Fighting the Good Fight for New York Estate Tax Reform: Examining the Estate Tax in the 2015–2016 New York State Fiscal Year Budget

By:
Kevin Matz, Esq., CPA, LLM
Published Date:
May 1, 2015

The estate tax provisions signed into law by Governor Andrew Cuomo on Apr. 1, 2015, as part of the 2015–2016 New York State fiscal year budget (the “budget bill”), leave much to be desired. While the bill’s estate tax provisions fill in some gaps left in the wake of last year’s substantial revisions to the New York estate tax, they completely fail to address the substantive areas that the NYSSCPA identified as warranting reform in a December 2014 report, including the following:

  • Wealthy New Yorkers in their golden years still have to contend with a confiscatory estate tax cliff that, at certain levels, will push the marginal New York estate tax rate far in excess of 100%.
  • There’s no New York State portability for the deceased spouse’s unused exclusion amount.
  • No separate state qualified terminable interest property (QTIP) election is available in the case of an estate that files a federal estate tax return solely to make a portability election.
  • No significant adjustment has been made to the three-year addback of post–Mar. 31, 2014 (and pre–Jan. 1, 2019) gifts of real or tangible personal property located in New York State, which effectively penalizes New York decedents for federal estate tax deduction purposes.

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What the New Law Does

The budget bill included the following minor technical amendments to the New York estate tax laws:

  • It removes a “lapse provision” that mistakenly would have caused no New York estate tax rates to apply to persons dying on or after Apr. 1, 2015.
  • It confirms that the three-year addback for gifts made by a New York resident between Apr. 1, 2014, and Dec. 31, 2018, does not apply to gifts of real or tangible personal property located outside of New York State.
  • It clarifies that, in the case of non–New York resident decedents, the New York taxable estate shall not include any deduction related to any intangible personal property.

What the New Law Fails to Do

Unfortunately, the budget bill’s amendments affecting the New York estate tax do little more than scratch the surface. The NYSSCPA submitted the following proposals to reform the tax in its aforementioned report:

  • A proposal to reform the New York estate tax by eliminating the “cliff” that applies to estates slightly above the estate tax exemption amount.
  • A proposal to reform the New York estate tax by permitting a separate state QTIP election when a federal estate tax return is being filed solely to make a portability election for federal estate tax purposes, or in any other situation in which the executor would not be subject to penalties under the Internal Revenue Code (IRC) for failure to file a federal estate tax return.
  • A proposal to reform the New York estate tax to prevent New Yorkers who make taxable gifts subject to addback to their New York gross estate under Tax Law section 954(a)(3) from being penalized for federal estate tax purposes, due to deduction limitations for state death taxes under IRC section 2058, by providing that the amount of any increase in New York estate tax attributable to the addback of New York taxable gifts shall be subject to a reduced tax rate and apportioning such additional New York estate tax against the residuary estate (unless the governing instrument provides otherwise) through an amendment to EPTL section 2-1.8.  (Another approach could be to amend EPTL section 13-1.3 to statutorily treat the New York estate tax attributable to the taxable gift addback as a debt allocable to the residuary estate, except as may be otherwise provided in the deed of gift, Will, or other governing instrument. This statutory treatment of the addback as a debt presumably should be respected for federal estate tax purposes. See Comm’r v. Estate of Bosch.)
  • A proposal to permit a portability election for New York estate tax purposes in order to conform to the portability election for federal estate tax purposes.

Unfortunately, none of the NYSSCPA’s proposals were enacted as part of the budget bill.

What Are the Next Steps?

Although the budget bill represents a temporary setback, it is hardly the end of the line.  Rather, this author would expect advocacy efforts in tandem with the New York State Bar Association and the New York City Bar Association to continue on the above-noted items over the following year. The issue that has drawn the greatest attention is the New York estate tax cliff, further described below. 

