New York State Significantly Changes its Estate and Gift Tax Regime
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New York State recently implemented significant changes to the Estate and Gift tax regime for New York residents, and in some instances, for non-New York residents, as part of the April 1st budget bill. The State and Governor Cuomo have touted the changes as "taxpayer friendly," but the reforms are not exactly as advertised. The new law could subject some estate plans to new and unexpected tax consequences and complexities. Certain anticipated changes were not included in the legislation as ultimately enacted, leading to a mishmash of rules that do not result in the stated objective for implementing the rules.  The significant aspects of the changes are discussed briefly below. Increase in the New York State Estate Tax Exemption The good news is that the amount of the exemption - the amount that you can pass free of estate tax when you die - has been increased from $1 million to $2,062,500. From and after January 1, 2019, the NYS exemption will be equal to the Federal estate tax exemption (currently $5.34 million in 2014 and indexed for inflation). Unfortunately, the Basic Exclusion Amount is phased out for taxable estates having a value between the Basic Exclusion Amount and 105% of that amount (see chart below). The exclusion or credit is eliminated entirely for taxable estates exceeding the full phase-out amount (exceeding 105% of the Basic Exclusion Amount). Thus, although for some decedents the new law might eliminate an estate tax, for others it presents a "cliff" which, if fallen off of, drags the entire estate into being subject to the state estate tax. Dates: Basic Exclusion Amount Full Phase-Out Amount (105%) 4/1/14 - 3/31/15 $2,062,500 $2,165,625 4/1/15 - 3/31/16 $3,125,000 $3,281,250 4/1/16 - 3/31/17 $4,187,500 $4,396,875 4/1/17 - 3/31/18 $5,250,000 $5,512,500 As of January 1, 2019 Equal to the federal exemption amount 105% of the federal exemption amount There are three pitfalls to the law: One, the phase-in. Two, the cliff. Three, the "claw back" of gifts made in the three years prior to death until 2019. What does this mean for you?  Planning will be more complex, current plans could be less effective, and now more than ever it’s important for New Yorkers to partner with their tax professionals to evaluate and examine new options. The New York State Estate Tax "Cliff" Even if you think you don't have a taxable estate, you could fall victim to these traps. The new estate tax is a so-called "cliff tax." If your taxable estate is between the Basic Exclusion Amount and the Full Phase-Out Amount (the 105%), then your estate owes no state estate tax. If the taxable estate is on the dollar or more than the Full Phase-Out Amount, the ENTIRE estate is subject to the state tax, which tops out at 16%. In other words, for a decedent dying on Feruary 2, 2015 wih a net taxable estate of $2,165,700 the entire estate will be responsible for a 14% - 16% tax to the state. Certain Gifts Made Within Three Years of Death Subject to Estate Tax Prior to the law, New York State had no gift tax. NYS residents could transfer as much money as they wanted during their lifetime without owing a gift tax to the state (although a gift tax to the federal government would likely have been owed). Under the new law, the amount of taxable gifts made by a NY resident between April 1, 2014 and January 1, 2019 that were made within three years prior to death will be added back to the New York taxable estate of such resident. The "add back" of taxable gifts is only for gifts made in that period (April 1, 2014 to December 31, 2018). Someone making a gift in December 2018 could be subject the add back if he or she dies within three years, while a gift of the same amount in January 2019 would not be. Estate Tax Rate Unchanged The current 16% top rate for the NYS estate tax remains unchanged. A reduced rate to 10% was proposed but not adopted. The new law also does not include "portability," a concept incoporated at the federal level which allows citizen spouses to share their exemption. Repeal of the New York State Generation-Skipping Transfer Tax The NYS GSTT was repealed. The GSTT applied to certain distributions and trust terminations under prior law. Summary of what's happening: -The NY estate tax exclusion amount (formerly $1 million) is increased incrementally until the NY exclusion matches the federal estate tax exemption as follows: taxtable -The benefit of the new NY exclusion amount is  “phased out” for taxable estates between 100 percent and 105 percent of the NY exclusion amount.  As a result, taxable estates that exceed 105 percent of the NY exclusion amount will lose the benefit of the exclusion completely—the entire taxable estate will be subject to the NY estate tax (applied at graduated rates). -The new law also adds a limited 3-year look back period.  If a NY resident dies within three years of making a taxable gift, the value of the gift will be included in the decedent’s estate for purposes of computing the NY estate tax. -The new law also repeals the NY generation-skipping transfer tax, provides permanent relief for surviving non-citizen spouses, allowing a marital deduction without the requirement of a qualified domestic trust when a federal estate tax return isn’t required to be filed, and specifically identifies the income of an “incomplete gift non-grantor trust” as being included in the income of the trust grantor, eliminating such trusts as a vehicle to avoid NY income taxes on residents. Tax laws are always complex, and always changing.  Whether you are just beginning the estate planning process, or have an established plan, this is an excellent time to revisit your tax plan and keep yourself and your family on track. It is always a good idea to consult a trusted attorney when working on estate and trust planning, and now it is even more important. Source: wealthmanagement.com    
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