On March 31, 2014, Governor Cuomo signed legislation making sweeping changes to New York's estate tax laws. While these changes will help some, many others will not see any relief.
Under prior law, New York had an estate tax exclusion equivalent amount of $1,000,000. In other words, a New York decedent could leave up to $1,000,000 to someone other than his or her spouse without having to pay a New York estate tax. The new law increases this amount immediately to $2,062,500. This exclusion amount is scheduled to increase over the next several years as follows:
Date of Death/Exclusion Amount:
- On or after April 1, 2014 and before April 1, 2015/$2,062,500
- On or after April 1, 2015 and before April 1, 2016/$3,125,000
- On or after April 1, 2015 and before April 1, 2017/$4,187,500
- On or after April 1, 2017 and before January 1, 2019/$5,250,000
- On or after January 1, 2019/Same amount as Federal Exemption (currently $5,340,000)
At first blush, this seems like a marked improvement over the prior law's $1,000,000 exemption amount. For example, an individual leaving a taxable New York Estate of $2,000,000 would have paid $99,600 under the prior law. Under the current law, if the individual dies after March 31, 2014, he or she would not owe any New York tax. Unfortunately, what the new law gives it potentially takes away. While the benefits of the new exclusion amount have been widely heralded, what is not widely known is that the benefits phase out very rapidly.
The new law provides that the benefit of the increased exclusion phases out completely once the taxable estate reaches 105% of the exclusion amount. This means that for decedents dying during the balance of this year, the $2,062,500 exclusion will phase out entirely once the taxable estate reaches $2,165,625 (i.e., 105% of $2,062,500). In other words, a decedent dying during the remainder of 2014 with a taxable estate in New York between $1,000,000 and $2,062,500 will win, while the same decedent dying with a taxable estate in New York of over $2,165,625 will not. In fact, as a result it is possible that having a $103,125 larger estate can result in a tax of $112,050 – an effective tax rate of over 100%! This result is totally different than what occurs under the federal estate tax laws which do not eliminate the benefit of the exclusion once a certain level is hit.
The new New York estate tax laws differ from the federal tax laws in several other important respects. Most importantly, New York does not follow the federal laws with respect to portability. As many are aware, under the prior federal law, if a decedent died without using all of his or her federal exemption amount, the balance of the exemption was lost. For example, if a decedent died with an estate of $2,000,000 in 2010, the remainder of the decedent's $5,000,000 exemption amount could not be used. The result was that if the decedent's spouse died with a taxable estate of $8,000,000, there would be a federal estate tax due on the excess beyond the surviving spouse's $5,000,000 exemption (i.e., $3,000,000).
Beginning in 2011, the concept of portability was introduced under federal law. This new concept allowed the surviving spouse to take advantage of the deceased spouse's unused exemption. In the above example, the surviving spouse would be able to take advantage of the deceased spouse's $3,000,000 unused exclusion thus eliminating any federal tax due on the second death. This new concept greatly reduced the need for a lot of couples to undertake expensive and complicated estate planning techniques. Instead, couples with combined estates under $10,000,000 could simply leave everything outright to each other without having to resort to such planning techniques as "credit shelter trusts."
New York unfortunately did not adopt the federal rules with respect to portability. Instead, it maintained the old federal rules which provided that any unused exemption was lost. The result is that even though no federal estate tax might be due on an estate of $10,000,000 in 2014, there will still be a considerable New York state estate tax due of over $1,000,000. Accordingly, certain New York residents will still be required either to continue to undertake some sophisticated estate planning techniques or be faced with a significant estate tax burden.
Recently, New York has tried to hold itself out as a more tax friendly state in which to live. The goal is, at least in part, to keep its wealthier citizens from moving to other states like Florida (where there is no estate tax). Unfortunately, it does not appear that the new estate tax changes will do anything to facilitate that goal.
If you have any questions regarding the content of this alert, please contact Jeffrey B. Andrus at (315) 425-2799 or jandrus@hblaw.com, or Eileen A. Casey at (315) 425-2840 or ecasey@hblaw.com.