New York’s Estate Tax law has just seen its most dramatic change in recent memory. Finally, the exemption has increased from $1,000,000.00 where it has remained since 2002, with the exemption set to increase annually until it matches the federal estate tax exemption in 2019. After 2019, the exemption will be indexed for inflation annually so that it will equal the federal estate tax exemption.

This means that for decedent’s passing away from April 1, 2014 through March 31, 2015, the exemption is now $2,062,500.00. The exclusion then increases each April 1st in the years 2015 through 2017. On January 1, 2019, the basic exclusion amount will be indexed for inflation annually and will be equal to the federal exclusion amount.

The exclusion and the timeframe for each increase are as follows:

From April 1, 2014 through March 31, 2015 – $2,062,500
From April 1, 2015 through March 31, 2016 – $3,125,000
From April 1, 2016 through March 31, 2017 – $4,187,500
From April 1, 2017 through December 31, 2018 – $5,250,000
From January 1, 2019 forward – Will match the federal exemption indexed for inflation

An item of particular concern is the “cliff” language contained in the new law. If the estate is valued between 100% and 105% of the exclusion amount, the amount over the exclusion will be taxed. However, once an estate exceeds the exclusion amount by more than 5%, not just the amount in excess of the exclusion amount is taxed, but, rather, the entire estate is subject to estate tax. Practically, this means that taxable estates greater than 105% of the exclusion amount receive no benefit from the exclusion amounts shown above and will pay the same tax that would have been paid under the prior estate tax law.

New York repealed its gift tax in 2000. This meant that as a New York resident, if you made lifetime gifts to friends or family members, the gift was not taxed or included in your New York gross estate for purposes of calculating your estate tax. With the passage of the new law, there is now a limited three year look back period for gifts made between April 1, 2014 and January 1, 2019. This means that if a New York resident dies within three years of making a taxable gift, the value of the gift will be included in the decedent’s estate for purposes of computing the New York estate tax. The following gifts are excluded from the three year look back: (1) gifts made when the decedent wasn’t a New York resident; (2) gifts made by a New York resident before April 1, 2014; (3) gifts made by a New York resident on or after January 1, 2019; and (4) gifts that are otherwise includible in the decedent’s estate under another provision of the federal estate tax law (that is, such gifts aren’t taxed twice).

The new law also repeals the New York generation-skipping transfer tax, eliminating it as a planning and administration concern for those people with estates valued below the federal exemption. In addition, the new law also provides relief for non-citizen surviving spouses, allowing a marital deduction without the requirement of a qualified domestic trust when a federal estate tax return is not required to be filed.

The new law does not contain a portability provision like in the federal estate tax law. Portability is a provision in the federal estate tax law that allows the unused estate tax exemption of a married taxpayer to carry over to his or her surviving spouse. Without portability, the manner in which a married couple holds title to their assets may continue to have a significant effect on the amount of tax ultimately payable upon the survivors’ death.

This new New York estate tax law is working to close, and eventually eliminate, the gap between the New York and federal estate tax exclusion amounts. For the next five years, however, as the exclusion amount increases and the 3-year look back for taxable gifts applies, planning will become more complex. That being said, it is important for anyone considering whether to make changes to their estate plans or gifting strategies to see an estate planning attorney specializing in these matters.

– Nancy Burner, Esq. & Kera Reed, Esq.