The New York estate tax law provisions that came into effect on Apr. 1, 2014, significantly increased the basic exclusion amount used to determine the estate’s filing threshold and the amount of the applicable credit (if any). The basic exclusion amount is as follows:

  • $2,062,500 for decedents dying between Apr. 1, 2014, and Mar. 31, 2015
  • $3,125,000 for decedents dying between Apr. 1, 2015, and Mar. 31, 2016
  • $4,187,500 for decedents dying between Apr. 1, 2016, and Mar. 31, 2017
  • $5,250,000 for decedents dying between Apr. 1, 2017, and Dec. 31, 2018
  • The federal basic exclusion amount for decedents dying on or after Jan. 1, 2019. 

In addition, a graduated tax rate table applies based on the New York taxable estate of the New York resident or nonresident decedent. The budget bill’s estate tax provisions confirm that, for persons dying on or after Apr. 1, 2015, the top marginal estate tax rate is 16%, and it applies to New York taxable estates in excess of $10.1 million.

The language of N.Y. Tax Law section 952(c)(1), however, creates an effective “cliff,” due to the rapid phase-out of the applicable credit amount for taxable estates that are only slightly in excess of the basic exclusion amount that is inconsistent with the policy objective of eliminating incentives for wealthy New Yorkers to move to another state to avoid the New York estate tax.

N.Y. Tax Law section 952(c)(1) provides an extremely steep slope that phases out the applicable credit amount for New York taxable estates that are between 100% and 105% of the basic exclusion amount, and it eliminates the basic exclusion amount altogether for the estate of any decedent whose New York taxable estate exceeds 105% of the basic exclusion amount. The effect of this cliff is demonstrated in guidance issued by the NYS Department of Taxation and Finance (DTF) on Aug. 25, 2014, in TSB-M-14(6)M.

TSB-M-14(6)M provides an example where an individual dies with a taxable estate of $2.1 million, which is $37,500 above the basic exclusion amount of $2,062,500 for persons dying between Apr. 1, 2014, through Mar. 31, 2015.  This produces a New York estate tax of $49,308, which computes to a marginal estate tax rate of more than 131% on the amount of the taxable estate in excess of the basic exclusion amount ($49,308 divided by $37,500 equals 1.3149, which rounds to more than 131%). This marginal estate tax rate gets even higher in subsequent years, due to the mathematics involved as the basic exclusion amount increases from year to year, traversing into higher marginal tax rates that would otherwise be soaked up by the applicable credit amount.

The cliff is completely contrary to the policy objective of making New York a more favorable environment for New Yorkers during their golden years, and it renders illusory any notion of estate tax reform for wealthy New Yorkers (who, paradoxically, are the ones most at risk from an estate tax standpoint to leave New York to move to a state such as Florida that does not impose a state estate tax). Accordingly, the cliff should be eliminated altogether by removing both the phase out and the elimination of the applicable credit amount.   

Alternatively, if New York’s need for revenue is such that the complete elimination of the cliff is not practical, then the cliff should at minimum be “smoothed out” by “extending the runway” over which the phase out of the applicable credit amount occurs—say, from 100% to 150% of the basic exclusion amount, instead of between 100% and 105% of the basic exclusion amount, as the law currently provides. A proposal to slightly extend the phase-out runway from 100% to 110% of the basic exclusion amount was contained within the Senate’s “one-house proposal” on the 2015–2016 New York State fiscal year budget, but this provision was not enacted into law. It does, however, demonstrate some legislative sensitivity to this issue (at least in the Senate), and will hopefully serve as a prelude to corrective action in the near future.


Kevin Matz, JD, LLM, CPAKevin Matz, Esq., CPA, LLM, is the managing attorney of the law firm of Kevin Matz & Associates PLLC, with offices in New York City and White Plains, N.Y. His practice is devoted principally to domestic and international estate and tax planning. Mr. Matz is also a CPA (in which connection he is the chairman of the NYSSCPA Estate Planning Committee and a member of the NYSSCPA Board of Directors), and he writes and lectures frequently on estate and tax planning topics. He can be reached at kmatz@kmatzlaw.com or 914-682-6884.            

 
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