TAX LAW UPDATE - 159 MERRIE JEANNE WEBEL, ESQ. 315 Madison Avenue, Ste. 901 New York, New York 10017 - New York State Bar Association
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TAX LAW UPDATE
MERRIE JEANNE WEBEL, ESQ.
315 Madison Avenue, Ste. 901
New York, New York 10017
(212) 886‐9030 – direct
159160
NYSBA Probate and Administration of Estate
Fall 2016 Tax Law Update
Table of Contents
I. FEDERAL ESTATE and GIFT TAXATION: A Short Review of Pertinent Changes .................. 2
A. The Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”)........................... 2
1. State Death Tax Credit Replaced with State Death Tax Deduction under “EGTRRA” ................. 3
B. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the
“2010 Tax Act”) ................................................................................................................................ 3
1. Estate Tax .................................................................................................................................... 4
2. Gift Tax......................................................................................................................................... 4
3. GST Tax ........................................................................................................................................ 4
C. 2010 and the Introduction of Portability .................................................................................. 4
1. How to Make the Federal Portability Election ............................................................................ 5
2. Opting Out of Portability ............................................................................................................. 6
3. The Last Deceased Spouse........................................................................................................... 6
4. Why bother with Estate Planning? .............................................................................................. 8
D. The American Taxpayer Relief Act of 2012 ............................................................................... 8
II. NEW YORK ESTATE AND GIFT TAX REVIEW ...................................................................... 9
A. The “Sop” Tax .......................................................................................................................... 9
B. New York’s 2014 Estate Tax Reform ....................................................................................... 10
1. Resident v. Non‐Resident .......................................................................................................... 11
2. Inclusion of New York Resident and Non‐Resident Taxable Estate Assets ............................... 12
C. Gifts ...................................................................................................................................... 14
D. GST Tax.................................................................................................................................. 14
E. Trust Income Tax and the New “Throw‐back” Tax .................................................................. 15
F. ING Trusts .............................................................................................................................. 15
G. Valuation ............................................................................................................................... 15
H. QTIP Elections and Portability ................................................................................................ 15
I. Planning for Portability and the QTIP Election........................................................................ 16
J. New York Estate Tax Rates .................................................................................................... 17
K. The New York Estate Tax “CLIFF” ........................................................................................... 17
III. APPENDIX .................................................................................................................. 20
A. Form 706: Federal Estate Tax Return..................................................................................... 20
B. Form 709: Federal Gift Tax Return ........................................................................................ 20
C. Form E.T. 706: New York State Estate Tax Return .................................................................. 20
D. Form E.T. 141: New York State Domicile Affidavit ................................................................. 20
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NYSBA TRUST & ESTATE SECTION: PROBATE and
ADMINISTRATION of ESTATES
FALL 2016 TAX LAW UPDATE
The following materials are not intended to be a complete analysis of Federal and New York
estate taxation; to do that would be encyclopedic and beyond the scope of this presentation. The
purpose of this writing is to consolidate and review, comprehensively, the history of gift and
estate tax law and how it has influenced New York and federal estate planning since the
introduction of the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”).
EGTRRA has dramatically increased the amount of assets Americans can pass on as gifts and at
death tax free. This, in turn, has changed our techniques and tools for estate planning and
administrative choices.
I. FEDERAL ESTATE and GIFT TAXATION: A Short Review of
Pertinent Changes
a)
B. The Economic Growth and Tax Relief Reconciliation Act of 2001
(“EGTRRA”)
As attorneys we continue to practice in the era of the Bush tax reforms. From 2001 to present
EGTRRA has controlled or affected the way we plan an estate and advise on family succession
matters. On June 6, 2001 President George W. Bush signed into law Public Law 107-16, or The
Economic Growth and Tax Relief Reconciliation Act of 2001, better known as “EGTRRA.”
