On March 31, 2014, New York state enacted several significant changes to its laws concerning estate, gift and fiduciary income taxes. The following summarizes some of the key changes:
- Estate Tax Exemption Increased. The New York estate tax exemption amount has been increased. This means that more New York estates will be exempt from estate tax, but because the tax rates themselves are largely unchanged, estates larger than the applicable exemption will not see a reduction in the tax due. For estates of decedents dying on or after April 1, 2014, the exemption has been increased to $2,062,500. The exemption will increase in roughly $1,000,000 increments effective April 1 of each of the next three years, until, effective for decedents dying on or after January 1, 2019, the New York exemption will be the same as the federal exemption. The phase-in of the estate tax is steep, causing New York estates that are only slightly larger than the applicable exemption amount to incur a disproportionate amount of estate tax. Clients subject to New York estate tax may wish to add a provision to their estate planning documents that will include a gift to charity if that gift will reduce the amount of estate tax due by an amount greater than the gift itself. For example, in 2018 when the New York exemption is $5,250,000, a taxable estate of $5,500,000 would owe $443,150 in estate tax, but by making a charitable gift of $250,000, there would be no estate tax due, and the amount passing to the intended beneficiaries would increase by $193,150.
- Some Gifts Included in Taxable Estate. Although New York does not have a gift tax, lifetime taxable gifts made by New York residents between April 1, 2014, and December 31, 2018, and within three years of death will be included in the decedent's taxable estate for purposes of calculating the New York estate tax. Accordingly, New York residents contemplating taxable gifts (that is, gifts not covered by the annual exclusion and not otherwise exempt from federal gift tax) should consult with counsel before making any additional gifts before January 1, 2019. Whether and how this will apply to gifts of non-New York property remains to be seen.
- Incomplete Gift Non-Grantor Trusts. So-called incomplete gift non-grantor trusts ("ING trusts") had been promoted as a way to avoid New York income tax on property without making a taxable gift of that property. That preferred treatment is no longer available. Starting with the January 1, 2014, tax year, New York will treat income earned by ING trusts as "grantor" trusts, meaning that the income earned by the trust will be taxed on the donor's individual return. An ING trust liquidated prior to June 1, 2014, is exempt from this tax treatment. Please let us know if you have an ING trust and would like to discuss your options going forward.
- Throwback Tax on Distributions to New York Residents From New York Resident Trusts. Previously, New York resident trusts with New York resident beneficiaries were exempt from New York income tax so long as they did not have New York resident trustees, New York source income, or New York real or personal property (so-called exempt trusts), which meant that accumulated (i.e., undistributed) income escaped New York taxation. The new "throwback" tax will now impose a tax on distributions made to a New York resident of previously accumulated, undistributed income. Although the new law is effective as of January 1, 2014, distributions made before June 1, 2014, are excluded.