By Mari Galvin.
The Tax Cut and Jobs Act of 2017 (TCJA) doubled the amount of property that an individual can pass free of federal transfer taxes. As of January 1, 2019, the federal exemption is $11.4 million making it possible for a couple to transfer a combined $22.8 million during their lifetime and/or at death. For a great portion of U.S. citizens, this rendered estate tax planning on the federal level obsolete. However, federal income tax planning, state estate taxes and other considerations still make planning necessary. Here is an overview of state estate taxes in the tri-state area—New York, New Jersey and Connecticut.
NEW YORK
Estate and Gift Tax. The State of New York imposes an estate tax on the transfer of property from any deceased individual who, at the time of his or her death, was either a resident of New York State or a non-resident who owned real or tangible personal property located in the State.
For a resident, the decedent’s gross estate is equal to his or her federal gross estate reduced by real and tangible personal property located outside of New York, and, increased by certain limited powers of appointment and the amount of most post-2013 includible gifts. Includible gifts are any taxable gifts made within three years of the decedent’s date of death and not already included in the federal gross estate. This does not include real or tangible property located in another state or outside of the United States. From the resident decedent’s gross estate, the executor (or administrator where the decedent died intestate) may deduct such items of deduction allowed under the IRC (whether or not a federal return is actually filed) except to the extent that such deductions relate to real or tangible personal property located outside of the state.
Non-residents owning real and tangible property in New York are subject to the state’s estate tax. Cooperative apartments are not real property. Condominiums held in S-corporations with a business purpose are also considered intangible personal property and not part of a non-resident’s New York gross estate. New York taxes non-resident estates on the decedent’s real and tangible personal property located in the state at the time of death and adds back into the taxable estate gratuitous transfer(s) after April 1, 2014 made while the decedent was a resident of New York and consisting of (1) real and tangible personal property located in the state and (2) intangible personal property used in a trade, business or profession carried on in New York.
New York’s estate tax exemption amount is referred to as the basic exclusion amount or BEA. On March 31, 2014 Governor Cuomo increased the BEA dramatically but he did so over a period of time, with the last increase set to be phased-in on January 1, 2019. This is when the BEA would equal the federal exemption amount, as adjusted for inflation. Since the enactment of TCJA, New York did not revise its BEA so practitioners should not be fooled by the TCJA increases for federal purposes; New York’s BEA is tied to the federal exemption in effect prior to TCJA, or, $5,000,000 as adjusted by inflation using the CPI (not chained-CPI). As a result, the present New York BEA is $5,490,000 as of January 1, 2019 while the Federal exemption is $11.4 million.
When Governor Cuomo increased the BEA, he also established a “Cliff” that phases out the BEA for both residents and non-residents. The phase-out is referred to as a “Cliff” because New York taxable estates that exceed 105% of the BEA will have no benefit of the exemption—it is completely phased-out. For estates valued between 100% and 105% of the “Cliff” consideration should be given to use of the “Santa-clause” to increase the amount that can pass to heirs while also giving to charitable organizations.
Here are a few additional pieces of information:
- A New York decedent’s unused basic exclusion amount is not portable to his or her spouse.
- The State does allow a QTIP (qualified terminal interest property) election whether or not a federal estate tax return is filed.
- New York does not have an inheritance tax.
- New York does not impose a gift tax. But, as previously noted, post 2013 gifts made within three years of death may be brought back into the taxable estate for estate tax purposes.
- New York does not have a generation-skipping transfer tax.
- New York imposes a maximum estate tax rate of 16% on the value of a decedent’s taxable estate in excess of $10,100,000.
- Buyers from estates owning real property will generally require a tax waiver to close on a sale.
- The state estate tax return (From ET-706) is due nine months after date of death.
- Unless there are errors or special circumstances, the New York State Tax Department will provide a closing letter four to six months after filing to certify that no tax is due or to serve as a final receipt for the tax due.
NEW JERSEY
Estate Taxes. New Jersey’s estate tax was repealed by Governor Christie on October 14, 2017 with an effective date of January 1, 2018. The new law also eliminated the tax on real and tangible property of a non-resident decedent.
