Major Changes Expected To New York State’s Estate Tax System

by Hodgson Russ LLP
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Governor Cuomo’s budget bill, released last week, includes significant changes to New York State’s estate tax system. If these provisions in the bill pass, many of the changes will become effective nearly immediately.

On the positive side for taxpayers, the exemption amounts for estate tax will be raised, the top rate will be lowered, and New York State’s generation-skipping transfer tax will be repealed.

The New York State estate tax exemption has been $1 million for quite some time, notwithstanding the federal unified credit having been raised two years ago to exempt more than $5 million from estate and gift tax. The current proposal will phase in an increased exemption to match the current amount sheltered by the federal unified credit by April 1, 2017. Over the same timeframe, the top estate tax rate will be gradually reduced from 16 percent to 10 percent.

On the negative side for taxpayers, the New York State gift tax “loophole” will be closed, and New York residents will be taxed on certain types of trust income that are currently exempt.

Though there is a gift tax at the federal level, the New York State gift tax was repealed in 1999. Accordingly, New Yorkers currently can make gifts (even on their deathbed) free of New York State gift tax. Once a gift is completed, the assets will not be subject to New York estate tax. The current budget proposal would require all gifts made by New York residents after April 1, 2014, to be added back to the taxable estate on death. This change means that the assets gifted become subject to New York State estate tax. The net effect is equivalent to a gift tax.

In addition, certain types of trusts can be structured from an income tax perspective to “reside” in a jurisdiction other than New York State and avoid New York income tax on their accumulated income. The current budget proposal requires New York State resident creators/beneficiaries of such trusts to include accumulated income of those trusts for purposes of New York State income tax. If adopted, this proposal would become effective beginning June 1, 2014.

Planning for these proposed changes to New York State’s gifting rules and trust taxation will be difficult given the very short timeframes between enactment and effective date. To the extent significant gifts are contemplated this year, it would be prudent to complete them before April 1.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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