New York’s New Changes to Estate, GST and Income Tax Laws

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New York has recently passed new laws that significantly reform its current estate, generation-skipping transfer (GST) tax and income tax scheme. This Private Client Group Client Alert provides a brief overview of New York’s new estate, GST and income tax laws.

1. New York Estate Tax Laws

Under New York’s prior law, the New York estate tax exemption amount was $1,000,000. The current federal estate tax exemption is $5,340,000. Under New York’s new law, the exemption is gradually elevated over the next four years to eventually match the federal estate tax exemption amount as follows:

  • $2,062,500 for decedents dying 4/1/14 to 3/31/15
  • $3,125,000 for decedents dying 4/1/15 to 3/31/16
  • $4,187,500 for decedents dying 4/1/16 to 3/31/17
  • $5,250,000 for decedents dying 4/1/17 to 12/31/18
  • Equal to the federal exemption for decedents dying 1/1/19 and later

However, it is vital to note that the elevated New York exemption amount is a “cliff” and not a threshold. That is, the New York exemption amount will be lost if the decedent’s taxable estate exceeds 105% of the exemption in effect at the decedent’s death. This means that even a minor difference in the size of a decedent’s taxable estate could result in a significant estate tax.

For example, if a New Yorker with a taxable estate of $5,250,000 dies on January 1, 2018 when the New York exemption is $5,250,000, that New Yorker will be able to apply the New York exemption amount because her taxable estate is below 105% of $5,250,000 (which is $5,512,500) and no New York estate tax is due. On the other hand, if that same New Yorker died on the same day with a taxable estate of $5,513,000, the New York exemption does not apply and her entire estate is subject to New York estate tax because her estate is above 105% of $5,250,000. As a result, the New York estate tax due is $452,360.

By working with skilled counsel, wealthy New York residents may avoid this undesirable result. For instance, if the New Yorker with the $5,513,000 taxable estate in the example above had included a charitable bequest of $1,000 in her will, then her taxable estate would have been reduced to $5,512,000 and she could have taken full advantage of the New York exemption.

2. New York’s Three-Year Look Back Period for Taxable Gifts

Under New York’s new law, the amount of all taxable gifts made by a New Yorker during the three-year period ending on the date of the New Yorker’s death is included in the New Yorker’s gross estate. However, the following gifts are excluded: (1) gifts made when the decedent was not a New York resident; (2) gifts made by a New York resident before April 1, 2014; (3) gifts made by a New York resident on or after Jan. 1, 2019; and (4) gifts that are otherwise includible in the decedent’s estate under another provision of the federal estate tax law (to prevent double taxation of such gifts).

3. The Elimination of New York’s GST Tax

Under prior New York law, GST tax applied to trusts held exclusively for the benefit of the grantor’s grandchildren or more remote descendants, or outright gifts to such individuals. Under New York’s new law, the GST tax is repealed. However, the federal government’s GST tax is still in effect and an experienced attorney should be consulted before making such gifts.

4. New York Income Tax Laws Relating to “ING” Trusts

Incomplete gift non-grantor trusts (also known as “ING” trusts) allows a grantor to have access to a trust’s property while shifting state income tax liability from the grantor’s estate of domicile to a trust located in a more favorable tax jurisdiction, such as Nevada or Delaware. Under New York’s new laws, ING trusts are now treated as “grantor trusts” and will result in the grantor paying New York state income tax on all income earned after January 1, 2014. Please note that any ING trusts that are liquidated on or before June 1, 2014, will not be subject to New York income tax.  

5. New York Income Tax Laws Relating to New York Resident Trusts

Under New York’s prior laws, certain trusts created by New Yorkers could avoid New York income taxation if the trust had no New York trustees, no New York assets, no New York source income or other connections to New York. Under New York’s new law, the accumulated income of these trusts will be subject to income tax when that income is distributed to New York beneficiaries to the extent the income is earned after January 1, 2014. Please note that distributions made to New York beneficiaries prior to June 1, 2014, are not subject to New York income tax.

Conclusion

While the changes to New York’s estate tax laws may provide a reprieve for estates below the heightened estate tax exemption, New York residents who are near or well above the exemption amount should consult with counsel to develop an estate planning strategy to minimize the impact of New York estate tax. Additionally, to alleviate New York income tax, New Yorkers should review the status of any ING trusts before June 1, 2014, and (2) consider whether distributions should be made to New York beneficiaries from any New York resident trusts before June 1, 2014.

We will continue to monitor these developments and will provide you with relevant updated information when available. If you have any concerns or questions, please contact a member of our Private Client Group or your usual Drinker Biddle contact.

