Proposal to Reform New York State Estate Tax System

January 26, 2015

Authored by: Stacie J. Rottenstreich and Karin Barkhorn

177572431As reported on this blog last year, New York State modified its estate tax system by gradually increasing the estate tax exemption along with some other changes. The hope and intent were to keep New York State’s estate tax more competitive and in line with other states within the country to prevent a migration of New Yorkers from the state to avoid state estate tax. However, the language in the New York State stature which made these modifications created some significant problems for New Yorkers. The New York State Society of Certified Public Accountants, through its Estate Planning Committee, has proposed some additional reforms to the New York tax law (the “Proposal”) which attempt to eliminate some of the perceived unfairness in current New York law.

As it currently stands, for a New Yorker with a taxable estate valued between 100% and 105% of the basic exclusion amount, the applicable credit amount is phased out. However, a New Yorker with a taxable estate that exceeds 105% of the basic exclusion amount will be taxed on his or her entire estate, not just the excess over the exclusion amount. So, for example, if you are a New Yorker and you die in January 2015 when the New York State estate tax exclusion amount is $2,062,500 with an estate of over $2,165,625, your estate will be taxed on its entirety not just the amount in excess of the $2,062,500 basic exclusion amount. The Proposal eliminates the cliff altogether by

removing both the phase out and the total elimination of the applicable credit amount.

The Proposal attempts to reform New York State law by allowing a separate state QTIP marital election in cases where a Federal estate tax return is being filed solely to make a portability election. Under current law a QTIP election is not allowed for a New York State estate unless such election was made with respect to the Federal estate which is “required to be filed”. In cases where no Federal estate tax return is required to be filed because the estate is too small and has not met the Federal threshold a New York State QTIP election is permissible. There is some ambiguity in cases where a Federal estate tax return is filed solely for the purposes of electing portability of the deceased spouse’s unused exclusion amount and the return is not otherwise required to be filed. Can a separate New York State QTIP election be made? The Proposal would allow for a separate state QTIP election in circumstances where a Federal estate tax return is filed to elect portability of the deceased spouse’s unused exclusion amount.

In a similar vein, the Proposal mimics Federal tax rules for portability so that a New York first to die spouse who has not fully used his or her New York estate tax exemption would not lose such exemption at his or her death. Instead such remaining exemption could be used later at the death of the surviving spouse along with the surviving spouse’s own New York State estate exemption.

Finally, the Proposal attempts to change the rules regarding the “add back” for New Yorkers who make lifetime gifts in excess of annual exclusion gifts during the 3 year period before death and prior to January 1, 2019. Due to the deduction limitations for state estate taxes in Federal law, this add back can be viewed as penalizing New Yorkers. The Proposal provides that any increase in New York estate tax attributable to the add back of New York taxable gifts be subject to s reduced tax rate.

There is no certainty as to what will happen with the Proposal. Will it be passed in its entirety? Will only certain provisions become law? However, what is certain is there at least discussion about change. Stay tuned for the latest updates yet to come.