Client Alerts

New Yorkers Take Note – Action May Be Needed By March 31

Client Alerts | February 5, 2014 | Estate Planning and Administration

Governor Cuomo’s recently released budget bill proposes important changes to the New York estate tax and the New York income taxation of certain trusts. Proposed changes require high net worth individuals and trustees of certain trusts to consider
taking action between now and March 31st.

Taxing Gifts. One proposed change is to increase, for New York
estate tax purposes, the gross estate of a New York resident decedent by the amount of any taxable gifts made on or after April 1, 2014, if the decedent was a New York resident at the time of the gift. New York, like most states, does not have a gift tax.

Under existing law, gifts made by a New York resident, even moments before death, escape the New York estate tax, an effective savings of about 10% of the amount of the gift. If this proposal becomes law, that savings will disappear because gifts made after March 31, 2014, will be taxed as if they were part of
the taxable estate.

For clients with large estates, particularly those who have not fully used their Federal lifetime exemptions, this may be an ideal time to make gifts and avoid paying any New York estate tax on those gifts.

Taxing New York Beneficiaries. The second proposal would tax distributions of accumulated ordinary income made on or after June 1, 2014, to New York beneficiaries of nontaxable New
York resident trusts. 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 would also tax accumulated ordinary income distributed to New York beneficiaries from non-resident trusts (trusts established by non-New Yorkers). Because capital gains are not included in ordinary income, planning to avoid state income tax of capital gains would remain unchanged.

As a result of the foregoing, Trustees may wish to consider whether to make distributions to New York beneficiaries before June 1st. Enactment of this proposal would also require a reconsideration of whether some trusts should become (once again, for some) grantor trusts, where the income is currently taxable to the grantor of the trust, a decision with many factors to consider.