SESSION 3
How Much in New York Estate Taxes Might You Save if You Change Your Domicile?

Most retirees who are motivated to change their domicile to Florida for tax reasons do so to avoid or reduce New York income taxes. However, because of recent changes in estate tax law, retirees are also changing their domicile primarily to escape New York estate taxes. Even if there is a domicile change, New York will impose a New York estate tax on real and personal property with a New York situs and the rate of tax may be higher than you anticipate.

In the past, Florida had an estate tax.  Therefore, a change of domicile was not generally motivated by a desire to save New York estate taxes because the change would trigger a Florida estate tax.  But Florida no longer has any estate taxes.  Now, saving New York estate taxes is a major motivation for a domicile change.

A New Yorker who has less than $2 Million need not worry about Federal estate taxes.  But this is not so with respect to New York estate taxes.

The New York Estate Tax is computed by taking into account the Federal estate tax laws as of July 22, 1998.  Thus, although the Federal unified credit has increased from $1 Million to $2 Million and is scheduled to increase to $3.5 Million in 2009, the estate of New Yorkers will not receive the benefit of such increases on their New York estate tax returns.  The New York threshold remains at $1 Million.

Consequently, the estate of a New Yorker who has more than $1 Million is subject to hefty New York estate taxes.  For example, the estate of a New Yorker who dies with assets of $2 Million and has no marital deduction will pay an estate tax close to $100,000.  Since no Federal estate tax is payable, the estate will not even have the benefit of a Federal estate deduction for the payment of the New York estate taxes.  Of course, as the New York taxable estate increases, the New York State taxes increase as well.  One way to avoid the New York estate tax is to change one’s domicile to Florida.

But even though a change of domicile to Florida becomes effective, New York may still impose an estate tax on those assets which continue to have a New York tax situs.  Since the applicable New York tax rate takes into account worldwide assets, the amount of the New York tax may come as a big surprise. One objective of the New Yorker who changes his or her domicile to Florida should be to minimize the assets that have a New York situs for purposes of imposing New York estate taxes.  It is therefore important to focus on what those assets might be.  But before doing so, it may be helpful to have a better understanding of the magnitude of tax savings that may result from a change of domicile to Florida.

Illustrative Examples of Impact of New York Estate Taxes

The following examples will give you an idea as to the magnitude of the savings that may result from a change of domicile to Florida.

If a former New Yorker has changed his domicile to Florida and dies with net assets of $10 Million (none of which are located in New York State), his estate will pay Federal estate taxes of approximately $3,680,000 and no New York estate taxes. 

If that same individual had not changed his domicile to Florida and all his assets are located in New York State, his estate will pay New York estate taxes of approximately $1,067,600.  That amount will be deducted on the Federal estate tax return and the Federal estate taxes will be reduced from $3,630,890 to $3,190,000.  Thus, the estate will pay a total of $4,257,600 versus a total of $3,680,000.  This is a difference of $577,000.

If that same individual has changed his domicile to Florida, but at the time of his death owned a home in New York valued at $1 Million, his estate will pay a Federal estate tax of $3,630,890 and a New York estate tax of $106,760, for a total of $3,737,650.  Thus, the estate pays additional net estate taxes of $57,650 because of the location of the home in New York State.

Let us look at another example where the decedent is not as affluent.  He dies in New York with an estate of $1,500,000.  His estate will pay a New York estate tax of $64,400.  There will be no Federal estate taxes because of the $2,000,000 threshold (i.e., equivalent to the Federal unified credit).  If the decedent had changed his domicile to Florida and had no assets in New York State, there would be neither a Federal estate tax nor a Florida estate tax.  However, if the $1,500,000 included a New York home valued at $500,000, then there would be a New York estate tax of $21,465. 

Where an individual dies in New York with assets of less than $1 Million, there is neither a Federal estate tax nor a New York estate tax.  But what if he has an estate of $1,050,000?  To the surprise of estate beneficiaries, the New York estate tax on that $50,000 is $20,500 or 41% of the $50,000.  This is because the computation of the tax for estates in excess of the threshold of $1 Million nevertheless takes the first $1 Million of the net taxable estate into account.  Is taxation at 41% excessive and overreaching by the State of New York?  Perhaps—but it may also be viewed as a 1.95% tax on the entire estate of $1,050,000.  The following table shows examples of how these effective rates work:

NOTE:  The above examples are for illustrative purposes only and may require further adjustment for prior gifts, administrative expenses, and the marital deduction if the decedent was married at the time of death, and other factors.     

