As of April 1, 2017, the amount of property that could pass free of New York State estate tax rose to $5.25 million. Approximately four years ago, the New York State legislature passed, and New York Governor Andrew M. Cuomo signed, the Executive Budget for 2014-2015, which significantly altered New York's estate tax. The changes to the New York estate tax were made for the ostensible purpose of preventing the exodus of wealthy individuals from New York to more tax-favored jurisdictions, but the law likely will not have the desired effect.
The law increases the New York basic exclusion amount, which was previously $1 million per person. As shown below, this increase will be made gradually through January 1, 2019, after which the New York basic exclusion amount will be equal to the federal exemption amount.
One of the most significant provisions in the law, however, is that no New York basic exclusion amount will be available for estates valued at more than 105% of the New York basic exclusion amount. In other words, New York estate tax will be imposed on the entire estate if the estate exceeds the exemption amount. Due to adjustments to the bracket structure in the new law, those estates that are valued at more than 105% of the New York basic exclusion amount will pay the same tax as they would have under the prior law.
For example, assume a person dies on May 1, 2018 with an estate valued at $5.6 million. The New York basic exclusion amount will be $5,250,000. Because the value of the estate exceeds 105% of the then available New York basic exclusion amount ($5,250,000 x 105% = $5,512,500), the estate will be subject to New York estate tax on the entire $5.6 million. The New York State estate tax bill will be $462,800, which is the same as the amount that would have been due under the old law. In contrast, if an individual had died with an estate valued at $5.1 million, her estate would owe no New York estate tax under the new law because the New York basic exclusion amount will be applied to her estate. Under the old law, however, the decedent's estate still would have owed $402,800 in New York estate tax.
A significant change in New York law involves certain gifts made during a decedent's lifetime. New York has no gift tax. Under prior law, lifetime gifts were not subject to gift tax or included in the New York gross estate. Under the new law, gifts made within three years of a decedent's death will be added back, increasing the New York gross estate, and thus potentially being subject to New York estate tax at a maximum rate of 16%. However, the add-back does not include gifts made before April 1, 2014, on or after January 1, 2019, or gifts made during a time when the decedent was not a resident of New York State.
These changes in New York law present further estate planning opportunities using bypass trusts to set aside New York's basic exclusion amount ($5,250,000 after April 1, 2017 for New York State estate tax purposes). The proper disposition of the basic exclusion amount is the cornerstone of estate planning for married couples. Significant tax savings can be achieved if the basic exclusion amount is set aside at the death of the first spouse, therefore "bypassing" estate taxation at the death to the surviving spouse. In addition, any growth that occurs in the trust also escapes estate taxation at the death of the surviving spouse. As New York's basic exclusion amount rises, the potential tax benefits from employing bypass trusts increase as well.