We’re all guilty of putting off discussions about wills and estate planning. In the grand scope of our lives, too many other things seem more important right now, and most of us tend to believe we have all the time in the world to consider circumstances that seem so far off in the future. But when we don’t take the time to prepare ahead of time—when we can really focus—we run the risk of making life-changing decisions without having the proper education or ample time to contemplate their consequences. As a result, we’re often forced into making decisions upon the death of a loved one, as the executor of an estate, in the most dire of moments.
As an executor, alongside your attorney and financial advisor, you will be guided in the legal and tax requirements for the estate. An executor is the representative who was appointed by the estate owner to carry out their last wishes and ensure the financial and tax implications of the estate are taken care of. The role of the executor requires reading the will and trust documents in aims of protecting the assets, making distributions to beneficiaries, and paying debts and taxes of the estate.
Why bring this up now? Well, unbeknownst to many New York residents and non-residents, the New York State and gift tax laws changed significantly on April 1, 2014, and went into effect immediately . In addition more technical changes were made to certain trust income tax rules. These comprehensive changes may impact your estate plans, so it would be wise to re-evaluate these changes with your advisors.
1. New York Estate Tax Exclusion – The new tax laws raise the applicable exclusion amount evidenced in table below. A decedent may pass to his or her heirs up to the exclusion amount from the Federal and New York estate tax. As such, if you are a U.S. citizen or resident, a certain amount of your property will be free from this tax. The New York State tax exclusion amounts has increased by more than double, and will continue to be raised on a laddered basis over the next five years to match the Federal estate tax exemptions. Before April 1, the amount was fixed at $1 million. On or after January 1, 2019, the exclusion amount will be indexed for inflation annually and will be equal to the Federal tax exemption amount.
2. Cliff Rule – The New York estate tax was devised to incentivize residents from moving out of state to avoid state taxation. With the new laws, at the point a New York Estate exceeds 105% of the exclusion amount then in effect at the time of the deceased person, the tax relief will not apply and the entire estate will be subject to New York State Estate Tax. Previously, heirs to an estate would only be taxed on the amount that exceeded the New York Estate tax exception of $1 million. Now, estate heirs will be taxed on the full value of an estate if your estate value exceeds 5% of the exception amount.
Example: An Individual passes away in May 2015; the New York State Tax Exception is $3,125,000 times 105%, which equals $3,281,250. That means than the entire estate would be subject to the New York Estate Tax at the point it exceeded this amount. Note: The 16% maximum New York State Estate Tax remains in effect. The new law does not include a provision for portability, allowing transferability of a surviving spouse to use the exemption of a deceased spouse for estate and gift tax purposes.
3. Three-Year Look-Back Period for Gifts – A gift made by a New York resident made between April 1, 2014, and Jan. 1, 2019, may be included in the New York estate of the deceased if it was bestowed within three years of their death. New York States residents who die after contributing to a taxable gift during that three-year period the value of the gift will be included in the descent’s estate for purpose of the New York Estate tax calculation. Exclusions of the gift tax: gifts from a non-New York resident; gifts from a New York resident before April 1, 2014, or after January 2019; and gifts included in the decedent’s estate within another provision of the Federal Estate tax law (as such, gifts are not double taxed).
4. Income Taxation and Trusts – There is now a “throwback” tax for New York beneficiaries who receive distributions of the trust’s accumulated income commencing in 2014. There is a grace period for distributions made before June 1, 2014, whereby any distribution will not be subject to this tax. Previously, trusts were exempt from paying New York State income tax if the “New York Resident Trust Exception” was met. This exception is no longer available to New York beneficiaries. Additionally another sweeping change is the new law classifies “incomplete non-grantor trust,” or “ING” trusts as grantor trusts for New York Tax purposes. That means the income from these trusts is now attributable to the New York grantor and is subject to tax. There is a similar grace period as evidenced above for the throwback rule whereby an ING trust may be liquidated before June 1, 2014 without NY state income tax consequence.
5. Generation Skipping Transfer Tax – New York will not impose a generation-skipping transfer tax on gifts to people who are two or more generations removed from the transferor. This includes distributions for other trusts held solely for the benefit of the recipient.
Take action now and make an appointment with an estate planning attorney and tax advisor to structure and document your Estate wishes. Discuss the present tax laws and the ones on the horizon SO YOU HAVE peace of mind.
DISCLAIMER: The author is neither an accountant nor attorney. This information is provided for discussion purposes only and the author does not guarantee the accuracy of any information provided. Please consult with your own financial advisor to discuss your particular circumstances. Rules derived from the New York State Executive Budget for 2014-2015. Additional information for this article credited to: Credit Suisse Private Banking North America Wealth Planning Group “Wealth Planning “New York Changes Estate and Gift Tax Laws and Income Taxation of Trusts”. Internal revenue Service Circular 230 disclosure: As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.