There have been important new developments for New York taxpayers over the past two months, some of which may require your immediate attention. 

Increase in estate tax exemption.  Governor Cuomo’s January budget bill proposes significant changes to the New York estate tax.  The first change would increase the New York applicable exclusion amount from $1 million to $5.25 million over a four year period, and be indexed for inflation thereafter.  Beginning April 1, 2014, the exclusion would be:

• $2.0625 million for decedents dying between April 1, 2014 through March 31, 2015; 
• $3.125 million for decedents dying between April 1, 2015 through March 31, 2016;
• $4.1875 million for decedents dying between April 1, 2016 through March 31, 2017;
• $5.25 million for decedents dying between April 1, 2017 through December 31, 2019.  Beginning in 2020, the exclusion would be indexed for inflation.

The top tax rate also would be reduced from 16% to 10% beginning April 1, 2017.

Lifetime gifts added back to estate.  Another significant change proposed in the budget bill is that all taxable gifts made by a New York resident after March 31, 2014 will be included as part of the New York gross estate for purposes of calculating the New York estate tax.  Currently, New York taxpayers will pay less New York estate tax if they make lifetime gifts, and the Governor’s proposal is designed to close this perceived loophole.  New York taxpayers who have an estate in excess of the federal applicable exclusion amounts and who are inclined to gift should consider doing so prior to April 1.

QDOTs.  For New York residents who are not US citizens, there is a new, favorable law regarding “qualified domestic trusts” or “QDOTs.”  These trusts can be required under federal law in order for a decedent’s assets passing to or for the benefit of a non-citizen spouse to qualify for the estate tax marital deduction. 

The new law amends §951 of the New York Tax Law, and provides that, where a federal estate tax return is not required to be filed, it is not necessary to create a New York QDOT in order to obtain the New York State estate tax marital deduction, if the transfer would otherwise qualify for the federal estate tax marital deduction.  This is helpful in cases involving non-citizen spouses where the estate does not exceed the federal exemption amount (currently $5.34 million).  Thus, a New York individual who has less than $5.34 million in 2014 would now be able to leave assets to his or her non-citizen spouse outright and not trigger any New York estate tax.

Residency audits.  Finally, the New York Court of Appeals (New York’s highest court) issued a favorable decision regarding New York residency. 

In Gaied v New York State, the taxpayer lived in New Jersey but maintained a home for his elderly parents in Staten Island and sometimes stayed there.  New York law provides that a statutory resident is someone who is not domiciled in New York but maintains a permanent place of abode in New York and spends more than 183 days of the taxable year in New York.  The issue therefore was whether the taxpayer’s home for his parents constituted a “permanent place of abode” as to him. 

The Court of Appeals reversed the Appellate Division (and lower tribunals) and held that the taxpayer did not satisfy the permanent place of abode test and thus was not a statutory resident.  The court found that the taxpayer himself must have a residential interest in the property in order for it to be his place of abode. 

This ruling provides more clarity for non-New York domiciliaries who maintain property in New York but do not reside in said property.