Proposals to Change New York State Transfer Tax System

January 13, 2014

Authored by: Stacie J. Rottenstreich and Karin Barkhorn

There is has been much talk recently about changing the New York State estate and gift tax structure. Currently, New York State estate tax is based on Federal law from 1998.  New York State imposes a state estate tax on estates valued at $1M. Just this week Governor Cuomo proposed increasing the estate tax threshold from the current $1M to $5.25M and lowering the top estate tax rate to 10% over the next four years. His hope would be that beginning in 2019, the New York State estate tax exemption would equal the Federal exemption, which is indexed to inflation.  This plan would ultimately exempt nearly 90% of estates from New York state estate tax and would eliminate any incentive for New Yorkers to move out of state and migrate to states with no estate tax imposed on its residents.

Cuomo’s proposal is different than the final report issued by the New York State Tax Reform and Fairness Commission, a group set up by him in December 2012. The Commission’s role was to find ways to make the State’s complex tax code simpler and to help reduce the tax burden faced by New Yorkers, yet to have a revenue neutral impact on the State budget.

In the transfer tax arena, the Commission made the following recommendations: reform the estate tax and raise the estate tax exemption, eliminate the generation-skipping transfer tax, reinstate the gift tax and close the resident trust loophole.

The Commission’s proposal as to the estate tax was to raise the estate tax threshold from $1M to $3M and to gradually phasing out the exemption for those estates valued out over $3M.  This would eliminate about 75% of all New York State estates from state estate tax.

Another recommendation by the Commission was to have New York State totally eliminate the  generation-skipping transfer tax. The primary purpose of a generation-skipping transfer tax is to act as a deterrent for taxpayers who wish to avoid estate tax at their children’s death by transferring property to grandchildren.  The current New York State generation-skipping transfer tax generates minimal revenue so the Commission felt its repeal would not impact the State budget.  Additionally, the existence of the Federal generation skipping transfer tax will continue to deter the gifting of property to lower generations.

New York State repealed its gift tax in 2000.  This encouraged New Yorkers to make sizable gifts which in turn reduced taxable estates which would be subject to estate tax starting with a $1M estate. Further, in the time since the New York State gift tax repeal, the Federal gift tax exemption has risen to $5.34M, which has encouraged substantial lifetime gifting which further reduce New Yorkers’ estates, with a corresponding loss of estate tax revenue. The Commission has proposed two options to address the impact of the Federal change on New York estate tax revenues.  The first, which is preferred, is to reinstate New York State gift tax, which would subject gifts above a certain threshold to tax rates in line with the New York estate tax.  Alternately, New York could require estates to add back the value of any gifts above a certain threshold before determining an estate’s value.

The final Commission recommendation concerns New York Resident Trusts. Certain trusts are separate tax paying entities. Current law will not subject a trust to New York State income tax if all the trustees are domiciled outside New York, all the trust property, real and tangible, is located outside New York and if all income and gain is derived from sources out of New York. The law as it currently stands has encouraged New Yorkers to set up non grantor trusts (which are separate distinct taxpayers) which are not completed gifts in states with no state income tax. The Commission has suggested that these trusts be treated as grantor trusts for New York income tax purposes, so the trust income would be taxed to the New York grantor.

There is clearly talk of change in the air. Stay tuned to see what the New York State Tax Relief Commission will say and what the legislature will propose. Change is likely to occur, the exact hows, whys and wherefores are still unclear.