New York state budget could overhaul existing estate tax rules

Advisers urge clients to think carefully before reacting to Gov. Cuomo's latest proposal

Mar 19, 2014 @ 2:38 pm

By Darla Mercado

When it comes to estate taxes in the Empire State, New York Gov. Andrew M. Cuomo both giveth and taketh away.

Legislators in New York this week are negotiating over Mr. Cuomo's proposed $140 billion budget for the 2014-15 fiscal year, which begins on April 1. After turning a $10 billion deficit into a projected $2 billion surplus over the last three years, the governor is up for re-election this year and has proposed an ambitious budget that will include tax cuts, as well as additional investments in education and health care.

One interesting provision stands out to estate tax experts in New York: Mr. Cuomo wants to raise the exclusion threshold of the state estate tax to $5.25 million from its current level of $1 million over four years. He's aiming to have the state estate tax exemption conform with the current federal exemption — which is at $5.34 million for 2014 — beginning in 2019. Mr. Cuomo also wants to reduce the top rate from 16% to 10% over four years.

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At the same time, these steps will be paired up with proposals that would require the value of gifts to be added back into the estate once the donor is deceased.

New York tax experts are finding the moves contradictory and upsetting on a number of levels.

“What they're trying to do is get us more in line with the federal exemption,” said Ronni G. Davidowitz, a partner at Katten Muchin Rosenman and head of the firm's New York trusts and estates practice. “So are they trying to get something through the back door, too?”

“It's wrought with practical problems, and it runs counter to the governor's twofold objective of making New York an attractive state and not raising taxes,” she added.

Even more pressing is the fact that the Empire State's fiscal year is supposed to end on March 31. This raises concerns that if the proposal were to pass as-is with this provision, then New Yorkers would only have until April 1 — the start of the state's fiscal year — to make gifts and have them kept out of their estate for state tax purposes.

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“This is closing the loophole right now where you can reduce New York state estate taxes by making lifetime gifts,” noted Barry C. Picker, an accountant with Picker & Auerbach CPAs PC.

New York estate experts note that while there are only 12 days left until the end of March, the provision is more of an item that warrants caution rather than action.

“The advice is to keep an eye out for people who might be thinking of gifting,” said Kate Cassidy, an advanced markets specialist with Barnum Financial Group's wealth strategies division. “I would put thought into it: Building a trust that can receive the gift. This is a large gift you'd make all at once, an asset that you can give away without feeling the pinch.”

She noted, however, such plans need to be hashed out early.

Anecdotally, Mr. Picker and Ms. Davidowitz said they observed some experts suggest that wealthier clients in New York make their gifts before April 1 to get them out of their estate. Both of them said this was more of a discussion item for clients rather than an urgent matter that would require them to act. Bear in mind that this is still a proposed budget and it's up for debate.

“Who knows what shape or form [the budget] will take and whether this will have legs,” said Ms. Davidowitz. “I don't see the rush to judgment on this one.”

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