New York's estate tax is not imposed on real property and tangible personal property having an actual situs outside New York even if such property was owned by a deceased individual who at his death was a resident of New York.⁽¹⁾ On the other hand, New York's estate tax is imposed on real property and tangible personal property having an actual situs in New York, even if such property was owned by a deceased individual who at his death was not a resident of New York.⁽²⁾ For New York estate tax purposes, intangible property has a tax situs in the state in which the deceased individual was domiciled at the time of death. For example, a New York bank account kept by a Florida domiciliary is considered to have a Florida situs. No estate tax is imposed by New York if the decedent is domiciled elsewhere but has intangible property located within New York State. Therefore, with respect to the decedent's property, in addition to the domicile issue, there are two key inquiries in the application of New York's estate tax law:

First Inquiry:

Is an asset tangible or intangible personal property?

Second Inquiry:

If it is tangible personal property, where is its actual situs at the time of death?

Let's look at the first inquiry. Is an asset tangible or intangible property? The New York Tax Law defines "tangible personal property" by emphasizing what it is not. It is not:

* deposits in banks

* mortgages

* debts

* receivables

* shares of stock

* bonds

* notes

* credits

* evidence of an interest in property

* evidence of debt

* choses in action generally

The New York Tax Law states that tangible personal property does include "corporeal personal property, including money held for numismatic purposes."⁽³⁾

One New York tax publication has set forth a more meaningful definition. It states that a tangible asset is personal property which has a value of its own, is movable, has physical characteristics and is capable of being possessed. It notes that tangible assets include cars, furniture, jewelry, livestock, clothing and so forth. On the other hand, the publication defines an intangible asset as personal property which does not have any physical characteristics or marketable value in itself but merely represents a value, and notes that intangible assets include bank accounts, shares of stock, bonds and mortgages.⁽⁴⁾

In the Matter of Lawrence,⁽⁵⁾it was held that land trust certificates were intangible property and not real property even though they entitled the owner to participate, pro rata, in the annual rental of non-New York realty. In Matter of Finkelstein,⁽⁶⁾ it was held that a decedent's full partnership interest was intangible property even though the partnership owned an interest in non-New York real property. A condominium is real property and a cooperative appartment is intangible personal property.⁽⁷⁾

Now let's address the second inquiry. Where a retiree has a home in New York and in Florida, it may not be clear where the situs of his property is located. The question then becomes: Where is the actual situs of the property?

* Intangibles. Intangible personal property is deemed to have a situs where the owner is domiciled and will be subject to estate taxes in the state of domicile.

* Real estate. The actual situs of real property is the state in which the real property is located and will be subject to taxation only in that state.

* Tangible personal property. Tangible personal property will be subject to New York estate taxes only if it has an actual or "permanent" situs in New York. Where tangible personal property has its permanent location in New York, New York clearly has taxing power over the property. However, the power of New York State to tax tangible personal property that is moved between New York and another state raises issues regarding the property's actual situs. This situation may arise where an individual has one home in New York and another in Florida and takes assets back and forth with him. Although it is questionable, it is possible that the New York Department of Taxation may take the domicile of the decedent into account in determining the location of the property.

Assume that an individual dies in Florida owning a condominium in New York and a condominium in Florida. He owns a Cadillac registered in New York and a Buick registered in Florida. He owns works of art located at both homes and has a safe deposit box in New York State containing stocks, bonds and jewelry. At his death he was wearing a valuable diamond ring. What are the New York estate tax consequences? It would appear that:

New York condominium -- The property will be subject to New York estate taxes whether the decedent was domiciled in New York or Florida since it is real property located within the state.

Florida condominium -- If the decedent was domiciled in New York, the property will be subject to New York estate taxes because it is non-New York real property.

