Trusts And Estates Planning Opportunities Arising From Recent Changes To The New York Estate Tax And Trust Income Tax Regimes

On April 1, 2014, the New York state 2014-2015 budget (the "Budget") became effective. The Budget includes legislation (the "Budget Legislation") that makes several significant changes to New York's estate tax regime and to the income tax treatment of trusts created by New York residents that were exempt from tax under prior legislation ("exempt resident trusts") and incomplete gift nongrantor trusts (INGs) created by New York residents.

Under the Budget Legislation, New York imposes a tax on a decedent's entire taxable estate and allows a credit (the "Applicable Credit Amount") against that tax. The Applicable Credit Amount depends upon the size of the decedent's taxable estate and the date of death. If the taxable estate does not exceed a certain threshold (the "State Basic Exclusion Amount"), the Applicable Credit Amount will equal the tax, thus resulting in no tax due. If the taxable estate exceeds the State Basic Exclusion Amount, the Applicable Credit Amount phases out very quickly, with the effect that if the taxable estate exceeds the State Basic Exclusion Amount by more than 5%, no credit is allowed. The Budget Legislation sets the State Basic Exclusion Amount at $2,062,500 for estates of decedents dying on or after April 1, 2014. Over the next four years and nine months, the State Basic Exclusion Amount will increase to equal, approximately, the federal applicable exclusion amount from estate tax, as indexed for inflation (the "Federal Applicable Exclusion Amount"), by January 1, 2019.

The Budget Legislation makes several other notable changes, such as: (1) providing for certain gifts made by a New York resident between April 1, 2014 and January 1, 2019, and also within three years of death, to be included in the decedent's New York gross estate; (2) repealing the New York state generation-skipping transfer (GST) tax; (3) subjecting the accumulated income of exempt resident trusts to a so-called "throwback" tax once distributed to a New York resident beneficiary; and (4) including the current net income of an ING created by a New York resident in its grantor's New York state income tax.

The Trusts and Estates Practice at Katten Muchin Rosenman LLP is pleased to provide you with a summary of the Budget Legislation, along with related planning recommendations to consider immediately.

Estate Tax Changes

As explained more fully below, the ultimate effect of the Budget Legislation with respect to the estate tax, once it is fully implemented in 2019, is to provide that New Yorkers with estates that do not exceed the Federal Applicable Exclusion Amount will pay no New York estate tax. Estates over $1 million (the state exemption amount under prior legislation) and less than or equal to the Federal Applicable Exclusion Amount will avoid paying any New York estate tax, whereas they would have been required to pay New York estate tax under prior legislation. In contrast, estates under $1 million and larger estates that exceed 105% of the Federal Applicable Exclusion Amount will receive no benefit and no penalty from the Budget Legislation.

Phased Increase to the State Basic Exclusion Amount and the Phase Out of the Applicable Credit Amount

Beginning with the estates of decedents dying on or after April 1, 2014, the State Basic Exclusion Amount will gradually increase over the span of four years and nine months to equal the Federal Applicable Exclusion...