New York State Significantly Changes its Estate and Gift Tax Regimes

On March 31, 2014, Governor Andrew Cuomo signed legislation to implement the New York State fiscal plan for 2014 - 2015.  The legislation makes broad changes to the New York State (NY) estate and gift tax laws, as well as some more technical changes to certain trust income tax rules. These broad changes may warrant the re-evaluation of estate plans currently in place. 

NY Estate Tax Exclusion Increases

Under the new law, beginning immediately and over the next five years, the NY estate tax exclusion amount (formerly $1 million) is increased incrementally until the NY exclusion matches the federal estate tax exemption, as follows:

Top NY State Estate Tax Rate

The top NY estate tax rate remains 16 percent.

Falling off the Estate Tax “Cliff”

The benefit of the new NY exclusion amount is  “phased out” for taxable estates between 100 percent and 105 percent of the NY exclusion amount.  As a result of the law's estate tax  “cliff,” taxable estates that exceed 105 percent of the NY exclusion amount will lose the benefit of the exclusion completely—the entire taxable estate will be subject to the NY estate tax (applied at graduated rates).  The old exclusion amount resulted in the avoidance of $33,200 of NY estate tax on the first $1 million of value, which benefit was phased out at a rate of 41percent as the taxable estate exceeded the exclusion amount.  The new exclusion regime, at its highest published statutory rate, will result in the avoidance of $420,800 of NY tax, which benefit will then be phased out as the taxable estate exceeds the exclusion amount until it is lost in full when it exceeds 5 percent of the exclusion amount.   

Three-Year Look Back

The new law also adds a limited 3-year look back period for gifts made between April 1, 2014 and Jan. 1, 2019.  Specifically, if a NY resident dies within three years of making a taxable gift, the value of the gift will be included in the decedent’s estate for purposes of computing the NY estate tax.  The following gifts are excluded: (1) gifts made when the decedent wasn’t a NY resident; (2) gifts made by a NY resident before April 1, 2014; (3) gifts made by a NY resident on or after Jan. 1, 2019; and (4) gifts that are otherwise includible in the decedent's estate under another provision of the federal estate tax law (that is, such gifts aren’t taxed twice). 

Other Benefits and Burdens

The new law also repeals the NY generation-skipping transfer tax, eliminating it as a planning and administration concern.  And the new law provides permanent relief for surviving non-citizen spouses, allowing a marital deduction without the requirement of a qualified domestic trust when a federal estate tax return isn’t required to be filed.    

On the income tax side, the new law specifically identifies the income of an “incomplete gift non-grantor trust” as being included in the income of the trust grantor, eliminating such trusts as a vehicle to avoid NY income taxes on residents.  Beginning in 2014, throwback rules will also impose tax on income accumulated in a NY resident trust that avoids current taxation pursuant to the exception for trusts having no NY trustees or assets, and that’s subsequently distributed to a NY resident beneficiary.

Narrowing the Gap 

This new law will narrow, and eventually eliminate, the gap between the NY and federal estate tax exclusion amounts.  For the next five years, however, as the exclusion amount increases and the 3-year look back for taxable gifts applies, planning will be more complex.  In any event, it’s important for attorneys with NY clients to consider whether changes to estate plans or gifting strategies are appropriate.