I have heard reports that the new state budget includes changes to the estate tax laws. How does this affect my planning? Do I need to redo my will?
You heard correctly. Gov. Cuomo commissioned a task force to examine the impact of taxes on New Yorkers and to propose reform. The Commission concluded in December 2013 that many New Yorkers were fleeing the state to places like Florida that do not have an estate tax. Until recently, New York imposed an estate (or “death”) tax on assets in a decedent’s estate exceeding $1 million. The tax was imposed only on the excess. New York also did not impose a gift tax on lifetime transfers and has not done so since 1999. After a flurry of activity, the powers that be in Albany included estate tax reform in the Executive Budget, which was passed at 11 pm on March 31, effective April 1. Among other provisions (pre-K funding!) the estate tax reform will exempt almost 90 percent of all New York estates from estate tax. This will provide relief to those whose estate value is largely made up of their homes, or for the nearly 2,800 farms in downstate and upstate New York, many of which would otherwise not have been able to be passed down to the next generation, because it would have had to be sold to pay estate taxes.
On the positive side: New York will allow a higher estate tax exemption, raising it immediately from $1 million (the third lowest exemption in the nation) to $2,062,500. Starting April 1, 2015, the exemption will annually increase by $1.0625 million through Jan. 1, 2019, until it reaches the original federal exemption of $5.25 million on Jan. 1, 2019. At that point, the exemption will be annually adjusted for inflation as is the federal exemption.
However, “grave” dangers lurk.
Cliff-hangers and phaseouts: Decedents have a narrow window to escape, pushing the entire estate off a tax “cliff” into an abyss. Before April 1, a New Yorker’s estate paid tax only on assets above the $1 million threshold, not on the entire taxable estate. Under the new law, if an estate exceeds the exemption amount by less than five percent, the tax is between 6.5 percent and eight percent on the excess above the threshold. Once the taxable estate exceeds the five percent, the full value of the estate is subject to the tax, not just the amount exceeding the exemption. The tax is then computed on a sliding scale from 3.06 percent to as high as 16 percent for estates exceeding $10 million.
This translates into what is being referred to as the “marginal 164 percent tax.” For example, in June 2017, a decedent with a New York taxable estate of $5,512,500 (five percent more than the then-$5.25 million exemption) would pay New York estate tax of $430,050. That is effectively a tax of $430,050 on the extra $262,500 in the decedent’s estate, as opposed to the roughly $26,250 that would be due if the tax was imposed solely on the amount exceeding the exemption. This can pose serious problems for New Yorkers with assets exceeding five percent of the exemption, inclusive of any gifts.
Gift tax: The new law increases the overall exemption, but claws back lifetime gifts into the gross taxable estate. Now, the gross estate of a New Yorker will include any taxable gifts made on or after April 1, 2014 but before Jan. 1, 2019 if they were made within three years of death, and made while the donor was a New York resident.
Taxes on trusts: The law closes loopholes on trusts that were previously not subject to New York tax. First, distributions of accumulated income on or after June 1, 2014 to New York beneficiaries of non-taxable New York resident trusts are now taxable. This does not change to income accumulated before Jan. 1, 2014 or to non-resident trusts created by a non-New Yorker. Second, the law targets Incomplete Non-Grantor Trusts. These are trusts established in another jurisdiction by a New Yorker who is the grantor and remains a beneficiary. The law now treats these trusts as “grantor trusts” for New York income tax purposes, taxing all income to the grantor.
In addition, New York still lacks “portability,” allowing spouses to automatically pass exemptions between each other.
The reform is expected to save New Yorkers $380 million over three years. Yet, the state expects overall state tax revenues to increase by $1.4 billion this year based on expected economic growth.
It is always important to review your estate plan every year to ensure that it continues to meet your needs in light of changes to the tax laws, as well as changes to your family or assets.
Alison Arden Besunder is the founding attorney of the law firm of Arden Besunder P.C., where she assists new and not-so-new parents with their estate planning needs. Her firm assists clients in Manhattan, Brooklyn, Queens, Nassau, and Suffolk Counties. You can find Alison Besunder on Twitter @estatetrustplan and on her website at www.besunderlaw.com.