By Sharon Klein

Following negotiations among the Governor’s office, the Assembly and the Senate, the final budget language was released late Friday night. A vote is expected by the April 1 deadline.

Regarding the trusts & estates related proposals, the final language reflects the following changes:

Estate Tax

The basic exclusion amount increases as follows – for individuals dying on or after:

April 1, 2014 and before April 1, 2015 – $ 2,062,500
April 1, 2015 and before April 1, 2016 – $3,125,000
April 1, 2016 and before April 1, 2017 – $4,187,500
April 1, 2017 and before January 1, 2019 – $5,250,000

After January 1, 2019, the basic exclusion amount will be indexed for inflation from 2010, which should link the state exclusion amount to the federal amount.

The rate reduction in the original Budget Bill and Senate Bill has been eliminated, and the top rate remains 16%.

There is an estate tax “cliff”: 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.

Gift Add-Back

Although the add-back for taxable gifts remains, its application has been significantly narrowed: there is a three-year look-back and the look-back applies only to gifts made on or after April 1, 2014 and before January 1, 2019.

Specifically, the New York gross estate of a resident decedent will be increased by the amount of any taxable gift under Internal Revenue Code section 2503 not otherwise included in the decedent’s federal gross estate, made during the three-year period ending on the decedent’s date of death, but not including any gift made: (1) when the decedent was not a resident of New York state; (2) before April 1, 2014; or (3) on or after January 1, 2019.

Throwback/Accumulation Tax

Although the final language does provide for a throwback/accumulation tax, Senate Bill modifications to the original proposal have been incorporated, including:

  • Accumulation distributions are limited 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 will not be taxable, a recommendation also made in the New York City Bar Report
  • The accumulation tax is limited to distributions from exempt resident trusts (i.e. does not extend to nonresident trusts)

These changes would be effective immediately and be applicable to tax years beginning on or after January 1, 2014. To mitigate transition issues, however, the section excludes from tax distributions of accumulated income by exempt resident trusts (except ING trusts) made before June 1, 2014.

QTIP Election

The final budget language does not include the language in the Senate version which specifically provided that a separate New York QTIP election could be made where a federal estate tax return was required to be filed only to elect portability. The final language provides that a separate QTIP election can be made when a federal return is not “required to be filed”. However, in previous guidance, the New York State Department of Taxation and Finance has advised that, even if a federal return was filed solely to elect portability, the elections made for federal and state purposes must be consistent: if a QTIP election was not made for federal purposes, it cannot be made for state purposes.

ING Trusts

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.

This change would be effective immediately and be applicable to tax years beginning on or after January 1, 2014. To mitigate transition issues, however, the section excludes from tax income earned by ING trusts that are liquidated on or before June 1, 2014.

 

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