One of the most important provisions of EGTRRA was Section 501. Section 501’s main goal
was the phase-out and eventual repeal in 2010 of the estate and generation-skipping transfer
taxes and the increase in the gift tax exemption to $1 million with carryover basis.1 In addition,
EGTRRA added several sections to the Internal Revenue Code, some which have been repealed
and others still in effect today, e.g., IRC § 2056(A)(b)(1)(A) which deals with the tax on any post
December 31, 2009 distribution made from a qualified domestic trust (“QDOT”) to a non-citizen
spouse before January 1, 2021.2
EGTRRA contained a “sunset” provision, effective December 31, 2010, applicable to the estate,
gift and generation-skipping transfer tax changes it enacted in 2001. The “sunset” provision was
compelled by the Congressional Budget Acts of 1974 and 1990. The Budget Acts require a vote
1
“EGTRRA” or the “Tax Act of 2001,” §§501(a), 501(b).
2
IRC § 2056.
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of 60 senators to make permanent a bill that would decrease annual government revenues for
more than ten years. Thus, on January 1, 2011 the law in effect before June 7, 2001 was
scheduled to be revived.3 Most importantly, this meant that the Federal applicable exclusion
amount would have returned to $1,000,000 along with the maximum tax rate of 55% for both gift
and estate tax, the 5% surtax on taxable estates between $10,000,000 and $17,184,000 would
have been restored, and the GST tax rate of 55% with a $1,000,000 exemption would return.
Other tax changes would be restored and repealed, including the date of death basis rules being
restored (the carryover basis therefore being repealed), several changes to the GST tax provisions
would be repealed, and the state death tax credit would be restored.4
1. State Death Tax Credit Replaced with State Death Tax Deduction under
“EGTRRA”
EGTRRA phased out the state death tax credit between 2001 and 2005 and replaced it with an
unlimited state death tax deduction for decedents dying after December 31, 2004.5 This had the
gravest effect upon the Sop tax states, of which New York was one. If the credit was claimed
properly by the states, it was refunded by the federal government and acted almost like a subsidy.
This federal subsidy to the states was now gone.
Equally to the individual, a credit is better than a deduction. Although an unlimited death tax
deduction seems advantageous, it may increase the amount of death taxes an individual will pay.
Remember a credit is taken above the line while a deduction is taken below the line. Deductions
depend on a taxpayer’s income tax rate and their tax liability before applying the deduction.
Deductions cannot reduce taxable income below zero. A tax credit, on the other hand, is a dollar
to dollar credit and has the same value to all taxpayers. A taxpayer must, however, have a
liability equal to the credit to take complete advantage of it.
C. The Tax Relief, Unemployment Insurance Reauthorization, and Job
Creation Act of 2010 (the “2010 Tax Act”)
On December 17, 2010 President Obama signed into law the 2010 Tax Act passed by Congress
just one day earlier. The essence of the 2010 Tax Act was to extend the tax laws of EGTRRA
through 2012 creating a new “sunset” or expiration date of December 31, 2012. Thereafter, the
estate, gift and GST taxes would revert back to the June 6, 2001 rates on January 1, 2013.
3 HOWARD M. ZARITSKY, PRACTICAL ESTATE PLANNING AND DRAFTING AFTER THE ECONOMIC GROWTH AND
TAX RELIEF RECONCILIATION ACT OF 2001, ¶1.10 (2001).
4
Sanford J. Schlesinger and Martin R. Goodman, Estate Planning Update 1-85, 25 (Feb. 2013), Course materials,
NYSBA Probate and the Administration of Estates (2014).
5
ZARITSKY, supra note 3, ¶ 1.04.
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1. Estate Tax
What the 2010 Tax Act did for estate and gift tax matters was reinstate the 2009 applicable
exclusion amount of $3.5 million for estate taxes along with the maximum estate tax rate of 45%.
