Publications

2014 – 2015 New York Budget: Changes to New York Estate Tax

April 1, 2014
Harter Secrest & Emery LLP

HSE LEGALcurrents

As part of his 2014-2015 budget, Governor Cuomo had proposed making significant changes to the New York estate tax. The budget, as finalized, incorporates much of the Governor’s proposal with some significant changes. This LegalCurrents describes the legislation and notes the more important differences with the Governor’s proposal.

The legislation does not change the basic structure of the New York estate tax. The estate tax continues to follow the federal estate tax to determine what is subject to tax, how assets are valued, and what deductions are available (with a possible exception that will be discussed below).

Changes

The first significant change is the increase in the amount exempt from New York estate tax. Over the course of four years, beginning April 1, 2014, the amount exempt from New York estate tax increases on the following schedule: $2,062,500 for decedents dying between April 1, 2014 to March 31, 2015; $3,125,000 for decedents dying between April 1, 2015 to March 31, 2016; $4,187,500 for decedents dying between April 1, 2016 to March 31, 2017; and $5,250,000 for decedents dying between April 1, 2017 to December 31, 2018

After December 31, 2018, the New York exemption is to be indexed for inflation. Unlike the Governor’s initial proposal, the indexing will conform the New York exemption to the federal exemption.

It is important to note that, while the New York exemption is effectively a credit, there is an exception, which we will discuss in the “Exceptions” section below.

At the federal level, the exclusion against the federal estate tax not used at the death of a spouse may be inherited by the surviving spouse (“ported” is the technical word). The legislation does not provide for portability of the New York exemption. If a decedent leaves all of his or her estate to a surviving spouse in a manner that qualifies for the marital deduction, the decedent’s New York exemption will be lost.

A second significant change is that the New York estate tax will take into account adjusted taxable gifts made by a donor after April 1, 2014 if he or she was a New York resident at the time of the gift. In a difference with the Governor’s proposal, the “includible gifts” are those made within three years of death and before January 1, 2019.

The third significant change is the introduction of a “New York-only” Qualified Terminable Interest Marital Deduction. Some explanation is in order.

The federal estate tax provides a deduction for certain transfers to a decedent’s surviving spouse. The deduction is unlimited. Outright transfers qualify for the deduction; transfers to certain trusts that benefit the surviving spouse also qualify for the deduction.

One of the qualifying trusts is a “qualified terminable interest property trust” or “QTIP trust” for short. In order to qualify as a QTIP trust, the surviving spouse must be entitled to all of the income from the trust for his or her life and no other individual may have a benefical interest in the trust while the spouse is alive. The QTIP deduction is elective.

The New York provision, if enacted, would allow for a QTIP deduction for New York purposes where no federal estate tax return is led. If a federal return is led and the QTIP election is made, a New York QTIP election must also be made.

The provision effectively removes any question about the status of a QTIP election where the QTIP election was not needed at the federal level to avoid tax (there is a pronouncement from the Internal Revenue Service to the effect that such an election is void).

A fourth significant change may be a trap for unwary non-residents. In addition to taxing real property and tangible personal property located in New York owned by non-residents, the legislation includes in the estate tax base gifts of real estate and tangible personal property located in New York and “intangible personal property employed in a trade, business or profession carried on” in New York.

Several things are noteworthy: first, unlike the inclusion of certain adjusted taxable gifts for New York residents, the legislation simply includes “gifts” of non-residents. Presumably, this would include gifts that qualify for the annual exclusion against the federal gift tax. Second, there is no time limit as to the includible gifts (unlike the limit for adjusted taxable gifts for New York residents). Third, the significance of the use of “employed” in connection with intangible personal property is unclear. It is not known if the Legislature intended to distinguish the ownership of the trade, business, or profession (e.g., an interest in a partnership) from an asset of the trade, business, or profession (e.g., a bank account titled to the partnership).

Finally, the legislation eliminates New York’s generation-skipping transfer tax with respect to post-March 31, 2014 transfers. As a practical matter, this tax had relatively little application in most estates.

Exceptions

As previously mentioned, some estates will not have the benefit of the increased New York exemption. Which estates? In a word, larger estates. The New York exemption is effectively a filing threshold and a credit. Where the taxable estate exceeds 105% of the exemption, however, “no credit shall be allowed to the estate.”

As indicated above, under the legislation, New York estate tax deductions track federal estate tax deductions with one likely exception. Although Section 955 of the Tax Law broadly states that the New York deductions are the federal deductions, the pertinent Internal Revenue Code provisions that are incorporated in New York law do not include the IRC section providing for a federal deduction for estate tax payable to a state such as New York. In keeping with the current regime, in which the New York estate tax is not a deduction against the New York estate tax, it is likely that the non-deductibility of New York tax against the New York tax will continue.

What Did Not Change

Governor Cuomo’s proposal included a reduction in the rates for New York estate tax. The legislation continues the current rates, with a very slight upward modification as to the bracket, for one year, i.e., to March 31, 2015. The question about rates will have to be revisited in next year’s budget.

Some Thoughts

The eventual elimination of the New York estate tax for estates under $5 million (the figure does not reflect indexing after 2010) will be welcome for many estates.

Where the New York estate tax will or may apply, planning will not necessarily be simple under the legislation. First, without portability of the New York exemption, the question of whether to use the New York exemption at the first death of a married couple will still be present.

Second, for an individual near the federal exclusion, the combination of the “all or nothing” feature of the New York exemption and the potential inclusion of certain adjusted taxable gifts in the New York gross estate likely will make planning to reduce an estate below the exemption difficult. Apart from the possibility of an estate having to pay tax, liquidity planning will be more difficult.

Moreover, the possible inclusion of adjustable taxable gifts made between April 1, 2014 and January 1, 2019 will make lifetime planning more difficult. A New York resident must consider whether to make gifts now (to get the three year clock running) or to wait until January 1, 2019 (and risk either a change that would extend the period of inclusion or death before the gifts are made).

Third, it is unfortunate that there is certainty about the New York rates only until March 31, 2015. Although the rates are closely tied to the rates under the now-repealed federal credit for state death taxes, there is no structural reason why New York rates cannot increase. Put another way, a revision to the rates—whether up or down—would not entail other changes to New York estate tax.

Lastly, if post-April 1, 2014 gifts are subject to New York estate tax and the recipients are different from those who are beneficiaries under a decedent’s testamentary documents, the estate beneficiaries effectively will bear tax on assets received by others.

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