Major Changes to New York State Transfer Tax and Fiduciary Income Tax Laws

by Dechert LLP
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Governor Andrew Cuomo signed into law on April 1, 2014 the 2014-2015 New York State budget. The new law, which was widely debated after Governor Cuomo introduced it on January 21, includes a number of changes to New York State’s transfer tax and fiduciary income tax regimes.

NY Estate Tax Exemption Will Be Tied to the Federal Estate Tax Exemption by 2019

At the end of 2012, the Federal government adopted an exemption from estate tax of $5 million per person, indexed for inflation. In 2014, that amount is $5.34 million per person. New York State’s exemption from estate tax, however, remained at $1 million.

The new legislation provides that for decedents dying on or after April 1, 2014, the New York State exemption from estate tax (the “basic exclusion amount”) is increased to $2,062,500. This exemption amount will increase yearly through April 1, 2017. Beginning January 1, 2019, the exemption will be $5 million per person, indexed for inflation from 2010, bringing the New York State and Federal exemption amounts in line with one another:

April 1, 2014 through March 31, 2015                 $2,062,500 

April 1, 2014 through March 31, 2016                 $3,125,000 

April 1, 2016 through March 31, 2017                 $4,187,500 

April 1, 2017 through December 31, 2018         $5,250,000

January 1, 2019 and beyond                                  $5,000,000, indexed for inflation from
                                                                                     2010 (equal to the federal estate
                                                                                     tax exemption)

However, the new legislation is phased out if the New York State taxable estate exceeds the basic exclusion amount by 5%. The phase out works as follows:

  • There is no New York State estate tax if the New York State taxable estate is less than or equal to the basic exclusion amount.
  • For New York State taxable estates that are between 100% and 105% of the basic exclusion amount, the basic exclusion amount is rapidly reduced, producing a very high marginal tax on the amount by which the decedent’s taxable estate exceeds the basic exclusion amount.
  • For New York State taxable estates that are above 105% of the basic exclusion amount, there is no basic exclusion amount. For these decedents, the entire taxable estate will be subject to New York State estate tax.

The application of these rules is perhaps most easily illustrated by the following example. Three decedents, A, B and C, die April 30, 2014, while the basic exclusion amount is $2,062,500. Decedent A has a New York State taxable estate exactly equal to $2,062,500; Decedent B has a New York taxable estate equal to $2,145,000 (104% of the basic exclusion amount); and Decedent C has a New York State taxable estate equal to $2,165,625 (105% of the basic exclusion amount).

 

NYS Taxable Estate

Change in Taxable Estate from Decedent A

NYS Estate Tax Payable

Marginal Tax Rate on Change in Taxable Estate from Decedent A

Decedent A

$2,062,500

NA

$0

0%

Decedent B

$2,145,000

$82,500

$97,777

118.52%

Decedent C

$2,165,625

$103,125

$112,050

108.65%

The impact of the phase out becomes even more pronounced as the basic exclusion amount increases over time.

Estate Tax Rates Remain the Same

Although the Governor’s original bill proposed lowering the top marginal estate tax rate, the bill as enacted maintains New York State’s top marginal estate tax rate at 16%. The new New York State estate tax rates are almost identical to the old rates.

Three Year “Lookback” for Gifts Made Between April 1, 2014 and January 1, 2019

New York State does not have a gift tax. However, the new legislation provides that the value of gifts made within three years of death, beginning with gifts made on or after April 1, 2014, will be included in the decedent’s estate for determining the New York State estate tax liability. This provision only applies to gifts made before January 1, 2019 and does not apply to gifts made when the decedent was a non-resident of New York State.

Repeal of New York Generation Skipping Transfer (GST) Tax

The new legislation eliminates New York State’s Generation Skipping Transfer (GST) Tax, which had limited applicability.

“Throwback” Tax on Certain Trusts

Until passage of the new legislation, certain non-grantor trusts created by individuals domiciled in New York State or New York State decedents (“resident trusts”) could avoid New York State fiduciary income taxation, provided the trusts held no New York State property (real or tangible personal property located in New York State), had no trustees domiciled in New York State and had no New York State source income.

The new legislation imposes an income tax on these exempt resident trusts when distributions of accumulated income are made to New York State beneficiaries, beginning with income earned after January 1, 2014. The new law also imposes a reporting requirement on all resident trusts when accumulation distributions are made to New York State resident beneficiaries. Even a resident trust claiming exemption from the tax must file a return substantiating its entitlement to the exemption.

The new law does not tax accumulation distributions made by exempt resident trusts before June 1, 2014. In addition, income earned by an exempt resident trust in a taxable year prior to when the New York State resident beneficiary become a resident or reaches age 21 is not subject to the tax.

Incomplete Gift Non-Grantor (ING) Trusts Not Respected

New York resident incomplete gift non-grantor (ING) trusts, or those resident trusts which do not qualify as grantor trusts and to which the grantor’s transfers of assets are treated as incomplete gifts, will be taxed under the new legislation as grantor trusts for New York State income tax purposes. INGs are generally used to avoid the payment of New York State fiduciary income tax. The law applies to all income earned on or after January 1, 2014. The legislation does not affect the trust’s classification for Federal income tax purposes. Accordingly, an ING trust will be treated as a separate taxpayer for Federal purposes, but as a grantor trust for New York State purposes.

 

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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