The New York State Legislature passed the Executive Budget for 2014-2015 on March 31, 2014, which brings about important changes to New York estate and gift tax laws.  These include:

Estate tax exemption increase.  Effective April 1, 2014, the New York State estate tax exemption increased to $2,062,500 for New York residents dying between April 1, 2014 and April 1, 2015 and will increase to $3,125,000 on April 1, 2015, $4,187,500 on April 1, 2016 and $5,250,000 for taxpayers dying between April 1, 2017 and January 1, 2019.  Beginning on January 1, 2019, the exclusion will be indexed for inflation taking into consideration cost-of-living adjustments.  In 2019, the New York exemption is scheduled to equal the federal estate tax exemption.

The top tax rate will remain at 16% rather than a reduction to 10% as proposed by Governor Cuomo.

New York has not adopted the concept of “portability,” which would permit a surviving spouse to utilize any estate tax exemption unused by the decedent spouse.  For this reason, estate planning tools such as qualified disclaimers should continue to be used to capture the decedent’s exemption absent portability.

Estate tax cliff.  The New York estate tax exclusion increase will benefit those estates equal to or below the estate tax applicable exclusion amount at the time of a decedent’s death while those estates that are between 100% and 105% of the exclusion amount will rapidly lose the benefit of the exclusion due to a phase-out computation.  However, no credit is allowed for New York taxable estates exceeding 105% of the basic exclusion amount.  Instead, these estates will be taxable in their entirety.

For example, assume an applicable estate tax exclusion amount of $2,062,500 at the time of a decedent’s death.  Under the new laws, if the decedent’s estate is valued at $2,062,500, the entire estate escapes New York estate tax.  However, if the estate is instead valued at $2.2 million, which represents more than 105% of the basic exclusion amount of $2,062,500, then the entire estate is subject to taxation, resulting in a tax of $114,800.

Pursuant to the new brackets, an estate exceeding 105% of the New York exclusion amount that is fully subject to New York estate tax will effectively owe the same amount that was owed under prior law.

Lifetime gifts added back to estate.  The new law also provides that all taxable gifts not otherwise included in the Federal gross estate and that were made during the three years ending on the decedent’s date of death will be included as part of the New York gross estate for purposes of calculating the New York estate tax.  This significant change in law does not apply to gifts made while the decedent was not a resident of New York State nor to gifts made prior to April 1, 2014 or on or after January 1, 2019.