New York Budget Bill Makes Changes to Estate Tax

Posted By Steven Adler || 29-Apr-2014

On March 31, 2014, the New York State Senate and Assembly successfully passed a $140 Billion budget that included the most significant estate tax changes for the State since the estate tax exemption was increased to $1,000,000 in 2002. The new law is effective as of April 1, 2014.

Estate Tax

The most notable change is the increase of the estate tax basic exclusion amount. The exclusion had been $1,000,000 per person since 2002. Effective April 1, 2014, the new law immediately increases the exclusion to $2,062,500 per person. The exclusion then increases each April 1st in the years 2015 through 2018. On January 1, 2019, the basic exclusion amount will be indexed for inflation annually and will be equal to the federal exclusion amount.

The exclusion and the timeframe for each increase is as follows:

◾ From April 1, 2014 through March 31, 2015 - $2,062,500

◾ From April 1, 2015 through March 31, 2016 - $3,125,000

◾ From April 1, 2016 through March 31, 2017 - $4,187,500

◾ From April 1, 2017 through December 31, 2018 - $5,250,000

◾ From January 1, 2019 forward - Indexed for inflation

Estate tax rates were not changed in the final legislation so the maximum rate remains at 16%. Under federal estate tax laws, the New York State estate tax is deductible and, accordingly, the maximum rate after the deduction is effectively 9.6% for estates subject to federal estate tax.

Cliff Concerns

Of particular concern is the new "cliff" language contained in the law. It has been dubbed a "cliff' because if it is triggered you basically fall into a state estate tax abyss. The cliff drastically phases in the estate tax for taxable estates that are between 100% and 105% of the exclusion amount. The effect of the cliff on taxable estates that fall within that range is to impose a substantial tax on the value of the assets in excess of the exclusion amount. Once an estate exceeds the basic exclusion amount by more than 5%, not just the amount in excess of the basic exclusion amount is taxed, but, rather, the entire taxable estate is subject to estate tax. In essence, taxable estates greater than 105% of the basic exclusion amount receive no benefit from the exclusion amounts shown above and will pay the same tax that they currently pay.

So, for example, if you are a New Yorker and you die in 2018 with an estate of $5,512,000, your estate will be taxed in its entirety not just the amount in excess of the $5,250,000 basic exclusion amount. This is because your estate is more than 5% above the exclusion amount so you fall off the cliff and your estate does not get the benefit of the exclusion.

Gift Add-Back

New York State repealed its gift tax effective January 1, 2000. The new legislation, however, essentially implements a tax on taxable gifts (i.e., gifts that exceed the annual exclusion amount which is currently $14,000 per recipient per year) if they are made under certain circumstances. The statutory language does not directly impose a tax on gifts, per se, but, rather, adjusts an individual's gross estate by "adding-back" taxable gifts to an individual's gross estate when calculating the New York estate tax, thus, potentially resulting in a larger estate tax.

In order for gifts to be added to the gross estate, the following requirements must be met: Lifetime taxable gifts (in excess of the $14,000 annual exclusion per donee) which are made by (1) a resident of New York at the time of the gift, and (2) made during the 3 year period before his or her death, and (3) to the extent such gifts are made between April 1, 2014 and December 31, 2018 are "added back" to the decedent's gross estate.

Therefore, taxable gifts made outside of the three-year "look-back" period prior to an individual's death, by individuals when they were not residents of New York, or outside the dates above will not be added back to an individual's estate. Because the gifts subject to the add-back provisions will be reported on federal gift tax returns, no separate New York gift tax return requirement was enacted.

New York Only Qualified Terminable Interest Property (QTIP) Election

The Budget Legislation includes provisions that may be helpful to some married couples, depending on the size of each spouse's gross estate. Specifically, the legislation provides that if an estate files a federal estate tax return and elects to qualify certain property (e.g., a marital trust) for the unlimited marital deduction from federal estate tax (a so-called "QTIP election"), the estate must make a consistent QTIP election on the New York state estate tax return. However, if the estate is not required to file a federal estate tax return because the federal gross estate is below the threshold for filing one, the estate may make an independent QTIP election on the New York state estate tax return.

No New York State Estate Tax Portability

Under federal estate tax law, the surviving spouse of a married couple can use any unused exemption of a deceased spouse. For some married couples, portability of the deceased spouse's exemption simplifies planning. The new law enacted does not contain equivalent provisions for New Yorkers. Accordingly, traditional estate tax planning using trusts will be necessary for New Yorkers who are married and have assets in excess of the new exclusion amounts.

Repeal of New York State's generation-skipping transfer (GST) tax

Under prior legislation, New York State imposed a GST tax on taxable distributions and/or terminations from a trust to a "skip person" for GST purposes. The Budget Legislation repeals New York's GST tax entirely. Unfortunately, this will not result in any overall tax savings for New York estates as the federal GST tax will now be larger, by the amount of the available credit for state GST tax that New York has now decided not to impose.