Commentary 5/7/2014

The recently passed New York State budget significantly changes the New York State estate tax. Until passage of this year’s budget, the exclusion from New York estate tax was $1 million per person. The new law gradually increases the amount excluded from taxation through January 1, 2019, when the New York exclusion amount will equal the federal exemption amount. The new legislation sets the following schedule for the new exclusion amounts:

   Date of Death Between                               Exclusion Amount

• April 1, 2014 and March 31, 2015                    $2,062,500

• April 1, 2015 and March 31, 2016                    $3,125,000

• April 1, 2016 and March 31, 2017                    $4,187,500

• April 1, 2017 and December 31, 2018              $5,250,000

After January 1, 2019, New York exclusion amount is intended to be the same as the federal exemption which is currently $5,340,000, increasing each year for inflation. However, no increased New York exclusion will be available for estates valued at more than 105% of the New York exclusion amount. Those larger estates valued at more than 105% of the New York exclusion will pay the same tax as under the old law with the $1 million exemption.

For example, the estate of a decedent who dies in September 2014 with a taxable estate of $2,000,000 owes no New York State estate tax because the exclusion amount of $2,062,500 is greater than the taxable estate. However, if the same decedent has a taxable estate of $2,166,000, which is more than 105% of the exclusion amount ($2,062,000 x 105% = $2,165,100), the estate owes New York estate tax of $112,080, the same tax as under the old law with the $1,000,000 exclusion. The maximum tax rate on a taxable estate under the new legislation is 16%, unchanged from the prior law.

The new legislation also changes the taxation of lifetime gifts. New York has no gift tax. However, gifts made within three years of a decedent’s death will now be added back to the value of the New York gross estate. The inclusion of these gifts may make them subject to the New York estate tax.

One should note that the New York estate tax exemption will not be “portable” between spouses as in the federal estate tax exemption. Under the “portability” provision, if the first spouse dies with an estate value that does not require use of all of his or her federal exemption, then the surviving spouse’s estate has his or her own exemption plus the deceased spouse’s unused exemption. Portability lets the surviving spouse shelter as much as twice the exemption without the use of complicated trusts.

Clearly the intent of the New York legislation is not only to follow the federal rules, but also to bring its taxation of estates more in line with estate taxation in the other states. Indeed, in 2014, 31 states do not tax decedent’s estates, and the taxation of estates in 19 states and the District of Columbia varies significantly.

Today 14 states tax the value of a decedent’s estate, 4 states have an inheritance tax which is levied on the shares of beneficiaries who inherit an estate, and 2 states, Maryland and New Jersey, collect both an estate tax and an inheritance tax. Recent history confirms too that the landscape of the states’ taxation of decedent’s estates is changing frequently.