Inheritance Tax. New Jersey’s inheritance tax is still effective and is imposed based upon the following classes of beneficiaries:
Class A: Surviving Spouses, parents, children and grandchildren are exempt
Class C: Brothers and sisters and children-in-law are subject to tax after built-in exemptions.
Class D: Nieces, nephews, aunts, uncles, friends and non-relatives are fully subject to inheritance tax
Class E: Charitable Institutions are exempt.
Here are a few additional pieces of information:
- Since New Jersey does not impose an inheritance tax on assets passing to a spouse, the use of QTIP elections is not applicable.
- New Jersey does not impose a generation-skipping transfer tax.
- New Jersey excludes from taxation many types of insurance proceeds and retirement benefits. It is usually inadvisable to name your estate as a beneficiary, which is often the default election.
- New Jersey does not impose a gift tax.
CONNECTICUT
Estate tax was reformed in 2017 to mirror Federal exemption amounts and modified again after TCJA.Governor Malloy signed a state budget bill on October 31, 2017 that increased its state estate tax exemption amount from $2,000,000 to $11,180,000 by the year 2019. It did so by tethering the state’s exemption amount to the federal estate tax exemption amount. This meant that, unlike New York, TCJA’s new exemption amounts and the application of chained-CPI as an index for annual inflation adjustments would apply to Connecticut’s 2017 enacted increase in the State’s estate and gift tax exemption amount. The Connecticut bill was passed before TCJA and this sudden increase was apparently an unintended result becaskue Connecticut quickly passed another bill that phases in the increase in its exemption amount over an additional three-year period.
Connecticut’s increase in its exemption amount will phase-in as follows: $2,600,000 in 2018; $3,600,000 in 2019; $5,100,000 in 2020; $7,100,000 in 2021; $9,100,000 in 2022; and then, from 2023 until December 31, 2025 the Connecticut exemption will match the federal estate tax exemption amount, which is currently $11,180,000. Again, unlike New York which uses the former 2014 CPI index for annual inflation adjustments, Connecticut’s inflation index is tied to the same federal index (chained-CPI) and, therefore, federal and Connecticut exemption amounts will be the same from 2023 until the end of 2025. The Connecticut estate tax is payable six-months from date of death.
CT Gift Tax remains but is similarly tied to Federal exemption amount by 2023. Connecticut is the only state that still has a gift tax. However, newly elected Governor Lamont’s first proposed budget included repeal of the State’s gift tax.
Special state considerations:
- Connecticut does not allow portability of a deceased spouse’s unused exemption amount.
- Connecticut allows a reverse QTIP election so that during the years that the Connecticut exemption amount is less than the federal exemption amount an executor can make a QTIP election for a marital trust if such tax planning is warranted.
- There is a cap on the maximum estate tax payable. Max. estate tax is presently $20 million but will decrease to $15 million.
- Connecticut’s generation-skipping transfer tax does not apply to generation-skipping transfers after December 31, 2004.
- If you are wondering what happened to Connecticut’s Succession Tax, it was repealed and does not affect estates of persons dying after December 31, 2004.
The doubling of the federal estate tax exemption amount may leave individuals feeling that estate planning is no longer a major concern. However, this is not the case. We will continue to see life-events drive individuals to see their trusts and estate attorney. For example:
- a child is born, and clients ask who should be named guardian;
- divorce happens, and both parents or divorcing partners come in to ensure that assets are passing in according to their wishes which may now be different than before separation; and
- deaths occur and, again, we reassess to whom and how assets should be divided.
Economic factors will also remain a driving force for the wealthier client. For example:
- those with accumulated wealth in excess of the federal $11.4 million exemption amount ($22.8 million for a couple); and
- all clients who are reconsidering their home state domicile selection after TCJA.
Changes in tax laws create pivotal moments to reassess plans and take advantage of new possibilities. This is one of those moments. If you are considering a change in domicile, please see a qualified estate planner or tax professional to ensure that you take all the necessary steps to make an effective change.
