The BNA Tax and Accounting Center is the only planning resource to offer expert analysis and practice tools from the world's leading tax and accounting authorities along with the rest of the tax...
By Carmela T. Montesano, Esq.
Meyer, Suozzi, English & Klein, PC, Garden City, NY
Effective April 1, 2014, New York State (NYS) enacted
significant changes to its estate, gift, generation-skipping
transfer (GST) and trust income tax laws. Below are the highlights
of the new legislation:
I. Estate Tax Legislation
For a decedent dying on or
after April 1, 2014, and before April
1, 2015, the exemption amount (referred to in the new law as the
"Basic Exclusion Amount") has been increased from $1,000,000 to
The Basic Exclusion Amount
is scheduled to increase gradually
under the new law as provided in the table below:
Death On or After:
Basic Exclusion Amount:
Federal Exemption Amount,Adjusted Annually for Inflation.
under the new law, the New York taxable estate exceeds the
Basic Exclusion Amount by more than 5%, the entire taxable estate
will be subject to NYS estate tax as opposed to the amount in
excess of the Basic Exclusion Amount. Estates that are greater than
the Basic Exclusion Amount but less than the full phase out amount
receive a credit against the estate tax that rapidly diminishes as
the full phase out amount is reached. The amount at which the full
phase out occurs (the "Exemption Phase-Out Cliff") is provided in
the table below:
Death On or After:
Exemption Phase-Out "Cliff:"
Federal Exemption Amount,Adjusted Annually for Inflation.
discussing the Exemption Phase-Out Cliff, the NYS Office of
Tax Policy Analysis states:[t]he applicable credit is reduced for
New York taxable estates exceeding the basic threshold amount and
equals zero for those exceeding one hundred five percent of such
amount. This is similar to the loss of the benefit of the $1
million unified threshold under previous law.
The stark operation of the "cliff" may be illustrated by the
following two examples:Example 1: Two New York residents
die between April 1, 2014, and March 31, 2015, one with a taxable
estate of $2,062,500 and the other with a taxable estate of
$2,165,625. The decedent with a $2,062,500 taxable estate
would not be subject to estate tax (such an estate would have
generated an estate tax of $104,100 under prior law). The decedent
with a taxable estate of $2,165,625 would be subject to an estate
tax of $112,050 (the same estate tax that would have been generated
under the prior law). Accordingly an increase in the taxable estate
of $103,125 results in an estate tax increase from $0 to
Example 2: Two New York residents die between April
2017, and December 31, 2018, one with a taxable estate of
$5,250,000 and the other with a taxable estate of $5,512,500.
The decedent with a $5,250,000 taxable estate would not be subject
to estate tax (such an estate would have generated an estate tax of
$420,800 under prior law). The decedent with a taxable estate of
$5,512,500 would be subject to an estate tax of $452,300 (the same
estate tax that would have been generated under the prior law).
Accordingly an increase in the taxable estate of $262,500 results
in an estate tax increase from $0 to $452,300. This example is
subject to a potentially significant caveat in that it assumes the
estate tax rates and brackets will remain unchanged from those
currently in effect.
As shown, the new law will provide
significant tax relief to
estates that are in excess of the old taxable threshold of
$1,000,000 but below the Basic Exclusion Amount, and provides no
tax relief for those estates that exceed the Basic Exclusion Amount
by more than 5%.
Under the new law, the top NYS estate tax rate remains
Despite being included in the Senate version of the
Budget, the new law does not allow a separate NYS qualified
terminable interest property (QTIP) election to be made when a
federal estate tax return is required to be filed for purposes of
electing portability. Accordingly, a NYS QTIP election will not be
allowed where a federal estate tax return is required to be filed
and a QTIP election is not made on that return. Note that a NYS
QTIP election is allowed under New York law where no federal estate
tax return is required to be filed.
Although considered by the NYS Assembly, portability was also
not enacted into the new law.