Cadillac -- If the car is physically located in New York, it may be subject to New York estate taxes whether the decedent was domiciled in New York or Florida. It is not clear if the automobile would be subject to New York estate taxes if it was located in Florida at the time of its owner's death. However, registration in New York may be viewed by the New York Department of Taxation as some evidence of permanent location of the automobile in New York. Although the legal test is one of "permanent location" of the asset, issues of the owner's domicile may creep into the analysis.

Buick -- As with the Cadillac, if the car is physically located in New York, the New York auditor may contend its actual situs is New York. The estate might argue, in turn, that its actual situs is Florida because of its Florida registration. Registration may be viewed as some evidence of permanent situs, but issues of domicile of the owner may be relevant to the analysis, particularly if the automobile is located in both states at different times of the year.

Works of art -- Any art work that is kept in the New York condominium will be subject to New York estate taxes irrespective of the individual's domicile because it is tangible property whose actual situs is in New York.

Stocks and bonds -- All securities are subject to New York estate taxes if the decedent was domiciled in New York. If the decedent was domiciled in Florida, none are subject to New York estate taxes because they are intangible assets.

Jewelry in safe deposit box -- The jewelry in the safe deposit box will be subject to New York estate tax irrespective of the individual's domicile because it is tangible personal property with an actual situs in New York.

Diamond ring -- Since the decedent died in Florida, the ring would appear not to be subject to New York estate tax because of its Florida situs at death. However, a New York tax auditor might claim that the ring is subject to New York estate tax despite the fact that the ring was located in Florida at the owner's time of death. With respect to items of personal adornment and articles of clothing, the result may turn on the question of the owner's domicile at the time of death. In Matter of Martineau,⁽⁸⁾ jewelry in the possession of an individual who died in France was held not to have a permanent situs in France and therefore was includable in the decedent's New York gross estate.

If New York State attempts to tax tangible personal property that is temporarily in New York or tangible personal property that is temporarily out of New York, language referring to "actual situs" in City Bank Farmers' Trust Co. v. Schnader,⁽⁹⁾ may be instructive. In that case, New York contended that portraits physically located in a museum in Pennsylvania continued to have an actual situs in New York. The Supreme Court noted that the location of the portraits in Pennsylvania "was not merely transient, transitory, or temporary." ⁽¹⁰⁾ It differentiated vessels and rolling stock that in fulfilling the purpose for which they are created move from place to place and into different states. The case may be some authority to claim that a car registered in Florida and located there most of the time should not be subject to New York estate taxes when temporarily in New York. New York has enacted a limited statutory exception to the general rule that an estate tax is imposed on tangible personal property that has a situs in New York. It covers works of art owned by a nonresident that "are sited" in the state solely for exhibition purposes.⁽¹¹⁾

In Matter of Martineau, supra, New York County Surrogate Silverman noted that the term "actual situs" is a term taken from federal constitutional law as to the taxing power of the state and that the term connotes some element of permanency. The court cited City Bank Farmers'Trust Co. v. Schnader,⁽¹²⁾ as authority for holding that a merely transient, transitory or temporary location within a state is not sufficient to give the state the power to tax on death. The court noted that with respect to articles of jewelry and apparel, the ancient maximum mobilia sequuntur personam ("movables follow the person") has retained some vitality.

How to Avoid New York Estate Taxes on

Your New York House and its Contents?

This seminar focuses on the concerns of a New Yorker who changes his domicile to Florida but retains a house in New York.  Under these circumstances, there is a concern that the effectiveness of the change of domicile will be challenged by New York State in an attempt to impose either New York income taxes or New York estate taxes applicable to a resident of New York State.  In the hope of better meeting such challenge, some retirees either gift or sell the house to a family member (who does not occupy the house) and the retiree stays there when he visits New York for less than 183 days each year.  This change in ownership is not apt to be given any significant weight by a domicile auditor, especially where the retiree pays the maintenance expenses attributable to the New York house.

But let us assume that the retiree has effectively changed his domicile to Florida even though he stays in his former home in New York when he visits there.  Does the change of ownership prevent the house from being subject to New York estate taxes when the retiree dies, even though he is a nonresident of New York and clearly domiciled in Florida. 

