Some may remember that we had previously noted New York was considering favorably amending its estate tax laws and possibly enacting a state gift tax. On March 31, 2014, the State of New York enacted the 2014-2015 budget, and in doing so, brought significant reform to the New York estate tax (New York is 1 of 19 states with a state estate tax). New York did not enact a gift tax.
Under the terms of the new law, for decedents dying on or after April 1, 2014, the exemption rose from $1.0 million to $2,062,500. This exemption will continue to rise by $1,062,500 each year until April 1, 2017 where it will be frozen for two years at $5.25 million. Beginning January 1, 2019, the New York estate tax exemption will then equal the federal estate tax exemption. The enactment of the 2014-2015 budget provides some relief to average New York citizens. That said, state estate tax planning in New York is still necessary because the new law has potential pitfalls for the unwary.
The estate tax exemption is only for estates with less than 105 percent of the exemption amount. Estates valued at 105 percent or more of the estate tax exemption will not receive any exemption and will pay estate tax on the full value of the estate. For example, if a person dies in 2014 with an estate valued at $2,162,500, the estate can take the full exemption of $2,062,500. The estate will then be responsible for taxes on the remaining $100,000 at a rate of 8 percent, or an estate tax equal to $8,000. If, however, that same person dies with $2,165,625, the state estate tax is based on the entire $2,165,625 without an exemption. The estate would incur a $112,050 estate tax. A difference of $13,125 in assets yields an increase in taxes of $104,050.
Additionally, New York has not adopted portability. Therefore, married couples in New York may want to consider a QTIP trust. A QTIP trust creates two trusts, a “Family Trust” to hold the estate tax exemption amount (currently $2,062,500), and a “Marital Trust” to hold the remaining assets for the benefit of the surviving spouse. No tax is due on the death of the first spouse, because the decedent receives the estate tax exemption. The remainder is not taxed because it is a transfer for the benefit of the spouse. On the surviving spouse’s death, the assets in the Marital Trust are included in the surviving spouse’s estate, but the Family Trust assets are not. This shields the Family Trust from being taxed in both spouse’s estates.
Finally, New York has a three year look-back period for gifts made. If an individual dies within three years of making a gift, it is included in their estate for state estate tax purposes.
The changes to the New York state estate tax are effective April 1, 2014.