(EGTRRA provided for no estate tax in 2010 with the value of the estate determined by
employing a modified carryover basis as opposed to an income tax cost basis equivalent to the
federal estate tax valuation, better known as a “step-up” in basis.) For decedents whose death
occurred between 2010 and 2012, the 2010 Act increased the applicable exclusion amount for
estates to five million ($5,000,000). The $5 million applicable exclusion amount was indexed
for inflation from 2010, but did not reflect the indexed amount until 2012.6 The maximum estate
tax rate was adjusted down to 35%.7 An income tax cost basis equal to the federal estate tax
value was available for decedents dying in 2010. Executors had the option of choosing between
no estate tax and the modified carryover basis or the $5 million applicable exclusion amount and
the income tax cost basis equivalent to the federal estate tax value. The 2010 Act also restored
the lesser federal estate tax deduction instead of the credit for state death taxes paid by the estate.
2. Gift Tax
In 2010 and beforehand, the gift tax exemption was $1 million with a maximum gift tax rate of
35%. The 2010 Act increased the gift tax exemption to $5 million for gifts made after 2010,
creating a unified gift and estate tax exemption or applicable exclusion amount.
3. GST Tax
No generation-skipping transfer tax (“GST” tax) was imposed in 2010. The 2010 Tax Act
created a $5 million GST tax with a maximum tax rate of 35% for transfers occurring after 2010.
As with the gift tax, the GST tax was indexed for inflation beginning in 2010, but applied in
2012. The $5 million exemption was available to all estates of decedents dying in 2010
regardless if they elected no estate tax and a modified carryover basis for valuation or the $5
million federal gift tax exemption and the income tax cost basis.8
D. 2010 and the Introduction of Portability
Portability was originally introduced as a temporary provision of the 2010 Tax Act for married
couples. Portability, or Post-Mortem estate planning, provides the benefits of taxable estate
6
I.R.C. § 2010(c).
7
I.R.C. § 2001(c).
8
I.R.C. § 2631.
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planning, i.e., full use of both spouses’ applicable exclusion amounts, without going through the
time and expense of doing the planning. Sounds great!...but, it is limiting in its application to
achieve various planning goals and is not given automatically. Portability must be properly
elected by the estate’s Executor on the federal estate tax return, Form 706, or it is lost.
Portability only applies to U.S. citizens. If the surviving spouse is a non-U.S. citizen, then a
qualified domestic trust (“QDOT”) must be used to take advantage of the decedent spouse’s
applicable exclusion amount.
Portability is defined as the deceased spouse’s unused exclusion (“DSUE”) amount, or the
remaining amount of the deceased spouse’s applicable exclusion amount not claimed on the
Form 706.9 The DSUE is calculated by subtracting any lifetime taxable gifts and taxable estate
from the applicable exclusion amount available in the deceased spouse’s year of death. The
remaining amount of the deceased spouse’s applicable exclusion amount is elected on the Form
706 by the surviving spouse and is carried over and combined with the surviving spouse’s
applicable exclusion amount for use by the surviving spouse.10
For example, Wife dies in 2016 with an applicable exclusion amount of $5,450,000. Her estate
claims $3,000,000 of her applicable exclusion amount which is added to $400,000 of taxable
gifts she made over her lifetime. Thus, the wife has used a total of $3,400,000 of her applicable
exclusion amount, with a remainder of $2,050,000 still available after her death. The deceased
spouse’s Executor elects portability on the estate tax return. The wife’s DSUE, or $2,050,000, is
combined with the surviving husband’s applicable exclusion amount, or $5,450,000, so the
surviving husband will then have a total applicable exclusion amount of $7,500,000. If the
surviving spouse remarries, he may use the DSUE of his deceased spouse for gifts provided the
second spouse remains alive. If the second spouse also predeceases him, the first deceased
spouse’s DSUE is lost. Only the DSUE of the last deceased spouse may be used when there are
multiple marriages.
1. How to Make the Federal Portability Election
The Code provides that the portability election must be made on Form 706 and filed within the
time prescribed by law.11 The time prescribed by law is nine months from the decedent’s date
of death, with an extension of six months if properly applied for.12 Additional extensions may be
obtained from the Service for cause.
