Potential Changes to Taxation of Estates & Trusts in New York

February 11, 2014

New York residents may wish to make taxable gifts before April 1, 2014 to avoid additional estate tax.

Governor Cuomo’s tax reform proposals, introduced on January 21, 2014 as part of his Executive Budget for the 2014-2015 fiscal year, provide a number of changes impacting estates and trusts created by or benefiting residents of New York State.

Changes to the New York State Estate Tax

These changes include (1) increasing the New York State estate tax exemption amount (currently $1 million) gradually over the next five years to $5.25 million, indexed thereafter for inflation, and (2) lowering the top tax rate1 from 16% to 10%.

Currently, New York does not have a gift tax, and gifts made by New York residents are not included in their gross estates at death. The Governor’s proposal would not institute a gift tax in New York, but effective April 1, 2014, New York decedents would be required to include in their gross estates all gifts made after March 31, 2014 if they were resident in New York when the gifts were made. Therefore, those clients who have significant estates and are considering making substantial lifetime gifts may want to complete such gifts prior to April 1, 2014, in order to save their heirs additional New York State estate tax at death.

Changes to the Taxation of Trusts in New York

The proposal would impose New York State income tax on distributions to New York resident beneficiaries from trusts (i) that were not established by New York residents or (ii) that were established by New York residents but are not subject to tax in New York (i.e., trusts with no New York-situs property, no New York-source income and no New York-resident trustees) to the extent that the trust had accumulated income in prior years. This provision would be effective retroactive to January 1, 2014, but distributions made before June 1, 2014 would be exempt. As a result, Trustees of trusts that have New York resident beneficiaries and that had planned to make large distributions may want to consider making those distributions prior to June 1, 2014, in order to avoid this additional tax.

The Governor’s proposal also includes legislation that would prevent incomplete gift, non-grantor trusts (“INGs”) from avoiding New York income tax. Instead, such trusts would be considered “grantor trusts” for New York income tax purposes, and the creators of the trusts would owe tax on the trusts’ income.

All of the above-described changes to the tax law are still only proposals from the Governor’s office. As a result, the proposals may never be enacted into law, or may be substantially altered by the Legislature prior to enactment. Nevertheless, if you have remaining federal exemption from gift and estate tax, gifting now could be an effective and tax-free way to reduce the risk of increased New York State estate tax at your death.

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.


1 The top rate is currently applicable to taxable estates over $10,040,000.