The majority of states, including those that are often most attractive to New Yorkers looking to relocate post-retirement (e.g., Florida, Georgia, and the Carolinas), do not impose a state-level estate tax. Even though the estates of residents of such states will not owe estate taxes to the decedent's resident state, there may still be estate tax payable to another state if the decedent owned real estate or tangible personal property in a state that does impose an estate tax. New York is one of those states. For example, if a Florida resident at death owns real estate or tangible personal property (e.g., artwork, furnishings, boats, jewelry, etc.) located in New York, estate tax may be due to New York.
One strategy that may be employed to try and ameliorate the imposition of New York state estate tax is to attempt to convert any New York-situs real or tangible property owned by a non-resident into an intangible asset or assets. One way to potentially achieve this goal is to contribute the New York-situs asset to a partnership, limited liability company (LLC), or corporation, with the non-resident owner retaining an interest as a partner, member, or shareholder, respectively. The hope is that, upon death, the interest owned by the estate will be treated as an intangible asset and therefore will not be subject to New York state estate tax. This was exactly what was proposed in Advisory Opinion TSB-A-15(1)M (the Advisory Opinion) recently published by the New York State Department of Taxation and Finance (the Department).
In the Advisory Opinion, the taxpayer was a New York resident who planned to relocate outside of New York and reside outside of New York for the remainder of his lifetime. The taxpayer wanted to convert his New York real property (a condominium) into an intangible asset by forming a single-member LLC in Delaware (with taxpayer as the single member and 100% owner) and transferring ownership of the condominium to the LLC. The LLC would be a "disregarded entity" for federal income tax purposes, meaning the LLC would be a business entity separate from its owner (the Taxpayer) but would not be treated as a corporation for federal income tax purposes.
The Department concluded that a membership interest in a single-member LLC owning New York real property that is a disregarded entity for federal income tax purposes is not treated as intangible property for New York state estate tax purposes. The Department reasoned that when a single-member LLC is a disregarded entity, the individual owner is deemed to own the LLC and the LLC's activities are attributable to the owner.
The Advisory Opinion is only binding on the taxpayer who sought the ruling and is based on the specific set of facts presented to the Department by that taxpayer, and there are arguments to be made that the Department's reasoning is flawed. Nevertheless, the Advisory Opinion demonstrates the importance of consulting with an experienced practitioner in these situations to carefully consider the applicable state laws and legal concepts. It is quite possible that a different conclusion may have been reached by the Department if the entity to which the New York real estate was being transferred was a separate entity for federal income tax purposes, with more than one owner and a valid business purpose.
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