Potential New York State Estate Tax Changes to Consider for Tax Season

Mar 13, 2014

Major changes to the New York estate tax structure may be coming soon and may effect how you plan your estate.  Gov. Cuomo has introduced a new bill that, if passed, would make a significant change to the New York Estate Tax structure. Although the bill seeks to change New York’s reputation as having some of the highest estate taxes in the country, it may take away some of the biggest estate  planning benefits  that New Yorkers can currently take advantage of.  The New York State Tax Relief Commission’s proposal seeks to align New York State estate tax exemptions with that of the Federal estate tax exemption and allow New York estates a larger tax break. The proposal, if passed would go into effect April 1, 2014 and it will:  1. Increase the New York State estate tax exemption amount to $5.34 million over the next four years, and indexing future levels to inflation (up from the current $1 million) and 2. Lower the top New York estate tax rate from 16% to 10% by 2017. This means that estates less than $5.34 million would pay nothing in New York State estate tax.

This bill, however, also closes an old loophole in New York estate tax law that has often been the cornerstone for estate plans for people with larger estates who want to avoid New York State estate tax.  New York does not impose a gift tax during a person’s lifetime. This unlimited lifetime gifting can be a huge asset when trying to avoid New York State estate tax. It allows for a New York Resident to gift as much money as they want, tax-free, during their lifetime. This led to a lot of “deathbed gifting” in which large portions of a person’s estate would be gifted as they saw fit with no New York State estate tax implication. Depending on the type of asset, however, there may be a capitol gains issue. This is because lifetime gifting precludes the “step-up” in basis that would exist when assets pass through an estate. For example, under the current structure, if a father gifts $3million worth of  Coca-Cola stock which he purchased for $20/share and it is now worth $100/share, although there is no estate tax, he forfeits the step-up in basis that his son would have received if the assets were inherited through an estate, and the son has to pay the capitol gains tax on the value accrued by those stocks when he goes to sell them. However, if the father had given $3million cash to his son, there is no tax implication. The new bill would impose a tax on lifetime gifting depending on the amount gifted. This is, again, aligning New York State estate tax law more with the Federal estate tax law which taxes estates greater than $5.34 million, which includes all lifetime gifting.

These proposed tax changes certainly have a potential benefit and should serve to give New Yorkers an estate tax break. However, New Yorkers who wish to take advantage of lifetime gifting in excess of $1 million should be mindful of the type of gift they are giving and do so before April 1, 2014 in order to avoid a potentially sizeable tax increase.

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