Although the Legislature and Governor Cuomo can take justifiable pride in another on-time Budget, little in the Budget affects the New York State estate tax.
What Was in the Budget
Most important, the Budget did away with the expiration of the estate tax rates, originally scheduled for April 1, 2015. In a nutshell, the one year rates contained in last year's Budget have been rolled forward indefinitely. There was no reduction in rates (the rates are reproduced at the end of this piece).
Second, the New York estate tax takes into account adjusted taxable gifts made by a donor after April 1, 2014 if he or she was a New York resident at the time of the gift. The Budget clarifies that gifts of real property and tangible personal property (e.g., artwork) by residents with a location outside of New York at the time of the gift are excluded from the New York gross estate.
"What gifts are includible?" is an obvious question. Adjusted taxable gifts made within three years of death and before January 1, 2019. These gifts do not include gifts to a spouse or charity, gifts that qualify for the annual exclusion against the gift tax ($14,000 per donee in 2015) and certain gifts for tuition and medical expenses.
Third, there was a technical correction regarding the New York gross estates of non-residents; this change will not be discussed here.
What Was Not in the Budget
There were two significant omissions. First, there was no provision for portability of the New York exemption. What is portability? The amount of federal estate tax exemption that a deceased spouse did not use effectively can be inherited by the surviving spouse. Using some estate tax jargon, the unused federal exemption is "ported" between spouses in that instance.
Unfortunately, the New York exemption is not portable. The exemption is either used at the first death or lost. The loss will affect larger estates, that is, estates over the New York exemption ($3.125M between April 1, 2015 and March 31, 2016). Indeed, when the taxable estate exceeds 105% of the New York exemption, there is no exemption!
On a happier note, under last year's Budget, the exemption is scheduled to increase over the next several years, eventually equaling the federal exemption in 2019.
Second, there was no provision for a "New York-only QTIP election." Put another way, an estate cannot elect the qualified terminable interest property ("QTIP") marital deduction just for New York. A QTIP deduction must be elected on both a federal return--even if an estate would otherwise not have to file a return--and the New York return.
The loss of flexibility is perhaps regrettable. But, as a practical matter, many estates will be better off by electing QTIP on both the federal and New York levels as the election will permit a step-up in basis for income tax purposes at the survivor's death.
While it always makes sense to monitor legislative developments, the Legislature is unlikely to revisit the New York estate tax until next year's Budget. Given the significant revision in 2014, it is probably too much to expect an elimination of the tax. In addition, while clients may hope for New York portability, that should not be a key component of any plan.
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