Big Changes for New York's Estate Tax

On April 1, 2014, Governor Andrew Cuomo signed into law the first significant changes to New York’s estate tax in almost 15 years. The new rules will further reduce the number of New York estates that will be subject to a state estate tax.  But for the wealthiest New Yorkers, the new legislation may lead to a more significant estate tax burden than would have been in effect under the prior rules.

           

First, the good news.  From 2000 through April 1, 2014, New York’s estate tax exemption had remained fixed at $1 million per person. During the same time period, the federal exemption had increased from $1 million to the current exemption amount of $5.34 million per person. Since many states do not have a separate state estate tax, the increasing divergence between the New York exemption and the federal exemption was seen as creating an incentive for New Yorkers to relocate to states (such as Florida) that do not have an independent state estate tax.

           

With an eye towards being more competitive with other states, the increase in the New York State estate tax exemption is being phased in over five years as follows:

           

           For deaths occurring between:

• 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

Beginning in January 1, 2019, the New York estate tax exemption will be indexed for inflation to match the existing federal exemption.

           

While the new law provides immediate and rapidly accelerating relief for most New York estates, estates of decedents with assets in excess of the then-applicable exemption may be in for a rude surprise because of what practitioners are referring to as the estate tax “cliff”.  Specifically, if the decedent’s taxable estate is more than 105% of the New York exemption then in effect, the result will be the loss of the entire applicable exemption.

           

For example, if a person dies July 1, 2018 with a taxable estate of $5,500,000 (which is just below 105% of the $5,250,000 basic exclusion amount then to be in effect), the estate will be able to use the applicable credit of $420,800, resulting in a New York estate tax of $30,000.  If, however, the decedent’s taxable estate was instead $5,513,000 – that is, just $13,000 more than the taxable estate in the prior example, but more than 105% of the $5,250,000 basic exclusion amount then in effect – the credit of $420,8000 is rendered useless, resulting in a whopping New York estate tax obligation of $452,360.  Thus, the bizarre result would be that for two taxable estates having just a $13,000 difference in value, the additional tax paid by the larger estate would be $422,360!

A further twist is that gifts made within three years of death, if made between April 1, 2014 and January 1, 2019, will be added back to the decedent’s taxable estate unless the decedent was not a New York resident at the time the gift was made. This rule applies even to gifts of real estate and tangible personal property located outside of New York State, even though such property would not have been subject to New York estate tax had the decedent owned the gifted property at the time of her death.

The bottom line: while the estates of a growing number of New Yorkers will be exempt from the obligation to pay New York estate tax, the wealthiest New Yorkers may have even greater incentive than before enactment of the new rules to establish residency in a state that does not impose a state estate tax.