New York is one of only fourteen states that tax estates. That means in addition to the federal estate tax, a New York estate could be paying another 9% – 16% to Albany – a fact that some believe is leading to a migration from New York to other states. Governor Andrew Cuomo’s new budget proposes several major changes to New York’s estate tax.
First some background: The federal estate tax applies to people who have an estate of $5.34 million or more, and they typically pay a rate of 40%. So the federal system has a big exemption, but a high tax rate. New York’s system affects many more taxpayers because the personal exemption of $1 million is so much lower, notwithstanding the lower 9% – 16% rate.
When Governor Cuomo highlighted this issue at his recent press conference, he made a series of proposals to bring the New York system more in line with the federal system.
The first is to raise the exemption amount from $1 million to match the federal exemption (currently $5.34 million). This change would be phased in over four years, so it’s difficult to extrapolate what the amount would be (because the federal rate is going to be indexed upward in the meantime). Thereafter, the NYS exemption would be indexed to track the federal exemption.
The second is a change in the tax rate. The current NYS rate progresses from 9-16%; Governor Cuomo’s proposal is a flat 10%. Because the NYS estate tax is deductible for purposes of computing the federal estate tax, the effective tax rate is more like 6% (although, note that actual computation is extremely technical!).
The third is to reinstate the gift tax. The federal system imposes tax both on gifts people make during their lifetime and on their estates. These complementary provisions prevent people from making “deathbed gifts” to empty out their estates (the so-called “unified estate and gift tax”). For many years, New York has had no gift tax, which created a big planning opportunity: by making gifts during one’s lifetime, wealth could be transferred without being exposed to NYS estate tax. Mechanics of the NYS gift tax proposal are still being negotiated.
Effective date. The governor has proposed to make these changes effective as of April 1. We don’t yet know the exact date the budget will pass, but taxpayers are urged to weigh the strong possibility of an April 1 effective date. People planning to make gifts to avoid the coming New York State gift tax should use March 31 as a working deadline in order to be exceptionally prudent.