As mentioned earlier, even though a change of domicile to Florida becomes effective, New York may still impose an estate tax on those assets which continue to have a New York tax situs.  If the retiree at the time of his death owns the New York house, it clearly has a New York tax situs and is subject to New York estate taxes and in most instances a New York estate tax return must be filed by the Personal Representative (or Executor) of the Florida estate.

In order to avoid the New York estate tax, some consideration might be given to transferring the New York house to a limited liability company formed specifically for that purpose.  Since the membership interest of the retiree in the limited liability company is an intangible asset, a strong argument can be made that the retiree, at the time of his death, did not directly own real property in New York State.  A similar argument can be made where the New York house is transferred to a trust, partnership, or other entity and the retiree, at the time of his death, owned an interest in the entity and did not directly own an interest in the real property.

It is not clear what the position of the New York State Department of Taxation is on this issue.  The Department will be faced with somewhat of a dilemma.  On the one hand, it would like to increase tax revenues by asserting that the estate tax is applicable to the New York house.  On the other hand, the Department may not wish to take such a steadfast position because of its ramifications where a New York resident dies “indirectly” owning real property in another state.  Under such circumstances, it may wish to take the position that the decedent at the time of his death had ownership of only an intangible asset and not the real property itself so that it can subject the asset to New York estate taxes on the theory that New York estate taxes apply to all intangible property wherever located. 

To the extent that the Department decides to pursue the imposition of estate taxes on a Floridian who “indirectly” owns real property in New York, it may advance various theories.  For example, it may contend that where the property was transferred to a revocable trust (often referred to as a living trust), that because the decedent had the ability immediately before death to revoke the trust and take title to the New York house, that the decedent will be deemed to have owned the house at the time of his death.  Similarly, the Department may take the position that since the decedent immediately before his death was the sole owner of a limited liability company that he could have transferred the house back to himself immediately before his death and taken title to the New York house.

Another theory that might be advanced by the Department is suggested in Advisory Opinion TSB-A-00(1)(M).    In that Advisory Opinion, the decedent, a nonresident, created an irrevocable qualified personal residence trust for a term of 10 years but died prior to the end of the term. The residence was included in her gross estate for federal estate tax purposes and the Advisory Opinion concluded that the New York real property owned by the trust was subject to the nonresident estate tax.  The rationale expressed in the Advisory Opinion was that if the decedent’s interest in the trust property is so significant that it causes the trust property to be included in the decedent’s gross estate for federal estate tax purposes, it should be treated for nonresident estate tax purposes as though the decedent owned it and transferred it at death.

Under §2036 of the Internal Revenue Code, the value of the gross estate includes the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in the case of a bona fide sale for an adequate and full consideration in money or money’s worth), by trust or otherwise, under which he has retained for his life the possession or enjoyment of the property so transferred.  The New York Tax Department is likely to contend that where a gift of the New York house is made to a family member with the implied understanding that the retiree can have the enjoyment of the property whenever he is in New York State, it is subject to New York estate taxes based on the same rationale referred to in the Advisory Opinion.

One possibility is for the retiree to sell the New York house to a family member for full and adequate consideration and then enter into a lease with the family member that provides for a market rate rental income to be paid by the retiree to the family member.

If any of these alternatives are attempted, the transfer should not only include the New York house, but its contents and any other tangible property located in New York State.

If the retiree who believes he has effectively changed his domicile to Florida dies owning any real or tangible personal property having a New York State situs, the fiduciary of the estate, or the surviving spouse or a member of the decedent’s immediate family, will be required by New York State to file a New York State estate tax domicile affidavit.  If the change of domicile from New York to Florida has not been previously tested, the filing of the affidavit may trigger not only an estate tax audit but also a New York income tax audit where the effectiveness of the domicile is challenged.  Among other things, the affidavit must answer the following questions:

Ø    Did the decedent ever own, individually or jointly, any interest in real estate located in New York State; and if so, list the addresses and periods of such ownership?

Ø    Did the decedent lease a safe deposit box located in New York State at the time of death; and if so, was the box inventoried?  If so, attach a copy of the inventory.

