NY Estate Tax Update Creates Estate Planning Challenges

Legislation that went into effect on April 1 makes broad changes to New York’s estate and gift tax laws, as well as certain trust-income tax rules.

Although these estate-tax changes were intended to make New York a less expensive state in which to die, they could have a significant impact on some estate plans currently in place and necessitate a re-evaluation of those plans for individuals seeking to minimize the impact of taxes on their death.

A number of features of this legislation will directly affect the “cost of dying” in New York:
- Estate-tax exclusion increases
- The estate-tax “cliff”
- Gift add-back

Before the new law was passed, people in New York whose estates were valued at $1 million or less were exempt from estate taxes. The problem is that $1 million isn’t what it used to be and over the years we have seen an increase in the number of estates that meet or exceed that $1 million threshold. That threshold triggered a taxable event even though the estate was still too small to trigger federal taxes.

In a nutshell, the exemption from the state’s estate tax increases from $2,062,500 in assets in 2014 to $5,250,000 by 2017. Beginning in 2019, the New York exemption amount is expected to equal the federal estate-tax exemption.

The goal of the state legislation was to level the playing field between New York, with its high tax structure and very low estate-tax exclusion, and other states. That goal was only partially achieved, as the law kept the top tax rate — 16 percent — intact. Gov. Andrew Cuomo had sought to lower the top rate to 10 percent.

The increasing exemption amount will benefit many affluent New Yorkers, but will have little impact on the state’s wealthiest people — who still could save millions of dollars by moving out of state. For those wealthiest people, it is the top rate that matters most, not the exemption.

In addition to the top tax rate, the new legislation also includes an “estate tax cliff” if an estate exceeds the exemption by more than 5 percent. That means if a resident who dies has a taxable estate that exceeds the basic exempted amount by more than 5 percent, the entire estate will be to be subject to New York estate tax.

The legislation also includes provisions dealing with gifts. These provisions could be tricky to navigate because they require gifts made within three years of death to be added back into the value of the estate, increasing the amount of the estate tax owed.

As a way to keep individuals from simply giving away assets on their deathbed to avoid taxes, New York included a three-year, look-back window on gifts. Simply, if a person dies within three years of making a gift, the amount of the gift is added back to the estate. The calculation involved does not affect the federal tax, but could lead to a higher state tax bill.

This gift-giving add-back also seems to include out-of-state property, such as a vacation home in Florida or North Carolina. If that property is given away within three years of a person’s death, it appears to be added into the value of the estate and taxed even though it is in another state.

Authors’ note: This article seeks to provide general information only and is not intended to provide specific investment, legal, tax, or accounting advice for any individual.

Richard J. Marsh, Jr. is group vice president, upstate New York market leader for Wilmington Trust, N.A. a unit of M&T Bank Corp. Based in Syracuse, he manages Wilmington Trust’s Upstate Region. Sharon L. Klein is managing director of family office services and wealth strategies at Wilmington Trust and chair of the Trusts, Estates and Surrogate’s Court Committee of the New York City Bar Association.