Good News for Some, but Not All: New York State Raises Tax Exemption on Smaller Estates – Exemption Phases Out for Larger Estates, and No Portability for Anyone; Marginal Rates Increase for Some; Gifts May Be Added Back
Governor Cuomo recently signed legislation amending New York State’s estate tax. The new provisions are generally effective as of April 1, 2014. Set forth below is a brief summary of the major changes.
First, the welcome news is that New York State is slowly raising its estate tax exemption amounts for smaller estates to match the federal exemption. The exemption for decedents dying between April 1, 2014, and March 31, 2015, is $2,062,500. The exemption then increases by $1,062,500 per year, until it reaches $5,250,000 for decedents dying between April 1, 2017, and December 31, 2018. Beginning January 1, 2019, the New York State exemption will match the federal exemption. For smaller estates, these amounts may provide welcome shelter from the current tax.
The estate tax exemption phases out for estates that are larger than the exemption (as it always has). Under the new law, the exemption is fully phased out for estates larger than 105% of the exemption amount in effect for the year, and estates over that amount will essentially see no benefit from the increased exemption. Because the exemption is so much larger than the $1 million exemption under prior law, the tax cost of the phase-out is greater. Also, the phase-out is very quick, so that if your estate is in the phase-our range (i.e., just over the new exemption amount), the phase-out may result in a punitive marginal rate of tax that exceeds 100%! (The marginal tax rate is the rate on the next dollar in your estate – it is not the same as the effective total tax rate on your estate.) It is not clear that this result was intended, and if not, it may be corrected by future legislation.
New York also failed to adopt “portability”; the relatively new federal rule that allows the unused estate tax exemption of a married taxpayer to carry over to his or her spouse. Without portability, the manner in which a married couple holds title to their assets may continue to have a significant effect on the amount of tax ultimately payable.
Another change under the new law adds certain gifts back to the estate. New York State has not had a gift tax for a number of years, making it possible to save taxes by “deathbed gifts.” Under the new law, effective for gifts made by New York residents between April 1, 2014, and December 31, 2018, taxable gifts made within three years of death will be added back to the estate for New York estate tax purposes, eliminating the opportunity to make deathbed gifts.
In conclusion, the new law may bring relief for some, but create problems for others. This may be a good time to review your estate, and see how the new provisions affect you.
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