Recent Changes to New York Estate and Income Tax

by Pillsbury Winthrop Shaw Pittman LLP
Contact

On March 31, 2014, the New York State legislature passed and Gov. Andrew Cuomo signed into law the New York State 2014-2015 Budget Bill (the “New Law”), which contains a number of revisions to the New York State estate tax law and the laws governing the New York income taxation of trusts. Specifically, the New Law (1) gradually increases the New York State estate tax exemption amount over the next five years; (2) includes certain lifetime gifts as part of a decedent’s New York taxable estate; and (3) closes two perceived “loopholes” in New York’s income taxation of trusts in an effort to recapture income tax that New York was losing from certain resident trusts with non-resident trustees. By increasing the estate tax exemption amount, the New Law increases the number of estates that will pass free of New York State estate tax liability. Larger estates (as described below) will generally be subject to the same New York State estate tax liability as they were under the old law, unless they are required to include certain lifetime gifts as part of their taxable estates.

New York State Estate Tax under the New Law:
Under the New Law, New York State estate tax is computed using tax rates that are substantially the same as the tax rates under the old law. The highest tax bracket under the New Law is 16 percent, the same as it was under the old law.1 Under both the New Law and the old law, the tentative tax due on a taxable estate over $10,100,000 would equal $1,082,800 plus 16 percent of the excess over $10,100,000.

However, to increase the number of estates that pass free of New York State estate tax, the New Law provides an estate tax credit for certain estates based on a “basic exclusion amount” in effect at the time of the decedent’s death. The basic exclusion amount is set to increase gradually over the next five years as follows:

April 1, 2014 and before April 1, 2015 $2,062,500
April 1, 2015 and before April 1, 2016 $3,125,000
April 1, 2016 and before April 1, 2017 $4,187,500
April 1, 2017 and before January 1, 2019     $5,250,000
Decedent dying on or after: Basic exclusion amount:

For the estate of a decedent who dies on or after January 1, 2019, the basic exclusion amount will equal the federal basic exclusion amount indexed for inflation (currently $5,340,000).

A taxable estate that is less than or equal to the New York basic exclusion amount owes no New York State estate tax (because the New Law provides an estate tax credit for such estates in an amount that equals the tax the estate would otherwise owe). A reduced credit is available for a taxable estate that exceeds the New York basic exclusion amount by 5 percent or less of such basic exclusion amount. No credit is allowed, however, for a taxable estate that exceeds 105 percent of the New York basic exclusion amount. The New Law provides no relief for an estate of that size—it will owe the same New York State estate tax as it would have owed under the old law.

In this way, the New Law has created the perplexing situation whereby a taxable estate of $5,250,000 will owe no New York State estate tax in 2018 while a taxable estate of $5,600,000 will owe $462,800. This effect is referred to as the “cliff” (i.e., the amount over which the benefit of the exclusion is eliminated).2 As a result, the decedent with a New York taxable estate of $5,600,000 is able to pass only $5,137,200 to his or her heirs whereas a decedent with a taxable estate of $5,250,000 will be able to pass the full $5,250,000.3

Inclusion of Certain Lifetime Gifts:
Under the New Law, a New York decedent’s gross estate now includes the amount of any taxable gift (not otherwise included in the decedent’s gross estate) that the decedent made within three years of his or her death, unless the gift was made: (1) while the decedent was not a New York resident; (2) prior to April 1, 2014; or (3) on or after January 1, 2019. Thus, even though New York does not have a gift tax, New York decedents will not avoid state transfer tax on lifetime gifts made within three years of death (if such gifts were also made between April 1, 2014 and January 1, 2019).

Portability and QTIP Election:
Also significant is that despite practitioners’ recommendations, the New Law did not (1) adopt “portability” of the New York exclusion amount, or (2) allow a separate New York QTIP election to be made for New York State estate tax purposes unless a federal QTIP election was also made on any federal estate tax return required to be filed.

Adopting portability of the New York exclusion amount would have allowed a married couple to use their combined exclusion amounts upon the death of the surviving spouse, as is possible under the federal law. The New Law limits each spouse to his or her own New York basic exclusion amount upon his or her death, and if it is not used by a spouse’s estate, it is lost.

