Latest New York State Budget Proposal Contains Significant Estate Tax Calculation Change

March 11, 2014Trusts & Estates Alert

Residents Can Avoid Paying Additional Estate Tax by Making Gifts before April 1, 2014

Governor Andrew Cuomo's recent budget proposal includes a significant change to the method of calculating estate taxes for New York State residents. Because of this change, New York residents should consider making taxable gifts prior to April 1, 2014.

Currently, New York State does not impose a gift tax, but it does impose an estate tax on assets over $1,000,0001. Governor Cuomo has proposed that all taxable gifts made by a resident after March 31, 2014 be included in calculating the value of a decedent's estate for New York State estate tax purposes. The impact of this proposal would be to cause New York State residents who make taxable gifts after March 31, 2014 to effectively pay more tax by paying estate tax on such gifts.

For example, if a state resident makes a gift of $1,000,000 on March 31, 2014, that gift would not be subject to New York State gift tax at the time of the gift, and the gift would not be taken into account for purposes of computing New York estate tax on the gift-giver’s later death. In doing so, the gift-giver has essentially removed $1,000,000 from his estate free of any New York State estate or gift tax.

But if that same resident makes the same exact $1,000,000 gift on April 1, 2014, there would still be no gift tax imposed by the State of New York – however, upon the gift-giver's death, the $1,000,000 would be added back into the estate for the purposes of calculating New York State estate tax. Assuming the $1,000,000 does not appreciate, the result in this example would be the same as not making any gift at all from a New York State estate tax perspective.

If you or someone you know is a New York State resident and is considering making a taxable gift, it is recommended that the gift be made prior to April 1, 2014.

1 The budget proposal includes provisions which would raise the current New York State estate tax exemption from $1,000,000 to $5,250,000, indexed for inflation, over the next 5 years, and reduce the top tax rate from 16% to 10%.