New Rules Apply to the Taxation of Estates & Trusts in New York

April 11, 2014

In our February 11, 2014 bulletin, we discussed Governor Cuomo’s tax reform proposals contained in the 2014-2015 fiscal year Executive Budget, which included a number of changes impacting estates and trusts created by or benefiting residents of New York State. The final budget legislation was enacted on April 1, 2014 and contains many of the changes originally proposed by Governor Cuomo, although with substantial alterations.

Changes to the New York State Estate Tax

Exemption: The New York State estate tax exemption was increased, effective April 1, 2014, from $1,000,000 to $2,062,500. The exemption will continue to increase in stages over the next five years to eventually reach parity with the Federal exemption for decedents dying on or after January 1, 2019 (estimated at that time to be approximately $6 million). The table below details the increased exemptions over time:

For decedents dying: New York Exemption
Prior to April 1, 2014 $1,000,000
April 1, 2014 to March 31, 2015 $2,062,500
April 1, 2015 to March 31, 2016 $3,125,000
April 1, 2016 to March 31, 2017 $4,187,500
April 1, 2017 to December 31, 2018 $5,250,000
January 1, 2019 and thereafter Equal to the Federal exemption

Although the increase in the exemption is a welcome change for small estates, larger estates will not realize any benefit from these increased exemptions. Unlike the Federal exemption, which is available to all estates regardless of size, the New York State exemption phases out sharply if the New York taxable estate exceeds the exemption amount, and disappears entirely if the taxable estate exceeds the exemption by 5% or more.

Thus, for a decedent who died today, if the decedent’s New York taxable estate were equal to $2,062,500, the decedent’s estate would owe no New York State estate tax. However, if the decedent’s taxable estate were equal to $2,165,625 (105% of $2,062,500), the decedent’s estate would owe $112,050 in New York estate tax (an effective tax rate on that extra 5% of almost 109%!), which is the same amount that the decedent’s estate would have paid under prior law.

Gifts: The Governor’s budget proposal included a provision requiring any taxable gift made by a New York resident on or after April 1, 2014 to be included in the decedent’s New York taxable estate at death. While the final legislation did include certain gifts in a New York decedent’s taxable estate, it did not include gifts made (1) more than three years prior to the decedent’s death, (2) when the decedent was not a New York resident, (3) prior to April 1, 2014, or (4) on or after January 1, 2019. As a result, this provision, unless further amended in the future to include gifts made on or after January 1, 2019, will have a limited impact.

Tax Rate: Although the Governor’s budget proposal included a provision lowering the top marginal estate tax rate from 16% to 10%, the final legislation did not incorporate the reduced rate structure. As a result, large estates (in excess of 105% of the New York exemption) will not be affected by this legislation, and will pay the same estate tax as under prior law (unless the decedent made gifts that do not fall into one of the exceptions listed above, in which case the estate tax would actually increase, potentially substantially).

Changes to the Taxation of Trusts in New York

Resident Exempt Trusts: Under prior law, trusts established by New York residents that had (1) no New York situs property, (2) no New York source income, and (3) no New York resident trustees (“Resident Exempt Trusts”), were not subject to income tax in New York.

The Governor’s budget proposal included a provision taxing any distributions of accumulated income to a New York resident beneficiary from a Resident Exempt Trust or from a trust established by someone other than a New York resident (a “Nonresident Trust”).

Under the final legislation, distributions from Nonresident Trusts to New York resident beneficiaries will not be subject to tax on accumulated income, but distributions to New York resident beneficiaries from Resident Exempt Trusts will be taxed on all items of ordinary income (generally, interest, dividends, rents and royalties) accumulated in the trust on or after January 1, 2014. Capital gains earned by Resident Exempt Trusts will continue to escape New York taxation.

Incomplete Gift Non-Grantor Trusts: Under prior law, certain trusts known as “ING Trusts” (or variously as “DINGs,” “WINGs” or “NINGs” depending on the State of formation) could be created in a State other than New York, and a Settlor could transfer unlimited amounts of assets to such a trust without any gift tax consequences. Once transferred, the income from the assets in the trusts would not be subject to New York State income tax. Effective January 1, 2014, the New York resident Settlor of an ING Trust will be taxed in New York State on all of the income of the ING Trust as though the Settlor owned the assets outright. However, any ING Trust liquidated prior to June 1, 2014 will not be subject to this rule.

If you have any questions regarding this Bulletin, please contact Hume Steyer (212-574-1555), David Stutzman (212-574-1219) or Scott Sambur (212-574-1445) of our Trusts and Estates Group.