Ø    Set forth the residences of the decedent during the last five years, both in New York State and outside of New York State, and indicate whether the residence was owned or rented.

Ø    For the five years prior to death, list the Internal Revenue Service Centers where the decedent filed income tax returns.

Ø    List the states where the decedent was registered to vote during the last five years preceding the date of death.  If the decedent did not vote in those five years, when did he or she last vote and where?

Ø    List employment or business activities (if any) engaged in by the decedent during the five years preceding the date of death. 

Ø    Did the decedent have a license to operate a business, profession, motor vehicle, airplane or boat?

Ø    Did the decedent execute any trust indentures, deeds, mortgages, or any other documents describing his or her residence during the last five years preceding death?  If so, attach a copy.

Ø    Was the decedent a member of any church, club or organization; and if so, give the name, address and other details.

Ø    Submit any other information in support of the contention that the decedent was not domiciled in New York State at the time of death.

If the New York house is owned by the decedent at the time of his death, not only is there a concern that the domicile affidavit may trigger a challenge to the change of domicile but also the Personal Representative of the estate may be unpleasantly surprised when he is informed of the amount of the tax liability.  One would think that New York estate taxes would only apply to the value of the New York home that exceeds $1 Million.  This is not the case.

Although New York’s Constitution, Article XVI, Section 3, prohibits the taxation of a nonresident’s intangible property located within New York State, the New York nonresident estate tax factors in the nonresident’s intangible personal property in determining the tax.  In effect, the nonresident estate tax formula requires the tax to be first computed as if the decedent was a New York resident.  In so doing, the New York preliminary tentative tax base includes intangible personal property.     

Thus, the estate of every individual who was not a resident of New York State at the time of death must file a New York State estate tax return (Form ET-90) if (1) the New York adjusted gross estate (computed as if a resident) and the New York taxable gifts exceed certain threshold amounts, in the aggregate; and (2) the New York gross estate includes real property or tangible personal property having an actual situs in New York State.

There are other concerns as well.  After the retiree’s death, the family may wish to sell the New York house.  If it is not includable as an asset in the federal gross estate, then there will be no “stepped up” basis that might otherwise avoid a capital gains tax.  Although a change of domicile may have occurred, the retiree may still be within a time frame during which he can sell the New York house and still take advantage of the $250,000 exemption from both federal and New York capital gain. This may be lost if title to the house is transferred by the retiree before the sale occurs. 

Also, if title to the house is transferred, the retiree may no longer be able to deduct real estate taxes on his income tax return.

There may well be other important concerns that should be taken into account.  The primary goal of this session is to alert the retiree that there are many things to consider relating to the New York house and that ---

THE NEW YORK ESTATE TAX CONSEQUENCES OF THE NEW YORK HOUSE SHOULD BE FULLY CONSIDERED AND REVIEWED WITH A PROFESSIONAL ADVISOR.

1. See Treichler v. Wisconsin, 338 U.S. 251 (1949); Frick v. Pennsylvania, 268 U.S. 473 (1925); City Bank Farmers Trust Co. v. Shander, 291 U.S. 24; 293 U.S. 112 (1934); Blodgett v. Siberman, 277 U.S. 1 (1928).

2.  Under New York Tax Law Sec. 960, a New York estate tax is imposed on the real and tangible personal property of a nonresident situated in New York.     

3.  N.Y. Tax Law 951-a(c).

4.  See NY State Department of Taxation and Finance Publication 603 (8/91). 

5.  186 Misc. 631, 65 N.Y.S.2d 179 (Sur. Ct. N.Y. County 1945).

6.  40 Misc.2d 910, 245 N.Y.S.2d 225 (Sur. Ct., Rockland County 1963) and in Matter of Havemeyer, 17 N.Y.2d 216 (1966) rearg. den. 17 N.Y.2d 918 (1966).

7.  See TSB-M-81(1) EGT (February 20, 1981).

8.  NYLJ, Feb.2, 1968, Col 5 (Sur. Ct., N.Y. County 1968).

9.  See Endnote No. 1.

10.  See Endnote No. 1

11.  N.Y. Tax Law § 960(d).

12.  See Endnote No. 1.