New York Enacts Significant Tax Changes That Impact Individuals and Estate Planning
On March 31, 2014, Governor Andrew Cuomo signed into law a package of substantial changes to the tax laws of New York State and New York City. While many of these changes impact banks and other corporations doing business in New York, a significant portion of the bill was devoted to revising the tax rules that relate to estate planning for New York residents. The following is a summary of several key changes relating to New York’s taxation of individuals, estates and trusts:
Estate Tax Exclusion Increases, But with a Cliff Before April 1, 2014, each New York resident had a $1 million exclusion from New York estate tax. As of April 1, the new law increases the exclusion by approximately $1 million per year, to $5.25 million by 2019. Thereafter, the exclusion will be indexed for inflation from 2010, and thus brought in line with the federal exemption beginning on January 1, 2019, as follows:
- For decedents dying on or after April 1, 2014, and before April 1, 2015, the exclusion amount is $2,062,500.
- For decedents dying on or after April 1, 2015, and before April 1, 2016, the exclusion amount will be $3,125,000.
- For decedents dying on or after April 1, 2016, and before April 1, 2017, the exclusion amount will be $4,187,500.
- For decedents dying on or after April 1, 2017, and before January 1, 2019, the exemption amount will be $5,250,000.
- For decedents dying on or after January 1, 2019, the exemption amount will equal the federal estate tax exemption then in effect.
The benefit of this increased exclusion, however, does not apply to estates that exceed the exclusion amount by more than 5%. The benefit of the new state exclusion amount is phased out for taxable estates between 100% and 105% of the New York exclusion amount in the year of death. As a result of this estate tax “cliff,” taxable estates that exceed 105% of the state exclusion amount will lose the benefit of the exclusion completely. In other words, the entire taxable estate will be subject to New York estate tax (applied at graduated rates with a top rate of 16%), a result identical to the result under prior law. For example, in 2018, an estate valued at $5,250,000 will pay no New York estate tax, but estates valued at $5,512,500 or more will be taxed on every dollar in the estate, not just the value in excess of $5,250,000, as is the case with the federal estat e tax.
Other Important Distinctions Between the New York and Federal Taxation Schemes Unlike the federal estate tax exemption, the New York exemption will not be portable. For federal purposes, any estate tax exemption unused by a decedent can pass to that decedent’s surviving spouse, who may use that “ported” exemption to shelter additional transfers during life or at the spouse’s death. However, New York continues to provide that any unused portion of a decedent’s New York estate tax exemption will be lost rather than aggregated with the surviving spouse’s exemption.
Also, unlike the federal taxation scheme, New York’s generation-skipping transfer (GST) tax is repealed in its entirety.
Inclusion of Certain Gifts Made Within Three Years of Death in the New York Taxable Estate The new law also adds a limited three-year period for taxable gifts made on or after April 1, 2014, and before January 1, 2019. Specifically, although New York does not impose a gift tax, if a New York resident dies within three years of making a taxable gift (under federal law) during this period, the value of the gift will be included in the decedent’s estate for purposes of computing the New York estate tax. The following gifts are excluded: (i) gifts made when the decedent was not a New York resident; (ii) gifts made by a New York resident before April 1, 2014; (iii) gifts made by a New York resident on or after January 1, 2019; and (iv) gifts that are otherwise includible in the decedent’s estate under another provision of the federal estate tax law (i.e., such gifts are not taxed twice). Similar rules apply to a non-resident decedent who, whil e living in New York, made gifts of New York property located in New York or intangible personal property used in a business, trade or profession carried on in New York.
DING Trusts No Longer Avoid New York State and City Income Tax Until recently, if a trust had no trustees that are domiciled in New York, did not own any property in New York, and had no New York source income (e.g., income from an LLC or S corporation doing business in New York), the trust was not subject to tax on its income by New York State or New York City, even if the grantor or beneficiaries of the trust were New York residents. This meant that such a trust could accumulate income free of New York tax and then distribute that income to its beneficiaries in later years. Because the beneficiari es are not subject to federal income tax on distributions of accumulated income (which has already been taxed in the trust’s hands for federal purposes), the beneficiaries have been able to avoid New York State and City income tax on these distributions. Many taxpayers took advantage of this situation by establishing Delaware incomplete non-grantor trusts, or DINGs. Delaware (or sometimes an alternative state, such as Nevada) was chosen because that state does not impose income taxes on such trusts. Although the DING trust is subject to federal income taxes on its own income, its income has not been subject to New York or City income taxes until now.
Under the new law, which governs distributions from affected trusts made on or after June 1, 2014, if a trust is not a grantor trust for federal income tax purposes (and therefore pays its own income taxes), and the grantor’s transfer of assets to the trust was an incomplete gift for federal gift tax purposes (and therefore not subject to gift tax), the trust’s income will be taxed as income of the grantor for New York State and City purposes. So, if the grantor of a DING trust is a New York resident, he/she will be subject to New York tax on the trust’s income, even though the trust is treated as a separate taxpayer for federal purposes. As for other trusts where the grantor’s transfer of assets to the trust was a completed gift for federal gift tax purposes, the grantor will not be taxed on the trust’s income, but any beneficiaries that are New York residents will be taxed by New York on distributions of accumulated trust income, even if these distributions are not taxable to them for federal purposes.
Alternative Minimum Taxes In a positive development for New York individuals, trusts, and estates, the new law repeals the New York State and New York City alternative minimum taxes, effective for tax years beginning on or after January 1, 2014.
Revisit Your Current Estate Plan If you are a New York resident with a taxable estate that is likely to exceed the increased New York exclusion amount, consider revisiting your current estate plan to review the impact of these changes on your plan.