In analyzing the impact of the new law on New
Yorkers, and in
particular, the lack of a NYS QTIP election and portability, the
NYSBA Analysis comments:…This creates further issues for a New
Yorker planning his or her estate. As a result, (i) New Yorkers
should continue to use credit shelter trusts as part of their
estate planning since they will not be able to rely on portability
to take advantage of an otherwise wasted exemption; and (ii) New
Yorkers who expect that their estate will not exceed the then
applicable federal exemption will need to weigh the benefits of
(aa) electing portability for federal estate tax purposes or (bb)
not filing a federal estate tax return in order to make a New York
QTIP election. In making the decisions in "(i)" and "(ii)" above,
consideration should also be given to the income tax rates vs. the
estate tax rates and (particularly in the case of a first marriage)
the benefits of outright dispositions to take advantage of income
tax savings with portability, which could be costly in New York
where there is no provision for portability.
II. Gift Tax Legislation
New York repealed its gift tax law in 2000 and does
it under the new legislation. However, the new law implements a
significant albeit temporary change. Gifts made within three years
of death will be included in the gross estate of a New York
resident decedent, if the gift is made between April 1, 2014, and
December 31, 2018, and the decedent was a New York resident at the
time of the gift. The "add back" rule presents the following two
issues:It appears to include gifts of real or tangible personal
property sitused outside of NYS, which, if owned by a decedent at
death, would not be subject to NYS estate tax. The NYSBA Analysis
cautions estate planning attorneys in drafting documents, as
follows: "…because the New York estate tax will be imposed on gifts
that are no longer held in the estate, when drafting Wills and
revocable trust agreements it will be important for attorneys to
consider and specify the estate assets that would be the best
source against which to allocate the New York estate tax due on
such gifted assets."
It also appears that
gifts that are added back may not be
eligible for the state death tax deduction allowed against the
Federal estate tax. Internal Revenue Code §2058 provides that the
deduction must be paid "in respect of any property included in the
[federal] gross estate…" Since gifts added back would not be a part
of the federal gross estate, the NYSBA Analysis states that "… they
would not likely be eligible for the state estate tax deduction for
federal estate tax purposes." Other commentators have similarly
concluded. If so, analysis will now be required to take into
account the loss of the full deduction in determining the
advantages of making large gifts.
III. GST Tax Legislation
NYS's GST tax,
applicable to taxable distributions to skip
persons and taxable terminations where skip persons receive a trust
distribution on termination, has been repealed.
IV. Trust Income Tax Legislation
The new law makes significant changes to the income
certain "resident trusts" and "incomplete gift non-grantor trusts"
(INGs). These changes are highlighted below:A New York Resident
Trust is generally a trust created by a New York resident. Under
the new law, an accumulation or "throwback tax" may now be imposed
on certain distributions received by a New York resident
beneficiary of such a trust (other than an ING trust, which is
discussed below). Under prior law, a resident trust was not subject
to NYS income tax in any year where: (i) none of its trustees was
domiciled in New York, (ii) no real or tangible trust property was
sitused in New York, and (iii) neither trust income nor gains were
derived from New York sources. The new law seeks to close this
perceived "loophole" and provides that trust distributions to a New
York resident beneficiary will be subject to an accumulation or
"throwback" tax on previously undistributed accumulated income
which is distributed to New York residents in a tax year beginning
on or after January 1, 2014.
An ING Trust is a trust structured as an incomplete
non-grantor trust which is created by a New York resident in
another state to avoid NYS income taxes without incurring Federal
gift tax liability. Under the new law, such trusts will now be
treated as defective grantor trusts for NYS income tax purposes,
and thus be taxable to the grantor, for taxable years beginning on
or after January 1, 2014, unless the trust was terminated prior to
June 1, 2014. The new law will now result in a disconnect between
the reporting of such trusts for Federal and state income tax
As the above reflects, the tax law
changes made under NYS's 2014
- 2015 Executive Budget to its estate, gift, generation-skipping
transfer (GST) and trust income tax laws are both significant and
complex. As they are effective as of April 1, 2014, they require
immediate consideration and incorporation into the estate plans of
New York residents and certain non-residents.