Non-taxable estates, i.e., estates where both the gross estate and the adjusted taxable gifts do not
equal the applicable exclusion amount, may also make the federal portability election to preserve
9
I.R.C. § 2010(c)(2)(A).
10
I.R.C. § 2010(c)(2)(B). See also Louis P. Karol, What Matrimonial Attorneys Need to Know About the
Portability Rules for Estate and Gift Taxes and Pre-Nuptial and Post-Nuptial Agreements (2013), Course materials,
NYSBA Probate and the Administration of Estates (2014).
11
I.R.C. § 2010(c)(5)(A).
12
I.R.C. § 6075.
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the deceased spouse’s applicable exemption amount for the surviving spouse.13 This is achieved
by properly filing a Form 706 within the time prescribed by law.14 Estates which file a Form 706
exclusively for electing portability have fewer reporting requirements.
2. Opting Out of Portability
An executor can opt out of portability by either stating so on the Form 706 or by not filing a
Form 706 on a timely basis. After the due date for filing the Form 706 has passed, including
extensions from the IRS, the election is irrevocable. If an executor has timely opted out of
portability, but then changes his/her mind, the Executor can file an additional Form 706 as long
as it is within the prescribed time limits.15
3. The Last Deceased Spouse
It may seem odd to address this, but it is necessary to define who the last deceased spouse is.
The Code defines the last deceased spouse as the last spouse to predecease the surviving spouse.
Portability only applies to the last deceased spouse of U.S. citizens, it does not apply to spouses
in the aggregate, such that a serial bride or groom cannot collect DSUE amounts.
Example 1: H dies in 2014 with a lifetime gift and estate applicable exclusion amount of
$5,340,000. H did not make any gifts nor did he have a taxable estate. W elects portability on
the estate tax return and the entire DSUE is transferred to W to use in addition to her own
applicable exclusion amount. W now has assets totaling close to $11,000,000. W gifts
$5,000,000 to their children from H’s DSUE. W dies in 2016 with her own applicable
exemption amount of $5,450,000 and H’s remaining $340,000 DSUE. All assets are transferred
out of W’s estate both gift and estate tax free ($5,000,000 in gifts to children from H’s DSUE,
remainder of $5,790,000 passing at death - $5,450,000 allocated to W’s applicable exemption
amount and the remaining $340,000 from H’s DSUE as he was her last surviving spouse). H and
W have successfully transferred $10,790,000 transfer tax free to their children.
Example 2: Same facts as above, but Wife does not make a gift of $5,000,000 to her children
from H1’s DSUE nor does she consult her estate planning attorney. Instead, she consults her
son, the jeweler, he tells her that “the new $5million plus that goes up every year,” i.e., the
increased applicable exemption amounts that took effect in 2011, plus this new “no estate
planning” option called portability has her covered. Wife gifts $1,340,000 to her children after
her Husband’s (“H1”) death in 2014. In 2015, Wife remarries. Husband 2 (H2) is also a
widower worth approximately the same as Wife. H2 gifted $5,000,000 after his wife’s death in
2014 to his children using his deceased wife’s DSUE. Upon hearing this, Wife decides to gift
13
Treas. Reg. § 20.2010-1(T),(2).
14
I.R.C. § 6018.
15
Portability of a Deceased Spousal Unused Exclusion Amount, 80 FR 34279 (2015).
