New York Enacts Transfer Tax Law Changes -- New Jersey Residents Still Waiting
Effective April 1, 2014, the State of New York made significant changes to its transfer tax law. The $1,000,000 New York estate tax exemption, i.e., the amount of assets that may pass free from tax, will increase over the next four years. The new exemption amounts are as follows:
$2,062,500 for decedents dying between April 1, 2014 and March 31, 2015;
$3,125,00 for decedents dying between April 1, 2015 and March 31, 20160;
$4,187,500 for decedents dying between April 1, 2016 and March 31, 2017; and
$5,250,000 for decedents dying between April 1, 2017 and December 31, 2019.
After 2019, the New York exemption will be the same as the federal estate tax exemption, which is currently $5,340,000, but is indexed for future inflation. One important difference, however, is that the New York exemption is not a true “exemption.” Rather, the exemption is reduced for estates that exceed the exemption amount and is eliminated for estates that exceed 105% of the exemption amount. For example, in 2018 an estate valued at $5,250,000 or less will pay no estate tax to New York, but an estate valued at $5,512,500 or more will be taxed on the entire estate, not just the portion that exceeds the exemption as is the case under the federal law. Thus, a New York estate of $5,512,500 would pay a tax of $452,300.
Another difference between New York and federal law is that the New York exemption is still not “portable” between spouses. Any portion of the federal estate tax exemption not used on the first spouse’s death may be transferred to the surviving spouse. New York did not enact portability as part of its new law. Therefore, it remains important for the first spouse to have an estate plan that makes use of his or her New York exemption so that the exemption is not wasted.
With regard to lifetime gifting, during the next five years taxable gifts made by New York residents within three years of death will be added back to the gross estate for New York estate tax purposes, in the same manner as under federal law. This add back provision ends for gifts made on or after January 1, 2019. Therefore, in addition to the usual income tax concerns resulting from the carry-over basis of the gifted assets, New York residents will also need to consider the effect of the “add back” when deciding whether or not to make taxable gifts.
The final transfer tax-related provision in the new New York tax law is the elimination of the New York generation-skipping transfer (GST) tax. The GST tax was a separate tax, in addition to the regular New York estate tax, that was imposed on generation-skipping transfers made by New York residents to grandchildren or more remote descendants. Please note that the federal GST tax still applies to GST transfers in excess of the $5,340,000 exemption.
Two other important provisions of the new law relate to the income taxation of trusts. First, a New York resident who receives income from a non-grantor New York trust will now be taxed on such income, even if the trust itself is exempt from the New York income tax because the trust has no New York trustees, no assets located in New York and no New York source income. Second, New York income tax can no longer be avoided through a technique called an incomplete non-grantor (“ING”) trust. Under the new law, such trusts will be considered to be grantor trusts, which means that a New York resident who creates this type of trust in another state will be taxed on the trust’s income whether or not it is distributed.
For New Jersey residents, unfortunately the estate tax rules have not changed since 2002. The New Jersey exemption remains at $675,000 and there is no portability of the exemption between spouses. In comparing the two states, if death occurs in 2018 and the decedent had $5,250,000 in assets that passed to his or her children, there would be no estate tax if the decedent was a New York resident, but in New Jersey there would be an estate tax of $420,800.
If you are a New York resident, the foregoing tax law changes may significantly affect your current estate plan. Please contact your estate planning attorney at Wolff & Samson if you would like additional information.
Tax, Trusts and Estates Group at Wolff & Samson PC:
David L. Schlossberg
Member of the Firm
Phone (973) 530-2010
Sean M. Aylward
Member of the Firm
Phone (973) 530-2105
Roxanna E. Hammett
Member of the Firm
Phone (973) 530-2039
Carl B. Levy
Phone (973) 530-2035
Phone (973) 530-2149