If a federal estate tax return is required for an estate, even if only to elect portability, the New Law does not permit an executor to elect a marital deduction for a trust for New York estate tax purposes unless the election to have the trust qualify for the marital deduction is also made for federal purposes. Thus, the executor for a New York decedent’s estate is forced to elect a federal QTIP deduction for a trust that would otherwise fall within the federal exclusion amount in order to minimize New York State estate tax.

New York Income Taxation of Trusts:
The New Law also attempts to address two “loopholes” that the New York State legislature perceived with respect to New York income taxation of trusts.4 The first relates to income tax payable by a New York resident who is a beneficiary of an “exempt resident trust”. The second relates to income tax payable by a New York resident who transfers property to an “incomplete gift non-grantor trust” (an “ING trust”).

Beneficiary of an Exempt Resident Trust/“Throwback Tax”:
An irrevocable trust established by a New York resident (a “resident trust”) is generally subject to New York income tax. However, if a resident trust has no New York trustee, no assets located in New York, and no New York source income, it is deemed an “exempt resident trust” and will pay no New York income tax on income the trust earns and accumulates even though the trust pays federal income tax on that income. Prior to the New Law, in a year that a New York resident beneficiary of an exempt resident trust received a distribution of income that had been accumulated over prior years, the beneficiary was only required to include in his or her New York adjusted gross income a portion of the distribution that reflected the net income earned by the trust in the year of distribution.

The New Law attempts to close this “loophole” by requiring a New York resident beneficiary to include accumulated income of the trust not previously taxed in New York (“undistributed net income”) in his or her New York adjusted gross income in the year that he or she receives a distribution. In calculating such undistributed net income, the beneficiary may disregard any income earned by the trust in a taxable year prior to the date the beneficiary first became a New York resident or in any taxable year beginning prior to January 1, 2014. In addition, as this New York law is based on the federal provisions, income accumulated by a trust prior to the beneficiary attaining the age of twenty-one is excluded from the undistributed net income that the beneficiary must report.

Incomplete Gift Non-Grantor Trust:
An ING trust, as defined in the New Law, is a trust that satisfies two requirements: (1) it does not qualify as a grantor trust for federal income tax purposes; and (2) the grantor’s transfer of assets to the trust is treated as an incomplete gift for federal estate tax purposes (e.g., by the grantor retaining sufficient control over or a beneficial interest in the trust). By establishing an ING trust outside of New York, in a jurisdiction such as Delaware, a New York resident could avoid paying New York income tax on income earned on the trust assets and accumulated by the trust while still retaining some level of control over the disposition of the assets. To curtail this favorable treatment, the New Law provides that such trusts will now be treated as grantor trusts for New York income tax purposes, which means that the income and deductions of the trust will be reported on the grantor’s individual New York income tax return.


  1. Interestingly, the tax rates established in the New Law only apply to the estates of decedents dying on or after April 1, 2014 and before April 1, 2015. There is no indication of what the rates will be after April 1, 2015.
  2. Under the old law, there was also an estate tax cliff. The exclusion was $1,000,000, and estates that were larger than $1,100,000 did not receive the benefit of the exclusion. However, unlike the New Law, under the old law the elimination of the benefit of the exclusion never resulted in an estate netting less than the $1,000,000 exclusion amount.
  3. These calculations consider only the New York tax (before taking into account federal tax due). Contrast these calculations with federal estate tax calculations whereby a taxable estate of $5,250,000 in 2014 would owe no federal estate tax but a taxable estate of $5,600,000 would owe $104,000 (before any allowable deduction for state estate tax).
  4. None of the rules discussed here apply to a “grantor trust”, the income of which is taxable to the grantor of such trust.

 

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.

© Pillsbury Winthrop Shaw Pittman LLP | Attorney Advertising

Written by:

Pillsbury Winthrop Shaw Pittman LLP
Contact
more
less

Pillsbury Winthrop Shaw Pittman LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.