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her children an additional $1,000,000 using H1’s DSUE. After almost a year of marriage, H2
passes away the day after Thanksgiving 2015. H2 left $5,430,000, or the equivalent of his own
applicable exclusion amount to his children and does not owe any estate tax. Because H2 left
everything to his children, there was no remaining DSUE available for Wife to elect under the
rules of portability. For the new year, 2016, Wife gifts her children $3,450,000 from H1’s
DSUE, for a total gift to her children of $5,790,000. Wife dies in 2016 with an estate of
$5,500,000 which she leaves to her children. The applicable exclusion amount for 2016 is
$5,450,000. Wife’s estate names both Son and Daughter as co-Executors, but only Son actively
administers the estate. Co-Executor Son does not file a Form 706 nor pay any taxes. Co-
Executor Son claims his mother’s estate was under the applicable exclusion amount of
$5,450,000 after paying her final expenses, his father’s DSUE was used for the remaining gift to
him and his sister, and his step-father did not have a taxable estate because he did not have any
estate taxes due, so his mother inherited H2’s applicable exemption amount. According to the
son, there was only an overage of $50,000 in cash in his mother’s estate that wasn’t covered, so
he didn’t feel the estate needed to report it. He could easily hide that amount and avoid having to
pay any transfer taxes.
W’s daughter sues her co-Executor brother for non-payment of taxes due the IRS on their
mother’s estate, plus penalties and interest, after receiving a deficiency letter from the Service.
What went wrong?
W properly claimed H1’s DSUE of $5,340,000 in 2014, using a portion of it in 2014 as a
$1,340,000 gift to her children and then again in 2015 as a gift of $1,000,000. It did not matter
that she remarried. Wife was allowed to continue to use H1’s remaining DSUE because H2 was
still alive. The moment H2 dies in 2015, Hs becomes W’s last surviving spouse and she loses
the remainder of H1’s DSUE, or $3,000,000 for gifting.
H2 did proper estate planning and transferred $10,430,000 to his children estate and gift tax free,
but in doing so he used up his entire applicable exemption amount at death. Once an applicable
exemption amount is gone, it cannot be used again by a surviving spouse, nor can a surviving
spouse revive a previous deceased spouse’s applicable exemption amount who was not her last
surviving spouse.
Upon W’s death, her executor’s calculations were wrong. Although the value of her estate at
death was $5,500,000 and her exemption amount was $5,450,000, leaving only $50,000 as
taxable, the son did not take into account the additional $3,450,000 in taxable gifts. The 2014
and 2015 gifts were both covered under H1’s DSUE, so they passed gift tax free. The 2016 gift
of $3,450,000 was not covered by H1’s remaining DSUE because H2 was already dead.
Additionally, the applicable exemption amount is not indexed for inflation, it attaches at death,
e.g., H died in 2014 with an exemption amount of $5,340,000. Because the exemption amount
increases by $110,000 in 2016 to $5,450,000, it does not give the surviving spouse the current
amount to gift on behalf of the deceased spouse. The 2016 gift of $3,450,000 (this is in
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additional to annual gifts) must be covered by W’s applicable exemption amount, leaving her
with only $2,000,000 to be applied at death. W dies with a $3,500,000 taxable estate.
It is also noteworthy to mention that the portability regulations provide for examination by the
Service of any DSUE amount claimed by a surviving spouse to be part of his or her applicable
exclusion amount. The examination of the deceased spouse’s gift tax return, Form 709, is
limited to the surviving spouse’s statute of limitation period, not that of the deceased spouse.
4. Why bother with Estate Planning?
As mentioned earlier when we began this discussion on portability, many people (excluding the
super wealthy) think they no longer need to do estate planning because their taxable issues are
covered. Many couples who are in the $10,000,000 to $11,000,000 range believe they
understand the rules of portability well enough so they no longer need to go through the expense,
time and soul searching of working through an estate plan now that everything can pass transfer
tax free. Portability does not apply to GST tax, and more importantly, it is not allowed in New
York state.
For some transfer tax purposes credit shelter trusts may not be necessary, but they should still be
a first line of defense in planning for tax issues in the future and to achieve non-tax family
objectives. The following examples illustrate just some of the benefits of the continued use of
credit shelter trusts:
Estate tax freezes. Property placed in a credit shelter trust at the first spouse’s death will
pass estate tax free when the surviving spouse dies. A credit shelter trust can be an
important vehicle in transferring highly appreciable assets.
