Over the last decade, the federal estate and gift tax system has seen numerous changes to both the individual exemptions and tax rates. During that same period, New York state has consistently refused to make changes to its state specific exemptions and rates. After “decoupling” from the federal estate and gift tax system, the state specific exemptions and rates have remained $1 million per individual with a maximum rate of 16% respectively.

In the next few weeks, this is very likely to change. Earlier this year, Governor Andrew Cuomo proposed a series of major changes to the state’s estate and gift tax system. These changes, if agreed to by the State’s Assembly and Legislature, would greatly change both how estates, individuals and trusts are taxed and how estate planners advise their clients with regard to New York taxation.
The proposed changes include:

1) Increasing the individual estate tax exemption and lowering the maximum tax rate-Governor Cuomo’s proposal would, over the next four years, increase the individual estate tax exemption to $5.25 million. The exemption would be indexed to inflation thereafter, similar to the current increases to the federal exemption. The maximum tax rate would be reduced over the same period of time from 16% to 10%.

2) Reinstating the state gift tax-New York has not had a state specific gift tax for well over a decade, but under the governor’s proposal, taxable gifts would be included in a decedent’s estate. This would have the net effect of reducing an individual’s estate exemption by the value of all taxable gifts made during their lifetime.

3) Repealing the state Generation-Skipping Transfer Tax-This is a tax imposed on any transfers from an individual to an individual two or more generations below them (grandchildren and all subsequent generations).

4) Taxing distributions to New York beneficiaries of income accumulated in non-resident and exempt resident trusts-Typically, income accumulated by non-resident and exempt resident trusts is exempt from taxation. However, if the governor’s proposals are enacted, some income to New York beneficiaries of these trusts will be subject to tax.

The response to the governor’s proposals have generally been positive from both houses of the legislature. However, the Democrat controlled Assembly is seeking to tweak the governor’s estate tax proposal by increasing the exemption to $3 million and keeping the current rate structure in place. This difference of opinion is minor in the context of whether or not a change will likely take effect.

The practical effect of these proposals will not be known until the final budget is proposed and ultimately passed by the legislature and signed by Governor Cuomo. Once this takes place, it is important that all New York resident reevaluate their current planning to determine if it needs to be updated to reflect the changes to the law.

For more information, please contact info@levyestatelaw.com