New York has recently passed new laws that significantly reform its current estate, generation-skipping transfer (GST) tax and income tax scheme. This Private Client Group Client Alert provides a brief overview of New York’s new estate, GST and income tax laws.

1. New York Estate Tax Laws

Under New York’s prior law, the New York estate tax exemption amount was $1,000,000. The current federal estate tax exemption is $5,340,000. Under New York’s new law, the exemption is gradually elevated over the next four years to eventually match the federal estate tax exemption amount as follows:

  • $2,062,500 for decedents dying 4/1/14 to 3/31/15
  • $3,125,000 for decedents dying 4/1/15 to 3/31/16
  • $4,187,500 for decedents dying 4/1/16 to 3/31/17
  • $5,250,000 for decedents dying 4/1/17 to 12/31/18
  • Equal to the federal exemption for decedents dying 1/1/19 and later

However, it is vital to note that the elevated New York exemption amount is a “cliff” and not a threshold. That is, the New York exemption amount will be lost if the decedent’s taxable estate exceeds 105% of the exemption in effect at the decedent’s death. This means that even a minor difference in the size of a decedent’s taxable estate could result in a significant estate tax.

For example, if a New Yorker with a taxable estate of $5,250,000 dies on January 1, 2018 when the New York exemption is $5,250,000, that New Yorker will be able to apply the New York exemption amount because her taxable estate is below 105% of $5,250,000 (which is $5,512,500) and no New York estate tax is due. On the other hand, if that same New Yorker died on the same day with a taxable estate of $5,513,000, the New York exemption does not apply and her entire estate is subject to New York estate tax because her estate is above 105% of $5,250,000. As a result, the New York estate tax due is $452,360.

By working with skilled counsel, wealthy New York residents may avoid this undesirable result. For instance, if the New Yorker with the $5,513,000 taxable estate in the example above had included a charitable bequest of $1,000 in her will, then her taxable estate would have been reduced to $5,512,000 and she could have taken full advantage of the New York exemption.

2. New York’s Three-Year Look Back Period for Taxable Gifts

Under New York’s new law, the amount of all taxable gifts made by a New Yorker during the three-year period ending on the date of the New Yorker’s death is included in the New Yorker’s gross estate. However, the following gifts are excluded: (1) gifts made when the decedent was not a New York resident; (2) gifts made by a New York resident before April 1, 2014; (3) gifts made by a New York resident on or after Jan. 1, 2019; and (4) gifts that are otherwise includible in the decedent’s estate under another provision of the federal estate tax law (to prevent double taxation of such gifts).

3. The Elimination of New York’s GST Tax

Under prior New York law, GST tax applied to trusts held exclusively for the benefit of the grantor’s grandchildren or more remote descendants, or outright gifts to such individuals. Under New York’s new law, the GST tax is repealed. However, the federal government’s GST tax is still in effect and an experienced attorney should be consulted before making such gifts.

4. New York Income Tax Laws Relating to “ING” Trusts

Incomplete gift non-grantor trusts (also known as “ING” trusts) allows a grantor to have access to a trust’s property while shifting state income tax liability from the grantor’s estate of domicile to a trust located in a more favorable tax jurisdiction, such as Nevada or Delaware. Under New York’s new laws, ING trusts are now treated as “grantor trusts” and will result in the grantor paying New York state income tax on all income earned after January 1, 2014. Please note that any ING trusts that are liquidated on or before June 1, 2014, will not be subject to New York income tax.  

5. New York Income Tax Laws Relating to New York Resident Trusts

Under New York’s prior laws, certain trusts created by New Yorkers could avoid New York income taxation if the trust had no New York trustees, no New York assets, no New York source income or other connections to New York. Under New York’s new law, the accumulated income of these trusts will be subject to income tax when that income is distributed to New York beneficiaries to the extent the income is earned after January 1, 2014. Please note that distributions made to New York beneficiaries prior to June 1, 2014, are not subject to New York income tax.

Conclusion

While the changes to New York’s estate tax laws may provide a reprieve for estates below the heightened estate tax exemption, New York residents who are near or well above the exemption amount should consult with counsel to develop an estate planning strategy to minimize the impact of New York estate tax. Additionally, to alleviate New York income tax, New Yorkers should review the status of any ING trusts before June 1, 2014, and (2) consider whether distributions should be made to New York beneficiaries from any New York resident trusts before June 1, 2014.

We will continue to monitor these developments and will provide you with relevant updated information when available.

Topics:  Estate Tax, GST, Income Taxes, Look-Back Measurement Period, Trusts

Published In: Tax Updates, Wills, Trusts, & Estate Planning Updates

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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