Sharon L. Klein – TSB-M15(4)M: New York Issues Estate Tax Guidance for Residents and Nonresidents Owning New York Property – New York State Department of Taxation and Finance Technical Memorandum

By Sharon L. Klein

“On October 27, 2015, the New York State Department of Taxation and Finance issued a Technical Memorandum (“TSB”) that provides estate tax guidance for residents and for nonresidents owning New York property. Specifically, the TSB provides guidance on how to compute allowable deductions for resident and nonresident estates, and examples to illustrate the computations.”

FACTS:

Deductions Disallowed if They Relate to Property Not Included in NY Gross Estate 

In computing the New York taxable estate, both resident and nonresident estates must exclude any deductions that relate to property which is not included in the New York gross estate. The TSB provides guidance regarding three categories of deductions:

1.) Deductions directly related to real and tangible property

Deductions that relate directly to real and tangible property include charitable deductions for the donation of land included in the gross estate (Form 706, Schedule O), mortgages secured by real property (Form 706, Schedule K) and real or tangible property included as part of the marital deduction (Form 706, Schedule M).

2.) Deductions directly related to intangible property

Deductions that relate directly to intangible property include broker fees (Form 706, Schedule J or L) and stocks, bonds or cash included as part of the marital deduction (Form 706, Schedule M).

3.) Deductions indirectly related to real and tangible property or intangible property

Deductions that are indirectly related to real, tangible or intangible property (“Indirect Expenses”) include executor’s commissions, accounting fees, attorney’s fees and funeral expenses (Form 706, Schedule J) and debts of the decedent (Schedule K).  The TSB explains which deductions are disallowed, including how to apportion deductions in the third category – the Indirect Expenses.

COMMENT:

The TSB provides guidance on how to compute allowable deductions for resident and nonresident estates, and examples to illustrate the computations.

Computing Allowable Deductions – Residents 

The New York taxable estate of a resident is the New York gross estate (which excludes real or tangible personal property located outside of New York), less allowable federal deductions, except deductions that relate to real or tangible personal property located outside of New York:

  • Federal deductions that relate directly to real and tangible property located outside New York – disallowed
  • Federal deductions that relate to intangible property – allowed
  • Federal deductions that are indirectly related to property outside New York – disallowed by allocating Indirect Expenses
    • Multiply Indirect Expenses by a fraction equal to:
      • Value of real & tangible property located outside NY
      • Value of federal gross estate

For example, if half of the gross estate was real and tangible property located outside of New York, half of the executor’s commissions would be disallowed as a deduction.

Computing Allowable Deductions – Nonresidents 

The New York taxable estate of a nonresident is computed in the same way as for a resident, but does not include intangible property:

  • Federal deductions that relate directly to real and tangible property located outside New York – disallowed
  • Federal deductions that relate to intangible property – disallowed
  • Federal deductions that are indirectly related to property outside New York – disallowed by allocating Indirect Expenses
    • Multiply Indirect Expenses by a fraction equal to:
      • Value of real & tangible property located outside NY plus intangible property
      • Value of federal gross estate

The good news for nonresidents is that they seem to be permitted to deduct the balance of the Indirect Expenses – a fractional proportion of those expenses that are indirectly related to estate property, including executor’s commissions and attorney’s fees. In fact, in an example given in the TSB (which posits a $45 million federal gross estate of a nonresident, with $25 million in New York real property), the deduction analysis actually results in a negative New York estate. The $25 million New York estate is reduced by a $25 million marital deduction for the real property, reflected on Form 706, Schedule M; deductions directly related to the New York real property; and a portion of the Indirect Expenses – total allowable deductions for New York purposes =
$25,646,712.

Application Date and Effect on Previously Filed Returns 

The treatment of deductions as described in the TSB applies to estates of individuals dying on or after April 1, 2014.  If a New York estate tax return has been filed for such an individual, and the calculation of the allowable federal deductions is affected by this guidance, an amended return must be filed.

Reporting of Deductions When Federal Return Filed Solely for Portability 

Final federal portability regulations were issued on June 12, 2015. Under those regulations,[ii] if a federal return is filed solely for the purpose of electing portability, the estate typically does not have to report the value of property qualifying for the marital or charitable deduction and can instead estimate the value of the gross estate based on a good faith determination.  Reiterating the Department’s prior guidance on this topic,[iii] the TSB notes that New York law does not conform to the federal portability rules.  Even if a federal return is filed solely for portability reasons, the following must be submitted when filing the New York Estate Tax Return:

  • a copy of the actual federal estate tax return filed with the IRS, and
  • a completed (pro forma) Part 5 – Recapitulation (Form 706) and all applicable schedules reporting the actual date of death value of all property

Reminder About Significant Change for Nonresidents: Nonresident’s New York Estate Tax Liability Dependent on Value of New York Situs Assets, Not on Apportionment between New York and non-New York Situs Assets 

A change made to New York law by the 2014-15 Executive Budget can provide significant relief for nonresidents who die owning New York situs real or tangible property.

Previously, a nonresident’s estate tax liability was determined by calculating the estate tax that would have been due had the decedent been a resident, and then multiplying that estate tax liability by a fraction.  The fraction was equal to the percentage the New York situs property bore to the gross estate.  This calculation often led to the imposition of New York estate taxes even if the New York situs property was under the New York estate tax exclusion amount. Now, it appears that there will be no New York tax if the value of the nonresident’s New York situs property does not exceed the applicable New York estate tax exclusion amount in the year of death.  It is no longer necessary to apportion the tax by reference to the percentage of the estate located in New York.

sklien

Sharon L. Klein is Administrative Vice President and Managing Director of Family Office Services & Wealth Strategies at Wilmington Trust, N.A., where she assists high net worth clients in developing and implementing sophisticated planning strategies. She has presented at the Heckerling Institute on Estate Planning, the New York University Institute on Federal Taxation, the Notre Dame Estate Planning Institute, the Duke University Estate Planning Conference, and the Bloomberg BNA Tax Management Advisory Board. She has been quoted or featured in The Wall Street Journal, The New York Times, Estate Planning Magazine and Trusts & Estates Magazine. Sharon serves as Co-Chair of the Taxation Committee of the New York State Bar Association’s Trusts and Estates Law Section and Vice-Chair of the Estate & Gift Tax Committee of the American Bar Association. She is a member of the New York Bankers Association Trust & Investment Division Executive Committee, The Rockefeller University Committee on Trust and Estate Gift Plans, the Estates, Gifts and Trusts Advisory Board for The Bureau of National Affairs and the Professional Advisory Council of the Anti-Defamation League. She is the immediate past Chair of the Trusts, Estates and Surrogate’s Court Committee for the New York City Bar Association.

REPRODUCED COURTESY OF LISI (LEIMBERG INFORMATION SERVICES, INC). LISI Estate Planning Newsletter #2360 (November 4, 2015)

CITATIONS:

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New York State Department of Taxation and Finance Technical Memorandum TSB-M-15(4)M, Treatment of Certain Deductions for New York State Estate Tax, New York State Department of Taxation and Finance Technical Memorandum TSB-M-12(4)M, New York State Reporting Requirements for Certain Estates Making a Federal Portability Election 

[i] TSB-M-15(4)M, Treatment of Certain Deductions for New York State Estate Tax

[ii] Section 20.2010-2 (a) (7) (ii)

[iii] SB-M-12(4)M, New York State Reporting Requirements for Certain Estates Making a Federal Portability Election