Client Alerts

Changes to NY Trust & Estate Tax Treatment

Client Alerts | April 8, 2014 | Estate Planning and Administration

In February we alerted you that Governor Cuomo’s budget bill proposed important changes to the New York estate tax and the New York income taxation of certain trusts. The changes just enacted, described below, were scaled back from the original proposals, though still represent significant and important changes.

Estate Tax Exclusion. The New York estate tax basic exclusion amount has been increased to $2,062,500, and will increase in steps to equal the Federal exemption by January 1, 2019 ($3,125,000 on April 1, 2015; $4,187,500 on April 1, 2016; and $5,250,000 on April 1, 2017). The top New York estate tax rate remains at 16%.

However, the basic exclusion amount phases out quickly. For estates between 100% and 105% of the basic exclusion amount, the exclusion is phased out, so that a taxable estate of 105% or more of the basic exclusion amount will be subject to estate tax on its entire value. For example, until March 31, 2015, the basic exclusion amount is phased out between $2,062,500 and $2,165,625, with a $2,165,625 estate paying $112,050 of tax, effectively a 109% tax on the last $103,125 of assets. For estates subject to Federal estate tax, some of the tax will be recovered by reason of the deductibility of the New York estate tax for Federal estate tax purposes.

Taxing Gifts. The gross estate of a New York resident decedent will be increased by the amount of any taxable gifts made on or after April 1, 2014 and before January 1, 2019, but only if made within three years of death, and only if made when the decedent was a New York resident. Thus, the benefit of making lifetime gifts will continue except for those caught in this limited time frame.

Taxing New York Beneficiaries. Distributions of accumulated income made on or after June 1, 2014, to New York beneficiaries of nontaxable New York resident trusts will be taxable to the New York recipient. However, this will not apply to income accumulated before January 1, 2014, nor will it apply to New York non-resident trusts (those established by a non-New Yorker). Nontaxable New York resident trusts are trusts created by New York residents that pay no state income tax because the trusts have no New York trustees, no New York tangible property or real estate, and no New York source (essentially business-related) income. The proposal to tax accumulated ordinary income distributed to New York beneficiaries from non-resident trusts (trusts established by non-New Yorkers) was not enacted.

Incomplete Nongrantor Trusts. Trusts established by New Yorkers in another jurisdiction to avoid New York State income tax while the grantor remains a beneficiary, will be treated as grantor trusts for New York income tax purposes. As a result, the income will all be taxable to the grantor. Although this rule is effective January 1, 2014, any existing trust liquidated on or before June 1, 2014 will not be subject to this new rule.