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New York Estate Tax Changes – What Do They Mean for You?

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On March 31, 2014, Governor Andrew Cuomo signed legislation which made significant changes to the NY estate and gift tax laws. While on the whole these changes will provide significant relief to NY taxpayers, they also come with some interesting changes that may lead taxpayers to take another look at current estate plans.

What’s New?

First and foremost, the law brings good news to NY taxpayers. The law significantly increases the NY estate tax exclusion amount immediately, while continuing to incrementally increase the exclusion amount over the next five years. For estates arising after April 1, 2014, the exclusion amount is increased from $1,000,000 to $2,062,500. In April 2015, the exclusion amount increases to $3,125,000 and then increases again each year until eventually matching the federal exclusion amount in January 2019. The federal exclusion amount is indexed with inflation and could be somewhere between 5M and 6M in 2019.

While the increases in exclusion amounts are good news, they also come with a small catch. The benefit of the NY exclusion amount will be phased out for taxable estates between 100 and 105 percent of the exclusion amount. What does this mean? Well, for estates arising in 2014, it would mean that an estate valued at $2,000,000 would pay nothing in NYS estate tax, while an estate valued at $2,165,625 (5 percent more than the exclusion amount) would pay $346,500. That means that for the estate’s heirs, after estate tax, the $2,000,000 estate would actually be of greater value than the larger estate. This strange effect of the estate phase out is being called the “estate tax cliff,” and for some, it will make planning for NY estate tax just a little bit trickier.

What Stays the Same?

The top NY estate tax rate will remain 16 percent. For those with estates in excess of the exclusion amount, their nominal rate will remain consistent. What will change is the amount of the estate that is subject to that tax. No longer will the exclusion amount be excluded in all estates – instead, any estate in excess of 105 percent of the exclusion amount will be taxed in its entirety at 16 percent.

Planning for the Estate Tax “Cliff”

While the benefit of the new NY exclusion amount is phased out for taxable estates between 100 percent and 105 percent of the NY exclusion amount, estates that exceed 105 percent of the NY exclusion amount will lose the benefit of the exclusion completely. This may have the effect of simplifying planning for those whose wealth is not near the exclusion amount, but it will make planning even more important for any estates whose value is near the exclusion amount. In essence, an estate could be below the exemption amount one day and above it the next. And the tax effect would be substantial.

Estates near the exclusion amount may develop plans geared toward keeping the value of the estate below the exclusion amount, or they may utilize insurance policies to cover the cost of estate tax in the event that their estate exceeds the exclusion amount.

Increased Importance of Accurate Estate Tax Filings

While getting estate tax filings correct is always important due to the complexity and the number of parties potentially effected, the new NYS laws will only serve to increase the cost of getting things wrong. A small miscalculation could result in inaccurate reporting of the taxable value of an estate – with the NYS estate tax cliff, this error could have significant tax ramifications. With an inaccurate estate tax filing, an estate could significantly underpay, or overpay their NYS estate tax liability, causing significant loss or hardship to the beneficiaries. And NYS is sure to pay extra attention to estates which are reported just under the exclusion amount, making accuracy more essential than ever.

Other Benefits and Burdens

The new law also repeals the NYS generation-skipping transfer tax and provides permanent relief for surviving non-citizen spouses, allowing a marital deduction without the requirement of a qualified domestic trust when a federal estate tax return isn’t required to be filed.

The new law also requires that income from an “incomplete gift non-grantor trust” will being included in the income of the trust grantor, eliminating such trusts as a vehicle to avoid NYS income taxes on residents.  Beginning in 2014, throwback rules will also impose tax on income accumulated in a NYS resident trust that avoids current taxation pursuant to the exception for trusts having no NYS trustees or assets, and that’s subsequently distributed to a NYS resident beneficiary.

What does the New Law Mean for You?

As mentioned, for most NYS taxpayers, the new law will be a net positive, but changes to how estate tax will now be calculated will place a different focus and importance on estate planning activities. The estate tax cliff will also make it more important than ever that estate tax filings be carried out by qualified, experienced estate tax accountants.

If you have any questions about how the new NYS estate tax laws will affect your estate plan or the plan of your clients, please call Presti & Naegele today at 212-736-0055.