You have moved from a high-income-taxed state but left a vacation home behind. If you’re like most taxpayers with homes in multiple states, you’ve strategically planned with your advisors how to mitigate income tax obligations during your lifetime. But if this planning does not consider non-resident estate taxation upon the estate owner’s death, your beneficiaries may be faced with unintended and very surprising consequences.
New York State is a prime example. It is not uncommon for wealthy New York residents to move to Florida and still maintain a home, vacation home, Manhattan apartment or other secondary residence in their former state. Their tax advisors will counsel them on how to establish primary residence in Florida and minimize income tax bills from New York State, New York City and other jurisdictions.
Upon death, however, the rules change.
Consider the following real-life scenario: A New York resident moved to Florida and maintained her $17 million home in the Hamptons as a vacation home. The homeowner passed away, and New York sent the estate a tax bill of more than $2.1 million.
Even though it was considered a secondary residence for all other tax purposes, the property’s value exceeded the New York State exemption amount of $5.93 million for estate tax, leaving the asset wide open for an estate tax obligation.
This hefty non-resident estate tax of up to 16 percent in New York is imposed on any non-business real property located in the state and valued above the exemption amount, but it does not apply to intangible assets. It is based solely on the location of the asset, without regard to the primary residence of the decedent.
With no estate tax in Florida, this tax bill came as just as much of a surprise to the estate owner’s attorney as it did to the estate beneficiaries. Fortunately, there are proactive strategies that can be employed to prevent this from happening to you and your estate.
One of the most effective tax mitigation strategies in New York is to put the asset into a multi-member limited liability company (LLC), which would convert the asset from real tangible property (subject to NY non-resident estate tax) to intangible property (excluded from New York non-resident estate tax). A single member LLC will not work for this purpose. An S Corporation could work for this purpose; however, the S Corporation is typically not the best option for ownership of real estate assets.
In some states, such as Connecticut and Massachusetts, non-resident estate tax is levied as a percentage of the entire asset value, not just the portion owned by the decedent, making gifting strategies during your lifetime that much more important.
Connecticut takes it one step further and will look through an LLC or S Corporation if it is being used for a non-business purpose, and the proportionate percentage owned by the non-resident decedent will be taxed. Due to the nature of this calculation, an asset (even if left entirely to a surviving spouse) would incur estate tax.
A gift of this same asset may not suffer the same fate. There appears to be a loophole in Connecticut law that may allow gifts of the same property to escape gift tax.
Non-resident estate tax applies to all tangible personal property and real estate in a non-resident state that has an estate tax. After making your move to Florida, it is important to revisit the tax laws in the states where you left assets behind in order to fulfill your tax-savings and wealth transfer objectives.
Lisa Rispoli leads the Trust & Estate Services group at Grassi Advisors & Accountants. With more than 30 years of experience in trust and estate planning, gifting and taxation, she helps clients develop effective estate plans and transfer maximum wealth to the next generation and charitable organizations.