New York Estate and Gift Tax Reform

From Personal Estate Planning

October 1997

On August 7, 1997, Governor Pataki signed into law significant estate and gift tax reform legislation. Prior to the new law, New York imposed estate and gift tax on transfers in excess of $115,000 with a maximum rate of 21%. By contrast, federal law imposes estate and gift tax on transfers in excess of $600,000 (the amount sheltered by the unified credit).

The new law increases New York's unified credit over the next 2 1/2 years to phase in the repeal of New York's gift tax and the reduction of New York's estate tax to the amount allowed as a credit against the federal estate tax. For gift tax purposes, New York State's unified credit (amount which can be given without incurring a gift tax) will be increased to $300,000 for gifts made on or after January 1, 1999 and will be repealed for gifts made on or after January 1, 2000. Individuals contemplating significant gifts in the near future may wish to monitor the phase-out of the gift tax to see if they can wait until either or both of those dates.

For estate tax purposes under the new law, New York State's unified credit (amount which can pass free of estate tax at death) will increase to $300,000 in the case of persons dying on or after October 1, 1998. The estate tax will be repealed in the case of persons dying on or after February 1, 2000 and replaced with a tax equal to the amount allowed as the state death tax credit on the federal estate tax return ("sop tax"). As a result, the combined federal and New York estate tax will equal the amount that the federal estate tax would have been if there had been no New York estate tax.

Once the new law is fully implemented, New York’s estate tax will compare favorably with that of other states. For example, New York's estate tax will then be the same as Florida's.

New Jersey's death taxes are limited to a "sop tax" where property is transferred to a spouse or descendants. Transfers to any other persons are taxed at incremental rates.

The Connecticut Succession Tax, currently imposed on bequests to persons other than a spouse, will be phased out over the next few years and completely eliminated (i) by January 1, 2001 for bequests to lineal descendants and ancestors, (ii) by January 1, 2003 for bequests to siblings and their descendants, stepchildren and spouses of children, and (iii) by January 1, 2005 for bequests to all other beneficiaries. Connecticut will continue to impose a "sop tax," reduced by any Succession Tax imposed.

In the case of a married couple living in New York whose Wills provide for the creation of a credit shelter trust and the balance outright or in a marital trust for the surviving spouse, the credit shelter clauses in their Wills may need to be revised in light of the new law. With a properly drafted credit shelter clause, there will be no federal or state estate tax imposed on the death of the first spouse to die under the above plan if such spouse dies on or after February 1, 2000. A credit shelter clause which is not revised will cause the imposition of New York estate tax in the amount of $15,696.97 on the death of the first spouse.

New York Individual Income Taxes

The individual income tax rate for New York City residents will be decreased by 10% over the next four years. Individual tax rates for other New York State residents will decline in accordance with the previously scheduled decreases.

Recent Case Law Affects Taxpayers Who Itemize Deductions Taxpayers who itemize deductions on their federal income tax returns are required to reduce their federal itemized deductions (including the deduction for New York State income taxes paid) if their income exceeds a certain threshold ($121,200 in 1997). Such taxpayers are also required to add back their state and city income tax deduction when calculating their New York State income tax. New York State has taken the position in its regulations that the full amount of the state and city income tax paid must be added back, even though the full amount was not allowed as a deduction on the federal tax return. This result was not fair to taxpayers because they were effectively adding back deductions that were not claimed on their federal tax return.

The New York Tax Appeals Tribunal recently determined that the state regulation was invalid and that the law requires that taxpayers add back only the amount of the state tax actually deducted on the federal income tax return. The invalidation of the regulation should permit taxpayers to file amended New York State tax returns to claim a greater deduction and a tax refund. In general, amended returns can now be filed for 1994, 1995 and 1996. You should ask your tax preparer if you should file refund claims.

Real Property Tax

Under a new exemption from local school district assessments, senior citizens will be granted a $50,000 exemption and other homeowners will be granted a $30,000 exemption. The exemption will cause the assessed value of the home to decrease resulting in a decrease in real estate taxes. The exemption will be implemented in 1998 and will be fully phased in by 2002.

Federal Estate Tax and Other Changes

On July 29, 1997, the White House and congressional leaders reached an agreement on a net tax cut package totaling $95 billion over a five-year period. It was the first major tax cut in 16 years. The Taxpayer Relief Act of 1997 contained some much-awaited changes including:

1. Increase in the Estate and Gift Tax Unified Credit. The credit shelter amount, that amount that an individual can pass free from estate and gift tax, is increased gradually from $600,00 to $1,000,000 over time. The increase takes effect in accordance with the following time-table:

2. Estate Tax Exclusion for Certain Family-Owned Businesses. The law also includes a new exclusion of up to $1,300,000 (less the then applicable unified credit amount) of a qualified family-owned business interest. The change will apply to estates of decedents dying after December 31, 1997.

For more information on how the estate and gift tax reform may affect you, , please contact Paul J. Powers, Jr. or Kirk H. O'Ferrall at our New York office.