With the passage of the New York State Budget for 2014-2015 substantive changes were made to the New York State Transfer Tax System (Estate, Gift & Generation Skipping Transfer Taxes). Under prior law, $1,000,000 was excluded from tax under the New York Exemption. Effective April 1, 2014, the new legislation imposes a tax on a decedent’s entire taxable estate, but allows a credit, known as the “Applicable Credit Amount”, against the tax imposed. For decedent’s dying between April 1, 2014 and March 31, 2015, the New York exemption (called the “Basic Exclusion Amount”) is $2,062,500.
The new State Exclusion Amount is phased in over the next five years and will ultimately, as of January 1, 2019, approximate the Federal Applicable Exclusion Amount. As noted above, the new legislation features a generous credit which essentially eliminates the New York Estate Tax for estates which do not exceed the State Basic Exclusion Amount. However, the Applicable Credit Amount is rapidly phased out for decedents with taxable estates in excess of the new State Basic Exclusion Amount.
Once an estate exceeds $2,062,500, the Applicable Credit against the New York Estate Tax is phased out to $0. This phasing out of the Applicable Credit, up to 105%, is known as the “cliff,” and can have dramatic tax consequences. The effects of the cliff are illustrated by the three examples below.
Example A. Taxpayer has a taxable estate valued under the current Basic Exclusion Amount, $2,062,500. At his or her death in 2014, the credit will cover the entire tax and no estate tax will be due.
Example B. Taxpayer has a taxable estate valued at $2,100,000. The credit begins to phase out when the value is between 100-105% of the Basic Exclusion Amount. Here, a New York estate tax of $49,308 is due if the taxpayer dies in 2014.
Note that the increase in the value of the estate is only $37,500, but the estate tax is now $49,308. The cliff caused the estate taxes due to outweigh the increased value of the estate. If the $37,500 overage was instead transferred out of the estate, the estate tax may be avoided.
Example C. Taxpayer has a taxable estate valued at $2,166,625, which only slightly exceeds the 2014 Applicable Credit Limit. Here, the taxpayer goes over the 105% cliff and Applicable Credit is entirely phased out, causing New York estate tax of $112,130.
Note that the value of the estate only exceeds the Basic Exclusion Amount $104,125. The increase in taxes due, however, is $112,130, which is $8,005 more than the added value. The increase in value of the estate from the $2,100,000 value in Example B is $66,625, but the increase in tax is $62,822. Notice that all but $3,803 of the increase in value of $66,625 goes to paying the estate tax. The consequences of this cliff effect only increase as the Basic Exclusion Amount increases each year. Proper estate and tax planning can help minimize or eliminate the adverse consequences of the cliff.
As under prior law the New York’s maximum marginal estate tax rate is set at 16% under the new law for decedent’s dying between April 1, 2014 and March 31, 2015. However, the legislation did not make the 16% rate permanent and it could either increase or decrease after March 31, 2015 depending on what action the New York State Legislature decides to take.
In order to discourage a rash display of generosity by taxpayers who would prefer to make gifts to their heirs than pay any New York Estate Tax, the legislation provides for the inclusion, in the gross estate of a decedent, New York gifts made within three years of death, but only if the gifts are made during the phase in period for the new State Basic Exclusion Amount running from April 1, 2014 through December 31, 2018. No New York Estate Tax Return needs to be filed unless the taxable estate exceeds the Basic Exclusion Amount.
In addition, in an apparent effort to simplify the NY Tax Code and its enforcement, the NY Generation Skipping Transfer Tax has been repealed as of April 1, 2014. Unfortunately, this will not result in any savings for NY residents subject to the federal Generation Skipping Transfer tax as the tax previously imposed by NY was covered by a federal credit against state generation skipping transfer tax which will no longer apply thereby increasing the federal tax by the amount of the foregone credit.
The phase in of the new Basic Exclusion Amount and Applicable Credit Limit is illustrated in Appendix D in the revised Pierro Law Group Estate Planning Guide.
By: Philip A. Di Giorgio, Esq. & David S. Staggs, Esq., LL.M.