One of the biggest names and personalities in recent New York City history passed away in early February: Ed Koch. Koch has a wide-ranging career, most notable for his three terms as New York City mayor. The mayor emeritus apparently died with healthy bank accounts, as a recent Forbes article suggests that his estate is valued at about $10 million. Apparently most of the wealth was accumulated after he left office in the late 1980s. A high-profile name, Koch made money giving speeches, writing books, appearing and the radio and television.
As usually happens after a celebrity passing, many have asked how Koch’s fortune might be distributed. Court documents recently filed in the matter shed light on how it all might shake out–offering yet another example of the need for community members to be vigilant about their affairs to protect against large tax obligations.
According to reports, Koch left most of his fortune to various relatives along with some charities. He made specific cash distinctions to certain relatives (i.e $500,000 to sister and husband, $100,000 to sister in law, etc.), and left the “residuary estate” (everything remaining after specific gifts) to three nephews.
However, what those three nephews will receive will likely be significantly reduced as a result of estate taxes. Most are familiar with the federal estate tax, because it has been a hotly debated issue in recent Washington D.C. political battles. Per terms agreed upon earlier this year, the this rate is set at 40% for portions of an estate over $5.25 million. Considering Koch’s estate was well above that, a large federal estate tax bill is due. But that is not the only tax bite–New York state taxes also apply. The estate tax in New York has a $1 million exemption level and a top rate of 16%. All told, some suggest that this means that the estate will owe about $1.45 to the federal government and $1.1 million to Albany.
Observers have already pointed out that it likely would have been a better move for the inheritance to have been left in a trust. In that way a large portion of the tax would have been shielded from the “generation skipping transfer tax.” In addition, the money might be protected from creditors, spouses, and others. On top of using trusts, various gifts might have been employed to lower the tax bill. For example, by providing substantial gifts while still alive, Koch might have lowered his New York estate tax bill. The value of his estate would have been lower upon his death–meaning a smaller number upon which the 16% NY estate tax would apply.