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New York State Estate and Gift Tax: The Hidden Costs of Tax Reform

On March 31, 2014, Governor Andrew Cuomo signed the New York State 2014-15 Budget (the “Budget”) into law. While the Budget undertakes a number of New York State tax changes, the re-structuring of the estate tax provisions is especially noteworthy. The law finally puts into place the long-contemplated increases in the New York estate tax exemption to more closely dovetail the federal estate tax exemption. However, in what was apparently a last minute change to the Budget, there is a surprising “cliff” provision that results in the loss of any New York estate tax exemption once a decedent’s taxable estate exceeds 105% of the tax exemption in effect on the date of death.

Previously, the New York estate tax exemption was fixed at only $1 million per person and tied to a complicated formula whereby certain tax credits were applied in calculating the estate tax. The Budget now sets the applicable exemptions as follows:

For Decedents dying

4/1/14 – 3/31/15

$2,062.500

For Decedents dying

4/1/15 – 3/31/16

$3,125,000

For Decedents dying

4/1/16 – 3/31/17

$4,187,500

For Decedents dying

4/1/17 – 12/31/18

$5,250,000

As with the currently enacted Federal Estate Tax Exemption, beyond December 31, 2018, the applicable exemption will be indexed for inflation. While, at first blush, it appears that this results in a significant tax reduction, there is a surprising tax for the New York State tax payer once the maximum exemption is reached.

The Budget provides that, once the taxable estate exceeds 105% of the exemption in effect at the person’s death, the entire estate becomes subject to New York Estate Tax. The practical effect of this application is nothing short of astounding. Consider the following examples:

  • A decedent dies with a New York taxable estate of $5,500,000 on January 1, 2018. As the taxable estate does not exceed 105% of the NYS exemption of $5,250,000, the estate can apply the applicable exemption and be subject to a relatively small tax of $30,000.
  • On January 1, 2018, a decedent dies with a New York taxable estate of $5,513,000 which is above 105% of the NYS exemption of $5,250,000. Having now exceeded the exemption amount, the estate will be subject to a New York estate tax in excess of $450,000. Since the taxable estate is more than 105% of the exemption, there is no applicable credit whatsoever, leaving the estate responsible for a now significant tax.

The $13,000 difference between the values of the two estates results in an increase in taxation of several hundred thousand dollars and therein lays the “cliff.” Based upon the currently drafted provisions in the Budget, for wealthier New Yorkers whose estates exceed the exemption, the benefit of any exemption is entirely lost.

To further complicate matters, under the new law, during the period when there is a gradual increase in the exemption (now through the end of 2018), taxable gifts for Federal Gift Tax purposes made within 3 years of death will be added back into the value of the New York taxable estate for the purpose of determining the New York estate tax unless: (i) the gift was made when the decedent was not a New York resident, (ii) the gift was made before April 1, 2014, or (iii) the gift was made on or after January 1, 2019. The practical effect through the applicable period is that even though New York does not impose a gift tax, these re-captured gifts will be taxed as part of the estate when a donor later dies. Any appreciation on the gift, however, between the date of the gift and the donor’s death will continue to escape taxation.

Curiously, the estate tax changes undertaken in the Budget were touted by Albany as a boon for New York State and meant to address what Governor Cuomo perceived as an exodus of New York residents in an effort to avoid punitive income and estate taxes. While it is true that estates falling below the exemption will see the benefit in assessable estate tax, those with estates over the exemption amount will be faced with significantly more tax than they would have under the existing structure. As evidenced by the above example, even a small excess beyond the applicable exemption amount can convert a non-taxable estate into a nearly half-million dollar New York State estate tax obligation. Practitioners and the New York State Society of CPA’s have already begun an aggressive campaign to address the predicament created by the law and have proposed additional changes that would stem what appears to be an incongruous tax result. Thus far, there is no official comment by the legislature on the implications of the new law.

As is true whenever there is a significant change of law, it is important for individuals to revisit their estate plans. For more information on the topic discussed or to discuss your estate planning needs, contact the attorney listed.

For more information on the topic discussed, contact:

04.15.2014  |  PUBLICATION: Other Publications  |  TOPICS: Estate Planning, Tax

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