New York State Estate and Gift Tax Law Highlights Effective April 1, 2014

Effective April 1, 2014, the New York State 2014-2015 budget legislation (the “Executive Budget”) makes significant changes to New York’s estate tax and the income taxation of certain trusts. A brief summary follows:

Estate Tax Exclusion Increased but Includes a Cliff
New York has increased its basic exclusion amount (from $1,000,000 per decedent prior to April 1, 2014) to $2,062,500 per decedent as of April 1, 2014, with gradual increases annually as follows:

Date of Death Exclusion Amount
April 1, 2014 to March 31, 2015 $2,062,500
April 1, 2015 to March 31, 2016 $3,125,000
April 1, 2016 to March 31, 2017 $4,187,500
April 1, 2017 to December 31, 2018 $5,250,000

Thereafter, the New York State basic exclusion amount will be indexed for inflation, which should link New York’s basic exclusion amount to the federal basic exclusion amount (currently $5,340,000, indexed for inflation).

It is important to note that the New York exclusion is a “cliff” because it is phased out if the New York taxable estate exceeds the amount of the exclusion by up to 5% and no exclusion is allowed if the taxable estate exceeds 105% of the amount of the exclusion.

For a decedent dying on or after April 1, 2014 and before April 1, 2015, the top estate tax bracket is still 16%.

Gifts within Three Years of Death

Effective for gifts made by New York residents between April 1, 2014 and December 31, 2018, taxable gifts made within three (3) years of death will be added back to the gross taxable estate for New York estate tax purposes. Gifts made while the decedent was a nonresident of New York State and gifts made prior to April 1, 2014 or on or after January 1, 2019 are not included.

GST Taxes Repealed

New York repealed its Generation Skipping Transfer tax. There is still GST tax at the federal level.

Throwback Tax for Exempt Resident Trusts

Under prior law, a so-called “Exempt Resident Trust” (an irrevocable trust created by a New York resident) was not subject to New York income tax if all (1) all trustees were domiciled in a state other than New York; (2) the entire corpus of the trust, including real and tangible personal property, was located outside New York; and (3) all income and gains of the trust were derived from or connected with sources outside of New York.

Under the new law, a New York beneficiary of such an “ Exempt Resident Trust” (other than an Incomplete Gift Non-Grantor Trust described below), is now subject to a New York “throwback tax,” or an income tax imposed on accumulated income which is distributed to the beneficiary. This applies to the extent the income is earned in a taxable year starting on or after January 1, 2014, but does not apply to income paid to a beneficiary before June 1, 2014.

Incomplete Gift Non-Grantor Trusts Treated as Grantor Trusts.

Under the prior law, a New York resident could establish an Incomplete Gift Non-Grantor (“ING”) Trust and structure the trust so that the grantor’s transfer of property to the trust is an incomplete gift for gift and estate tax purposes and the grantor is not treated as the owner of the income or principal of the trust under the “grantor trust rules” of the Internal Revenue Code. If the ING trust was established in a state with no income tax and if the ING trust met the “Exempt Resident Trust” requirements (detailed above), the income would not be subject to New York State income tax.

Under the new law, a New York resident who transferred property to an ING Trust must now include the income of the trust, less any deductions, as personal income for New York purposes. For New York purposes, it is now as if the ING Trust was a “grantor trust” for New York State income tax purposes. This is effective for taxable years beginning on or after January 1, 2014, but does not apply to income from a trust that is liquidated before June 1, 2014.