By Sharon Klein

The Assembly and Senate released their so-called one-house budget bills last week (A8559-C and S6359-C, respectively): their versions of the Governor’s Budget Bill, which I have summarized in a previous article entitled, Governor Cuomo Proposes Massive Overhaul of NY Tax System.

What’s Different?

Among the more significant differences are the following:

Estate Tax

  • In the Assembly version, the New York exclusion amount would only be increased to $3 million by April 1, 2015, with no inflation indexing and no reduction in estate tax rates
  • The Senate version, like the Governor’s Budget Bill, phases in increases to the state exclusion amount until it is intended to be linked to the federal exemption amount for tax years on and after January 1, 2019, with indexing, and the top tax rate is reduced from 16% to 10%

Gift Tax

  • In the Senate version, there is no add-back at death for gifts
  • The Assembly version, like the Governor’s Budget Bill, increases the New York gross estate of a deceased resident by the amount of any taxable gift made on or after April 1, 2014, if the decedent was a New York resident at the time the gift was made. (As you may recall, in the New York City Bar Report I previously circulated, we had recommended limiting the add-back to gifts made within one year of death.)

Throwback/Accumulation Tax

  • A number of modifications were made in the Senate version, including:
    • Language has been added to limit any accumulation distribution to undistributed net income, an omission pointed out in the New York City Bar Report
    • Distributions of income accumulated in a taxable year before January 1, 2014 would not be taxable, a recommendation also made in the New York City Bar Report
    • The accumulation tax appears to be limited to distributions from exempt resident trusts (i.e. does not extend to nonresident trusts)
  • The Assembly version, like the Governor’s Budget Bill (including the 21-day amendments), provides that distributions of income accumulated prior to tax year 2011 would not be taxable, and does not contain the other Senate modifications

QTIP Election

  • The Senate version specifically provides that a separate New York QTIP election can be made where a federal estate tax return is required to be filed only to elect portability

Of Special Note

While the Assembly version limits the increase in the New York exemption to $3 million, there is an estate tax “cliff” in all three proposals: the applicable credit amount for New York taxable estates that are between 100% and 105% of the basic exclusion amount is rapidly phased out and eliminated entirely if the New York taxable estate exceeds 105% of the basic exclusion amount. Accordingly, if a resident decedent’s taxable estate exceeds the basic exclusion amount by more than 5%, the entire taxable estate will be to be subject to New York estate tax.

In all three proposals (1) there is some form of throwback/accumulation tax and (2) “incomplete gift nongrantor trusts” (ING Trusts) are subjected to New York income tax by treating those trusts as grantor trusts for New York income tax purposes.

State-level portability is absent from all three proposals.

Negotiations now step into high gear until a final budget, which is due April 1, is agreed upon between the Governor, Assembly and Senate.

 

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