Proposed New York Tax Reform

Governor Cuomo’s recent budget bill contains a number of proposed changes to New York tax law that, if enacted in their current form, would modify significantly the New York estate and gift tax rules. The proposal would also impose New York income taxes on certain trust distributions made to New York residents.

One item of particular interest is a proposed change that would adversely affect the taxation of gifts made by New York residents after March 31, 2014. Accordingly, as described further below, some clients may wish to consider making gifts prior to April 1, 2014.

New York Estate Tax to be Imposed on Gifts Made After March 31, 2014

There are a number of tax benefits associated with making lifetime gifts. For New York residents, one benefit has been that, because New York has no gift tax but does have an estate tax, property given away during life is not subject to New York transfer taxes. Under the Governor’s proposal, all lifetime gifts made by a New York resident on or after April 1, 2014 (other than gifts that qualify for the annual exclusion or the exemption for educational or medical expenses) would be subject to New York estate tax on the donor’s subsequent death if the gifts, combined with the donor’s taxable estate, exceed the New York estate tax exemption in effect at the time of death.

In light of the proposed legislation, New York residents may wish to consider making taxable gifts prior to April 1, 2014 in order to avoid the potential imposition of an eventual New York estate tax on the property given away. Such gifts may be of particular interest to individuals who intend to make, but who have not yet made, full use of their $5.34 million Federal gift tax exemption (including individuals who intend to top off prior gifts in order to take advantage of the annual inflation adjustments in the Federal gift tax exemption). Moreover, individuals who have already utilized their full $5.34 million Federal gift tax exemption but are willing to pay a Federal gift tax may wish to make an additional gift prior to the April 1 effective date.

By way of example, assuming the bill is enacted in its current form, if a New York resident makes a gift of his or her $5.34 million gift tax exemption prior to April 1, 2014 and then dies in 2014, the combined Federal and New York estate taxes would be reduced by approximately $465,000 (compared to making no gift) or potentially as much as $775,000 (compared to making the gift after March 31, 2014). This example assumes a top New York estate tax rate of 14.5%, as is currently proposed for 2014. The savings associated with a current gift would be reduced if the top New York estate tax rate is less than 14.5% at the time of the donor’s death.

New York Estate Tax - Exemption to Increase and Rate to Decrease

The proposal would increase the New York estate tax exemption from $1 million to $5.25 million (indexed for inflation after 2019), thereby bringing the New York estate tax exemption approximately in line with the Federal estate tax exemption. The proposal would also decrease the top marginal New York estate tax rate from 16% to 10%. Both changes would be phased in over five years, beginning on April 1, 2014.

Taxation of New York Resident Trust Beneficiaries

Currently, if ordinary income is accumulated in a non-resident trust (a trust that was established by a non-New York resident) or is accumulated in an “exempt” New York resident trust (a trust that was established by a New York resident but that lacks certain requisite connections to New York), there is no New York income tax imposed when that accumulated income is subsequently distributed to a New York resident. The proposed legislation would impose New York income taxes on a New York resident beneficiary who receives such distributions (but only if the income was accumulated in the trust after June 1, 2014), with a credit for taxes paid in other jurisdictions. In addition, the trustees of such trusts would be required to file informational returns when accumulation distributions are made to New York beneficiaries.

New York Income Taxation of “ING” Trusts

The proposed legislation also eliminates for New York residents a trust technique known as an “ING” trust (an “incomplete gift, non-grantor trust”). The ING trust strategy is designed to avoid New York income taxes on a trust created by a grantor for his or her own benefit. The new legislation would eliminate this technique by treating an ING trust as a “grantor trust” taxable directly to the grantor for New York income tax purposes. If enacted, the amendment would be effective as of January 1, 2014, provided that any ING trust that is liquidated prior June 1, 2014 would not be subject to the new rule prior to the liquidation. 

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The proposed legislation raises some technical issues that may be addressed prior to its passage and that are beyond the scope of this email alert. We expect to provide further detail as the legislation progresses.

If you would like to discuss any of these legislative proposals or to consider making a taxable gift prior to April 1, 2014, please contact one of the attorneys in our Private Clients and Charitable Organizations Practice Group.


Steven M. Loeb
(212) 225-2620
sloeb@cgsh.com

Judith Kassel
(212) 225-2062 
jkassel@cgsh.com 

Heide H. Ilgenfritz
(212) 225-2358 
hilgenfritz@cgsh.com 

Catherine A. Borneo
(212) 225-2292 
cborneo@cgsh.com

Ruth Z. Plave
(212) 225-2094 
rplave@cgsh.com 

Elana S. Bronson
(212) 225-2617 
ebronson@cgsh.com 

Naura M. Keiser
(212) 225-2439 
nkeiser@cgsh.com 

Michele Leibson
(212) 225-2166 
mleibson@cgsh.com 

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U.S. Treasury Circular 230 Notice

Any U.S. federal tax advice included in this communication was not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal tax penalties.