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Trust & Estates Law

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Q: I understand that Governor Cuomo reduced the estate tax for New Yorkers so that retired folks stay in New York rather than move to taxpayer friendly states like Florida.  How does this change affect my estate planning?  Me and my wife’s combined estate is $3 million.

A: In response to concerns about the long term effects of high taxes on New York State’s economic health and competitiveness, Governor Cuomo last year established a commission charged with identifying ways of reducing the state and local tax burden imposed on Empire State residents and businesses. Based on the commission’s report but with several important changes, the New York State 2014-15 Budget, signed into law on March 31, modifies New York’s estate tax laws.

Estate Taxes. Since the year 2000, the Federal estate and gift exemption amounts have risen steadily and significantly, with the 2014 amount set at $5.34 million, to be adjusted annually for inflation. During the same period New York taxpayers have been subject to a fixed $1 million estate tax exemption.

    Increasing Exemption Amount. Under the new law, as of April 1, 2014, for a decedent dying on or after April 1, 2014 and before April 1, 2015, the exemption (referred to in the statute as the “Basic Exclusion Amount”) has been increased from $1,000,000 to $2,062,500, meaning that property up to $2,062,500 in value is permitted to pass free of NYS estate tax. The Basic Exclusion Amount is scheduled to increase April 1, 2015 to $3,125,000, then on April 1, 2016 to $4,187,500, then on April 1, 2017 to $5,250,000 and finally on January 1, 2019, it will mirror the federal exemption amount, adjusted annually for inflation.

In your case, it is a matter of timing.  If both you and your wife die prior to April 1, 2015, you will incur a New York Estate Tax as your net worth exceeds the basic exclusion amount. However, after April 1, 2015, when the basic exclusion increases to $3,125,000, you would not incur such a tax.  You should also be aware of certain  nuances of the changes to the New York estate tax law that include:  

    Exemption Phase-Out “Cliff.” While the rising exclusion amount is good news for New York taxpayers, the law provides minimal or no benefit for those estates that exceed the tax threshold. Under the new law, if the New York taxable estate exceeds the Basic Exclusion Amount by more than 5%, no credit against the estate tax is provided and the entire taxable estate will be subject to NYS estate tax. 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.

    Examples. The stark operation of the “cliff” may be revealed by the following simple examples. 

    • 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 $112,050.

    • Two New York residents die between April 1, 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. However the rate table that is included in the new law covers only the period between April 1, 2014 and March 31, 2015 and accordingly new legislation that either extends the existing rates, or establishes different rates, must be enacted within the year.

As shown, the new law will provide significant tax relief to estates that are in excess of the old taxable threshold of $1 million but below the Basic Exclusion Amount, and provides no tax relief for those estates that exceed the Basic Exclusion Amount by more than 5%.

    Spousal Portability. Under Federal tax law, any Federal exemption that remains unused at the death of a spouse is generally available for use by a surviving spouse, as an addition to the surviving spouse’s Federal exemption. New York’s new law does not include spousal portability provisions for its estate tax exemption.

    Gift Taxes. Under Federal law, the gift and estate tax exemptions operate under a unified system. That is, taxable gifts made during lifetime will reduce the amount of the Federal exemption that is available at death. In contrast, New York repealed its gift tax in 2000 and it has not been revived under the new law. Although New York does not impose a gift tax on gifts made by a taxpayer during lifetime, the new law implements a significant temporary change. Gifts made within three (3) 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.

    Top Marginal Rate.  The top NYS estate tax rate remains set at 16%.

    Generation Skipping Transfer Tax.  The new law repeals the New York GST tax for transfers after March 31,2014.

The tax law changes brought under the new legislation are significant. You should contact a Trusts & Estates attorney to review the matters discussed in this Q&A and any impact that the new law may have on your estate plan.

In 2004, Nathaniel L. Corwin was named a Member of Meyer, Suozzi, English & Klein, P.C. located in Garden City, Long Island, N.Y.  Previously, he held the position Of Counsel from 1999 in the firm’s Trusts and Estates department. From 1989 to 1991, he was an associate in the firm’s Corporate and Securities Law practice. While Mr. Corwin’s practice now centers on the area of trusts and estates, he also performs legal work in the areas of corporate law, real estate, municipal law and contractual matters. His work includes the drafting of sophisticated wills and trusts, formation and organization of limited liability companies and limited partnerships for a broad spectrum of business ventures, the administration of estates, and handling of residential and commercial real estate and leasing transactions for the firm's trusts and estates clients.

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