Cuomo’s Proposed Budget Eliminates Lifetime Gifts Exclusion from NY Estate Tax, Changes Income Taxation of Certain Trusts

The current New York State Budget Bill A8559 which is likely to pass next month contains several proposals impacting New York State estate tax as well as income taxation of certain trusts which are briefly summarized below:

Inclusion of lifetime gifts in decedent’s taxable estate

Currently, properly structured lifetime gifts are not included in the taxable estate of a New York resident decedent.  Under the proposed Bill, any gifts made after March 31, 2014 will be included in the taxable estate for New York State purposes.  Therefore, New York residents who would like to avoid this outcome should consider making complete gifts by April 1, 2014.  It is important to remember the gift recipient’s (donee) tax basis is the same as the tax basis of the person making the gift (donor).  Therefore, in case of the gift of low basis property, the donor should also consider income tax implications to the donee of potential sale of the gifted property and compare them to the potential estate tax savings.

Other proposals impacting New York State estate tax law

  • The New York estate inclusion amount will be increased over the four year period from the current $1,000,000 to $5,250,000, which will be indexed for inflation.
  • The top tax rates will decrease from 16% to 10% by 2017.
  • The New York generation skipping transfer tax will be repealed.

Proposals affecting income taxation of certain trusts

Currently, New York non-resident trust is exempt from New York income tax other than on New York source income.  Similarly, certain New York resident trusts, which have no New York property, no New York trustees and no New York source income, are also exempt from the New York income tax.  The proposed legislation would result in income taxation of distributions of accumulated income to the New York resident beneficiaries of non-resident and exempt trusts made after May 31, 2014.  Income earned before 2011 or in the years before the beneficiary became New York resident would be exempt.
Also, the Bill proposes to tax trusts that were formed as incomplete non-grantor trusts in states like Delaware and Nevada (commonly called DINGs and NINGs).  Even though the trusts would remain separate taxpayers for federal income tax purposes, New York will treat them as grantor trusts for New York State tax purposes and thus include the trusts’ income on New York resident grantors’ personal income tax returns.   The new rules would not apply if the trusts terminated before June 1, 2014.

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