The final New York budget bill passed on April 1, 2014 has many significant trusts and estates related provisions. For wealthy clients, there is potentially an estate tax increase in spite of an increase in the New York estate tax exemption.
Estate Tax
The New York estate tax exemption is set to increase gradually though 2019 to eventually match the federal exemption, which is currently $5,340,000. The New York State exemption amounts are as follows:
April 1, 2014 – $2,062,500
April 1, 2015 – $3,125,000
April 1, 2016 – $4,187,500
April 1, 2017 – $5,250,000
After January 1, 2019 the exemption will be indexed for inflation.
The top New York estate tax rate remains at 16%. In spite of the higher exemption, there is an estate tax “cliff.” If a resident decedent’s taxable estate exceeds the exemption amount by more than 5%, the exemption is eliminated entirely. This means that your estate will be taxed on its full value, not just the amount over the exemption. There is also a phase out of the exemption for estates exceeding the exemption by 5% or less. The following example provided by the New York State Society of CPAs shows a 164% marginal tax rate.
In 2017: a decedent with a New York taxable estate of $5,512,500 (which is 5% more than the exemption of $5.25 million), would pay a New York estate tax of $430,050, whereas there would be no tax if the estate were worth $5,250,000. In effect, there is a $430,050 tax on the extra $262,500!!!
If Governor Cuomo believes this new law will stop residents from moving to Florida or another state with lower tax rates, he is sorely mistaken. If your estate exceeds the exemption, it is very important that you consider estate planning to reduce your taxable estate below the threshold.
Portability/QTIP Election
There is no portability provision as there would be under federal law. Under federal law, the unused estate tax exemption of the first spouse to die can be transferred or “ported” to the surviving spouse. This cannot be done under New York law. Therefore, planning steps must be implemented (including having proper Wills) to make sure the New York exemption of the first spouse to die is not wasted. In addition, a separate New York QTIP election can only be made when a federal return is not “required to be filed.” So even if a federal return is filed solely for purposes of electing portability, a separate state QTIP election cannot be made. Therefore, creating an exemption trust at the death of the first spouse is still necessary to make sure the New York State exemption of that spouse is not wasted. This is a better alternative than relying on a full marital deduction on the death of the first spouse and taking advantage of portability.
Gift Tax
New York has no gift tax. Under prior law, lifetime gifts were not subject to gift tax or included in the New York gross estate. Under the new law, the gross estate of a resident decedent is increased by the amount of any taxable gifts made within three years of death (and while a New York resident) provided such gifts (i) were made between April 1, 2014 and December 31, 2018 and (ii) are not otherwise includible in the estate for federal estate tax purposes. This provision, which is intended to prevent deathbed gifts from escaping New York estate taxation, may force many taxpayers to consider a change in residency to a state which does not have an estate tax.
Income Taxation of Certain Non-Grantor Trusts
Incomplete gift non-grantor (ING) trusts created by New York residents will be treated as grantor trusts for New York income tax purposes and thereby subject to New York income tax. ING trusts that are liquidated before June 1, 2014 are excluded from these new provisions. This provision is effective for tax years beginning January 1, 2014. Prior to the change in the law, many New York residents created ING trusts outside of New York (i.e. in Delaware or Alaska) to avoid paying New York state/city income taxes. Now ING trusts will be treated as grantor trusts for New York purposes resulting in the inclusion of all trust income on the grantor’s New York personal income tax return.
The legislation also imposes an income tax on the undistributed net income accumulated by all other exempt resident trusts (i.e. completed gift non-grantor trusts created by New York residents with no New York (i) Trustees, (ii) property or (iii) source income). In tax years beginning January 1, 2014, such income will now be subject to New York income tax once distributed to New York resident beneficiaries. Such trusts will accordingly be subject to return filing requirements when they make distributions to New York resident beneficiaries.
Immediate planning is essential for New York residents that have existing incomplete gift non-grantor trusts. As you can see, estate planning has just become exceedingly more complicated. There are many hidden traps, so watch out. Consider scheduling an appointment to review your existing plan. There’s a good chance it needs updating to account for the new law.