Excerpt from Part X of NYS's 2014 - 2015 Executive Budget
Revenue Article VII Legislation
Memorandum In Support
This bill would amend the estate tax to:
(1) increase the
exclusion threshold to the amount of the current federal unified
credit over 5 years; (2) decrease the top estate tax rate; and (3)
require the add-back of certain gifts and incorporate applicable
Internal Revenue Code (IRC) provisions. The bill would also repeal
the generation skipping transfer (GST) tax in Tax Law Article
"Statement in Support, Summary of Provisions, Existing
Law and Prior Legislative History:
New York's estate tax currently
conforms to the IRC with all
amendments through July 1, 1998, except that the exclusion amount
is fixed at $1 million. The estate tax is commonly known as a
"pick-up" tax, because the tax is equal to the federal credit for
state estate taxes, as it existed on July 22, 1998.
This tax is
woefully out of date. It is tied to a federal law
that no longer exists in practical effect, because the IRC has
undergone significant amendments over the last 15 years that have
not been adopted by New York. For example, the credit for state
estate taxes - the base of New York's estate tax - no longer exists
in federal law. Moreover, when the current State exclusion amount
of $1 million was set, it was not indexed to inflation or tied to
the periodic increases in the federal estate tax exclusion amount.
The federal estate tax exclusion amount has been raised to $5.25
million and indexed to inflation, leaving New York significantly
out of sync. New York is one of only 15 states with an estate tax
and only two states currently have a lower exemption.
Consistent with Governor Cuomo's Tax Relief
this bill would increase the New York exclusion amount to the
federal amount of $5.25 million over four years, with the exclusion
indexed to inflation thereafter. Many estates of middle class
individuals (including small business owners and family farmers)
will no longer be subject to the tax as a result of increasing the
exclusion amount. The bill would also phase down the top tax rate
from 16 percent to 10 percent by State Fiscal Year 2017-18. This
will address an incentive for wealthy New Yorkers to leave the
State. It would also require certain gifts made after April 1, 2014
to be included in a decedent's New York gross estate, closing a
loophole by preventing deathbed gifts from escaping the estate
The bill would also repeal the GST tax in Article 26-B
Tax Law, as recommended by Governor Cuomo's Tax Reform and Fairness
Commission. Currently, federal law imposes estate, gift and GST
taxes as part of a comprehensive scheme for the taxation of wealth
transfers. Federal law also provides for a unified credit that is
applied to each of these taxes so that all such wealth transfers
receive equivalent tax treatment. New York's gift tax was repealed,
effective January 1, 2000. The current GST is based on a federal
credit for state GST taxes that expired in 2004. Moreover, that
federal credit, and therefore, New York's GST tax, applied only to
certain specific types of generation-skipping transfers (i.e.,
distributions and terminations of trusts that occurred at the same
time and as the result of the death of an individual). Because the
federal GST tax already provides an effective disincentive to
wealth transfers to grandchildren and later generations, New York's
tax is largely unnecessary to prevent estate tax avoidance.
The current GST
tax affects a few dozen taxpayers each year,
yields minimal annual revenue, and frequently causes taxpayer
confusion. Repealing this tax would result in minimal revenue loss
and provide taxpayer relief.
portion of the bill creates an appendix to the Tax
Law of all of the IRC provisions, as amended through January 1,
2014, which are relevant to the estate tax. The current appendix,
which was enacted by §2 of Chapter 1013 of the laws of 1962, and
periodically amended, is based on the 1998 version of the IRC. This
bill would repeal the outdated appendix in Chapter 1013, and
replace it with a new appendix of current IRC provisions located in
the consolidated law."
Enactment of this bill is necessary to implement the 2014-2015
Executive Budget. It would reduce revenues by $33 million in SFY
2014-15, $175 million in SFY 2015-16, $371 million in SFY 2016-17,
$612 million in SFY 2017-18 and $757 million in SFY 2018-19."
This bill would take effect on April 1, 2014 and would
estates of decedents dying on or after that date."
more information, in the Tax Management Portfolios, see
Streng, 800 T.M., Estate Planning, and in Tax
Practice Series, see ¶6350, Estate Planning.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)