On March 31, 2014, Governor Cuomo signed legislation to implement the New York State fiscal plan for 2014 - 2015. The legislation makes broad changes to the New York State ("NY") estate and gift tax laws as well as some more technical changes to certain trust income tax rules. This alert focuses on the former, since these broad changes may warrant the reevaluation of estate plans currently in place.

New York State Estate Tax Exclusion Increases

Under the new law, beginning immediately and over the next five years, the NY estate tax exclusion amount (formerly $1,000,000) is increased incrementally until the NY exclusion matches the Federal estate tax exemption, as follows:

For decedents on or after... And before... The exclusion amount will be...
April 1, 2014 April 1, 2015 $2,062,500
April 1, 2015 April 1, 2016 $3,125,000
April 1, 2016 April 1, 2017 $4,187,500
April 1, 2017 January 1, 2019 $5,250,000
January 1, 2019 Scheduled to equal the Federal estate tax exemption

Top New York State Estate Tax Rate Unchanged

The top NY estate tax rate remains 16%.

Falling off the Estate Tax "Cliff"

The benefit of the new NY exclusion amount is "phased out" for taxable estates between 100% and 105% of the NY exclusion amount. As a result of the law's estate tax "cliff," taxable estates that exceed 105% 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).

Three-Year Look-Back for Certain Taxable Gifts

The new law also adds a limited three-year look-back period for gifts made between April 1, 2014 and January 1, 2019. Specifically, 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 following gifts are excluded: (i) gifts made when the decedent was not a NY resident; (ii) gifts made by a NY resident before April 1, 2014; (iii) gifts made by a NY resident on or after January 1, 2019; and (iv) gifts that are otherwise includible in the decedent's estate under another provision of the federal estate tax law (i.e., such gifts are not taxed twice).

Conclusion

This new law will narrow, and eventually eliminate, the gap between the New York and Federal estate tax exclusion amounts. For the next five years, however, as the exclusion amount increases and the three-year look-back for taxable gifts applies, planning will be more complex. In any event, it is important to consider whether changes to estate plans or gifting strategies are appropriate.

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