We came across a recent article in Forbes that discusses the advantages and disadvantages of living in different states when it comes to estate tax planning. While legislative changes are happening all the time as related to this subject, there are some basics worth considering as a way to protect an estate or legacy. Most would agree that federal estate tax laws are relatively manageable and for the most part beneficial to US citizens. While this is not always the case for foreign nationals, those wishing to pass on an estate at time of death that are US citizens have a reasonable tax exemption to work with at present. However, on a state-by-state basis, exemptions and state taxes vary considerably and in some instances can cause detrimental harm to a family’s generational wealth.
A number of states in the country including New York levy separate estate taxes aside from federally imposed taxes. The problem arises in the fact that state exemptions are typically quite a bit less than at the federal level. Those living in New York or who are planning to move to New York State would be well advised to consider recent legislation and existing tax laws. There are nearly two-dozen states that target estate wealth as a way to generate additional revenue at the state level. Careful planning can help to ensure that affluent individuals protect their family’s financial best interests. The Forbes article referenced above talks about a newly coined term known as “domicile planning.” This idea refers to the careful consideration that is necessary in respect to where a person chooses to live (and die) in order to maximize estate wealth protection.
In essence, domicile planning really comes down to choosing which state is most beneficial in terms of being able to pass on a family estate upon a principal's death. For example, a state like Florida is viewed as an ideal location for those wishing to avoid state income tax and so-called death taxes. While the federal estate tax exemption is slightly over $5 million per person and is permanent as it stands, estate taxes in different states present various challenges. States imposing these kinds of taxes, for the most part, have exemptions that are much more restrictive than their federal counterpart. The top tax rate in some states is upwards of 16%. As a note, both federal and state systems allow bequests to spousal partners that are always tax-free.
The Legislative Perspective
The state of New York, as a prime example, sets its exemption at approximately $1 million. Legislation ensures that this number is almost always a moving target. This means that if an individual dies in New York State with slightly over $5 million in wealth that they will incur virtually no federal tax but will be subject to nearly $1/2 million in state taxes. This is certainly worth taking note of when estate planning. Many states are in the process of repealing or substantially reducing estate taxes at the state level. The overall general trend is moving in this direction as more and more advocates of better estate tax laws make headway from a legislative perspective. Planning strategically from a “death tax” angle can have a profound effect on one's estate or legacy. Take the time to research this important topic as a way to protect generational financial interests. Silver Rock Partners is an experienced firm providing detailed New York estate planning for affluent and high-net-worth individuals.