cannot Create an Estate Tax (But What if He Could?)
Last week, in a move that surprised no one who was listening to his campaign promises, the NYC Mayor proposed to decrease New York’s current estate tax exemption from $7,350,000 to $750,000, and increase its highest estate tax rate from 16% to 50%. And while it only took 30 seconds for middle class New Yorkers to realize they were considered the people “not paying their fair share”, it didn’t dawn on them that they have another 3 ¾ years with this guy in charge.
Before some of you start succumbing to another bout of Mandami Derangement Syndrome, let me remind you that a Mayor does NOT have the ability to create or change an estate tax. Estate and gift taxes are controlled at the State level by both a state’s legislature and often its governor, so all the Mayor can do is make his suggestion to the Governor and New York State Legislature. And New York’s estate tax exemptions were last changed in 2014 because so many people were already leaving New York, so it is unlikely this proposal would be seriously considered (maybe?).
But what if the Mayor could pass such a small estate tax exemption and large highest rate. What could you do to decrease your estate tax on your hard-earned money? The sad truth is that there are no great options (except maybe the last one):
Gift Your Property During Your Life
New York State does not have a gift tax, so you can give away all your money during your lifetime without a second thought. And giving funds away during your life avoids having money to pay taxes on when you die (because you have already given the money away).
But beware: (1) You have to transfer gifted funds at least 3 years before you pass away, otherwise New York considers it a “deathbed transfer” and will include the gifted amount back into your estate for estate tax purposes, and (2) Any appreciated assets you gift (such as a house you bought for $200,000 and is worth $1,000,000) does not get a step-up in cost basis at your death, meaning your children will need to pay capital gains tax on the entire value of the property.
And for those of you with Medicaid Trusts: Medicaid Trusts protect your home and excess assets for Medicaid purposes but NOT for estate tax purposes. ☹ ☹
Do Not Contribute to Your IRA
Contributing to an IRA during your working years is a great idea, since it decreases your income taxes during your working years (almost a requirement in a state where your total tax bill may reach up to 50% of your income). And during retirement, New York does not tax the first $20,000 if your IRA withdrawals (of course, some states don’t tax any withdrawals, but more on that later). However, when you die, your IRA may be both income taxable and (under the Mayor’s proposal) estate taxable as well ☹ ☹ ☹. And on top of that, even though your Roth IRA will not face an income tax, it too shall be eligible for a New York estate tax. ☹
The other issue for an IRA is that you must pay income taxes when you withdraw funds, so you cannot take advantage of gifting IRA assets unless you pay both federal and state (and for some of you NYC) income taxes if you are trying to avoid the estate tax. So do yourself a favor and fund your IRA and 401(k) plans, and instead consider the following:
Leave New York When You Retire
I (and any estate planner with ½ of a functioning brain cell) have told their higher-net worth clients to retire outside of New York for 20 years. And what is good for the goose is good for the gander: Middle class retirees who don’t want to pay estate taxes should move to a state that has no estate tax when they retire. Yes, no one wants to leave their children and grandchildren behind and some people need their family to care for them when they age, but if your concern is saving money on estate taxes, changing your domicile is the only guaranteed estate tax plan..
So no, don’t freak out when the Mayor says he is going to change estate taxes, and save your MDS moments for his other terrible ideas. In the meantime: Work in New York until your retirement, then plan on moving to a non-estate tax state. Or vote out all the politicians who have made you their cash register.
