New York To Drastically Change 'Gift Tax' Rule

John Dadakis is a Partner in the New York office

HIGHLIGHTS:

Currently, there is no gift tax in New York, and although the amount of lifetime taxable gifts made by a New Yorker may cause the estate tax rate to increase, there is no additional estate tax paid on those gifts. New York individuals who have significant estates should consider making taxable gifts before April 1, 2014 - especially if the individual has not used up the federal exclusion amount. Gov. Cuomo has proposed a change to New York's estate and gift tax law that will require all taxable gifts made by a New York resident after March 31, 2014, to be included as part of the gross estate for purposes of calculating the New York estate tax.

Avoid Paying Estate Tax by Making Taxable Gifts Before April 1, 2014

Currently, there is no gift tax in New York, and although the amount of lifetime taxable gifts made by a New Yorker may cause the estate tax rate to increase, there is no additional estate tax due on those gifts. While not changing the gift tax, the net effect of this proposed change would be to cause New Yorkers who make taxable gifts after March 31, 2014, to pay more tax by requiring estate tax to be paid on those gifts.

In essence, when all of the New York rate adjustments are made, the new provision will cause any taxable gift made by a New York resident after March 31, 2014, to incur an additional net estate tax of anywhere from 6.5 percent to 12 percent, if the New York gross estate, including taxable gifts, exceeds the New York exclusion amount (the actual net rate is impacted by the amount of the New York exclusion amount and the federal exclusion amount). The governor's proposal also gradually increases the New York estate tax exclusion amount over the next five years from $1.0 million to $5.25 million, with CPI adjustments thereafter, while lowering the top rate from 16 percent to 10 percent.

New York individuals who have significant estates should consider making taxable gifts before April 1, 2014 - especially if the individual has not used up the federal exclusion amount.

The following is an example of the potential savings by making taxable gifts before April 1, 2014.

A New York resident has a taxable estate valued at $15.34 million. (For this purpose, no deductions other than the deduction for state estate taxes are being considered). If, before April 1, 2014, she makes a gift of the full federal estate tax exclusion ($5,340,000) and dies in 2014 after that...