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NEW STATE LAW TO END TAXES ON ALL BUT RICHEST ESTATES

Estate and trust lawyers in Florida like Alan Hilfiker for years enjoyed a steady source of clients who wondered whether they should leave New York.

With Florida's sun and a much lower cost of living fueled by lower taxes, he and his colleagues had good arguments for Florida residency.

Now, officials in Albany hope a new change in the state tax law will help slow the number of moving vans heading down Interstate 95 from New York -- the state that has provided Florida with nearly one quarter of its migrants in recent years.

Among the tax changes recently signed into law by Gov. Pataki is a provision that, over the next several years, will end New York's dubious, first-place distinction when it comes to taxing inheritances and gifts.

Estimated to cost the state nearly $1 billion in lost tax revenues between 1997 and 2002, the reforms approved as part of this year's state budget will end tax payments for 85 percent of estates that would otherwise pay the levy.

"Eliminating that factor may be a source of New York retaining more of its residents," said Hilfiker, who advises people on their estates from his law firm in the upscale West Coast Florida city of Naples.

"It's going to have a negative impact on Florida," agreed Tim Leadbeatter, a Tallahassee tax lawyer.

However, estate lawyers said few people -- beyond the super-rich in some isolated cases -- have shifted their residency from New York to Florida solely because of estate and gift taxes. But, especially for retirees, they've clearly been a factor.

In 1995, 64,200 people moved from New York to Florida; only 19,400 came the other way, according to tax return data compiled by the Internal Revenue Service. From 1992 to 1995, 250,000 New Yorkers moved to Florida.

In 1995, 2,231 people moved from Erie and Niagara counties to Florida. But only 589 people came the other way. .

The higher estate and gift taxes in New York were "just an added incentive not to be here," said state Senate Majority Leader Joseph Bruno, who for several years sought reforms. This year Pataki and, eventually, Assembly Speaker Sheldon Silver embraced the reforms.

Despite the tax revenue loss, "we feel it's an investment," the Republican senator said.

If more New Yorkers stay here and don't move to places like Florida and Arizona, Bruno and others figure, the revenue loss in estate taxes will be more than made up in the extra tax money those people will pay.

The estate tax was raised in New York in 1959 by someone with his own huge estate: Gov. Nelson Rockefeller. Ever since, it has been just one more competitive disadvantage New York has had with states like Florida and Arizona.

The new changes "finally put New York on an even playing field with those states that have for years been alleging that theirs is a state tax haven," said John Spitzmiller, a Buffalo attorney who was chairman of the New York Bar Association's trust and estate law section in 1995, when the lobbying on the tax reforms heated up.

New York is one of only 16 states with a specific estate tax that hits more people than the federal estate tax. Moreover, with rates from 2 to 21 percent, New York taxes the highest among the 16 states. Presently, estates worth more than $115,000 are taxed.

The IRS, however, doesn't start taxing inheritances until they are worth more than $600,000. The new state law will raise the exemption level to $200,000 by 1997, $400,000 in 1998 and then to $600,000 by 2000. Eventually, the level will rise to $1 million.

The higher exemption level will affect some 25,000 New York families each year, officials estimated. A side effect, even some lawyers acknowledge, will be that people now running to lawyers and accountants for help with New York estate taxes no longer will need those services.

New York's gift tax, one of only six nationwide that taxes individuals when they give away money or other gifts of value, also will be sharply reduced. Under the new law, people can give up to $600,000 in a lifetime without any tax consequences -- also up from the present $115,000.

The savings can be significant to survivors. Under current state law, a $250,000 estate -- say, the value of the dead person's savings, some property and an insurance policy -- would be taxed $7,500, according to Tom Hyde, a Buffalo lawyer who specializes in tax law.

Critics of the levy say such a sudden tax bill not long after someone dies often forces survivors to do things like sell off assets just to pay Albany. Under the new law, the $250,000 estate would owe no state taxes; federal taxes are still required, though those exemption levels also will be rising over the next several years as well.

While most people who die in New York have estates worth less than the $600,000 -- a level that now requires a $25,500 state tax bill -- the new law also will help the rich. A $10 million estate will save $370,000 when the new state tax law is fully implemented, according to Hyde.

"We think it's a good thing for New York state to have a lot of rich people," said Bob Ward, a spokesman for the Business Council of New York State, the top business lobby in Albany.

Ward said the higher estate taxes also hit smaller, family-owned businesses particularly hard. When a company owner died, relatives often would be forced to sell the business to pay the estate taxes.

"We were told by a number of business owners that the estate tax was a significant factor in their considering if not actually deciding to move out," Ward said. "In other cases, we were told it would make it more difficult for the business to stay in the family over the long term."

Ward believes the tax was also a factor in keeping small, growing companies from relocating to New York.

The move to reform New York's estate and gift tax began as a lonely fight about five years ago and was spearheaded by two Manhattan lawyers who practice estate and trust law, Joshua Rubenstein and Eileen Schwab.

Eventually, a few events came together that made the changes possible.

First, with a governor in office who not only favors tax cuts, but also once practiced estate law, the proponents had an easy ally in Pataki. With Bruno, the Senate was already won over.

But what really pushed it through, ironically, was an aggressive tax collection campaign by the state.

Near the end of the Cuomo administration, collectors beefed up their attempts to find people the state felt were trying to avoid paying estate or income taxes by living part of the year in places like Florida. They successfully nabbed people and forced them to pay taxes if, for instance, they maintained ties in New York like belonging to a church or keeping membership in a local garden club.

That created a cottage industry for lawyers: advising people spending most of their time outside New York on ways to avoid its taxes. To counter the state's aggressive collection efforts, these lawyers gave their clients -- many of them wealthy -- very simple advice: sever all connections to New York. The advice included stopping donations to New York charities. Some charity groups, as a result, saw wealthy board members, who lived most of the year in Florida, quit to protect their assets from Albany taxes.

Enter the charity lobby.

Eventually, business groups, the senior citizen lobby and groups representing farmers -- whose members sometimes were forced to sell off family farms to pay the estate tax -- joined the campaign.

"I think it's going to be a major shot in the arm for New York," said Rubenstein, the Manhattan lawyer. "Right now you have people come to New York to make money and then in their later years they take it out. Now, more businesses will stay and certainly more wealthy people will stay."

Hilfiker, the Florida lawyer, doubts there'll be any major fallout in migration to Florida, except maybe among the super-rich -- those worth $100 million or so.

"It may not be the entire answer to the exodus from New York. New York still has a pretty high income tax and I think most advisers tend to plan around income taxes because that's something that goes on for quite a number of years, where the estate tax is sort of a one-time thing," he said.

But Ward, the Business Council spokesman, said the tax changes will help send a signal.

"Everyone knows taxes in New York are high. But when you have something like this that really sticks out like a sore thumb it just makes our image worse," he said.