United States: Significant Changes To New York Tax Law Affecting Trusts And Estates

The 2014 - 2015 New York State budget, which was enacted and made effective on April 1, 2014, makes significant changes to the taxation of trusts and estates in New York. The new legislation may have an important impact on your estate planning.

Increase in New York Estate Tax Exclusion

Under prior law, $1,000,000 of assets was excluded from the New York estate tax for all estates. Under the new legislation, the New York estate tax exclusion is scheduled to increase over the course of four years and will match the Federal estate tax exclusion beginning in 2019, as follows:

Date of Death New York Exclusion Amount
April 1, 2014 through March 31, 2015 $2,062,500
April 1, 2015 through March 31, 2016 $3,125,000
April 1, 2016 through March 31, 2017 $4,187,500
April 1, 2017 through December 31, 2018 $5,250,000
On or after January 1, 2019 Equal to the federal estate tax exclusion

Estates valued under the exclusion amount will not be subject to New York estate tax. However, the benefit of the exclusion amount is phased out rapidly for larger estates. For decedents dying from April 1, 2014 through March 31, 2015, every $10,000 of estate value in excess of the exclusion amount results in a $200,000 reduction in the available exclusion. The result of the phase out is a "cliff" effect, where a small incremental increase in the value of an estate can result in significant increase in New York estate tax.

Estates valued at over 105% of the exclusion amount will not receive the benefit of any exclusion. Effectively, estates in excess of 105% of the exclusion are subject to New York estate tax on the full value of the estate. However, these estates are not adversely affected by the change in the New York exclusion amount because the new legislation maintains the same tax brackets and rates for these estates through March 31, 2015.

Certain Gifts Included in New York Resident Estates

Under prior law, lifetime gifts were not taken into account in calculating a decedent's New York estate tax. Under the new legislation, a New York decedent's gross estate must now include the value of taxable gifts made during the decedent's lifetime if three conditions are met: (i) the donor is a New York resident when the gift was made, (ii) the gift is made within three years of death and (iii) the gift is made on or after April 1, 2014 and before January 1, 2019.

Certain Gifts Included in New York Non-Resident Estates

Under prior law, non-residents were subject to New York estate tax on real property or tangible personal property located in the State if it was owned by the decedent at death. The new legislation expands this treatment by providing that the taxable estate of former New York residents will include gifts made during their residency of (i) real or tangible personal property located in New York or (ii) intangible personal property employed in a business, trade or profession carried on in New York. To be included in the non-resident's taxable estate, these gifts must be made within three years of death, on or after April 1, 2014 and before January 1, 2019.

Repeal of New York Generation-Skipping Transfer Tax

Under prior law, New York imposed a tax on certain generation-skipping transfers. The new legislation repeals the New York state generation-skipping transfer tax.

Accumulation Tax on Certain Distributions from Exempt Resident Trusts

The new legislation changes the way certain distributions from Exempt Resident Trusts are taxed. Broadly speaking, a trust is an Exempt Resident Trust if it is created by a New York resident but has (i) no New York Trustees, (ii) no property located in New York and (iii) no New York source income.

Under prior law, it was possible for the income of an Exempt Resident Trust to be accumulated year after year without the imposition of New York income tax. When a distribution was subsequently made from the trust to a New York beneficiary, only the trust's current year income (and not any accumulated income) would be subject to New York income tax.

The new legislation imposes a so-called "accumulation tax" on distributions of income accumulated on or after January 1, 2014 to New York beneficiaries from Exempt Resident Trusts (other than "ING" trusts, described below). Certain items of income earned by the Exempt Resident Trust are excluded from the calculation of the accumulation tax, including (i) income earned prior to when the New York beneficiary became a New York resident, (ii) income earned prior to the beneficiary's birth or the beneficiary attaining age 21 and (iii) income that was already subjected to New York income tax.

New York Taxation of "ING" Trusts

The new legislation eliminates the use of incomplete gift non-grantor ("ING") trusts to avoid New York income tax. An ING trust is generally structured so that transfers to the trust are not completed gifts for federal wealth transfer tax purposes and so would not incur a gift tax. In addition, the trust is designed to be a separate income taxpayer for federal income tax purposes that reports and pays its own taxes. Not coincidentally, the ING trust is typically established in a jurisdiction where the trust's income would not be subject to state income tax.

Under the new legislation, an ING trust is treated as a grantor trust for purposes of calculating the New York income tax of a New York resident. As a result, all of the income attributable to the ING trust is taxable to the New York resident grantor for New York income tax purposes, and the resident grantor will be responsible for the taxes and filing obligations associated with the trust's income. This change in the taxation of ING trusts applies to taxable years beginning on January 1, 2014. However, the new law will not apply to ING trusts that are liquidated prior to June 1, 2014.

Next Steps

In light of the significant changes in New York tax law, you may wish to review your estate planning structures, particularly if you:

  • Have an estate valued at or around the exclusion amount;
  • Have an estate plan that funds a "family trust" or "credit shelter trust" with the New York estate tax exclusion amount;
  • Are considering becoming a resident of New York or terminating New York residency;
  • Have an existing Exempt Resident Trust or are considering creating an Exempt Resident Trust; or
  • Have an existing ING.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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