Dynasty trusts. Adding onto the estate tax freezing concept, grandparents can each use
their GST tax exemption to benefit grandchildren, great-grandchildren, etc.
Protecting a spouse from themselves. Some spouses are not financially savvy and cannot
deal with having access to large sums of money, particularly all at once.
An elderly spouse’s mental state may change, developing dementia or Alzheimer’s
disease.
Protecting children from a previous marriage.
Protecting the client’s final wishes.
E. The American Taxpayer Relief Act of 2012
The American Taxpayer Relief Act of 2012 (the “2012 Tax Act”) was signed into law on
January 2, 2013 bringing permanence to more than a decade of planning ambiguities. The period
of “sunset provisions” was over. The 2012 Act retained many of the provisions of both
EGTRRA and the 2010 Tax Act reforming the estate, gift and generation skipping transfer tax
laws. The $5 million applicable exemption amount (adjusted for inflation from 2010) for estate,
gift and GST tax purposes was retained and the joint maximum tax rate was increased from 35%
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to 40%. The inflation adjusted exemption amount for 2016 is $5,450,000 per person and is
projected to rise to $5,900,000 by 2019. The 2012 act also continues the “portability” provisions
allowing the surviving spouse to carry-over the unused portion of their last deceased spouse’s
gift and estate tax exemption if properly elected on the deceased spouse’s estate tax return, Form
706. Portability cannot be applied to the GST tax.
II. NEW YORK ESTATE AND GIFT TAX REVIEW
The State of New York began taxing for inheritance transfers as early as 1885. The New York
Inheritance Tax was superseded by a New York Estate Tax in 1930. In 1963, New York adopted
an estate tax based on the estate tax provisions of the Federal Internal Revenue Code.16 Both the
New York Estate and Gift taxes were repealed by legislature in 1997.17 On January 1, 2000 the
state gift tax was permanently repealed for gifts made on that day and thereafter and the
independent state estate tax was repealed for deaths occurring on or after February 1, 2000.
A. The “Sop” Tax
The New York estate tax was replaced with a “sop” tax. The new “sop” tax was limited to the
credit allowed against the federal estate tax.18 The manner in which a “sop” tax works is that it
only imposes tax limited to the amount of the federal credit. It is limited to the amount needed to
sop up the federal credit. The amount of the “sop” tax paid to New York was calculated on the
federal estate tax return. If New York failed to collect the estate tax, the credit evaporated and
the tax monies passed to the federal government. This “sop” tax on the federal credit was the
same taxing scheme used at the time by the state of Florida. The theory behind using a Florida
style tax was that New York would stop losing its citizens and tax revenues to Florida.
Unfortunately, with the introduction of EGTRRA in 2001, the sop tax and the benefits of its
credits to the State were short lived in New York. EGTRRA repealed the estate tax credit over
four years and replaced it with an estate tax deduction in 2005. Post 2005, state estate taxes due
to the State are a deduction on the federal estate tax return rather than a credit.
After the elimination of the state death tax credit, many states that could establish a state estate
tax did. Florida was constitutionally prohibited from doing so exclusively through its
16
MARILYN M. RUBIN, A GUIDE TO NEW YORK STATE TAXES: HISTORY, ISSUES AND CONCERNS 14-2 (FEB. 2011).
17
1997N.Y. Laws ch. 389, §7.
18
Tax Law § 952.
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legislature.19 This is just one of the reasons Florida remains such a popular retirement venue for
New Yorkers and those from other states with high estate and/or inheritance taxes.
When New York repealed its estate tax in 2000 it did not attach itself to any federal tax laws,
then or in the future. New York law states that any tax law which is imposed, continued or
revived by the State cannot refer or be fixed by any other law, i.e., federal estate tax law, unless
it is in regard to income tax.20 New York’s estate tax repeal was tied to the state death tax credit
of July 22, 1998. New York’s estate tax conformed to the IRS, with amendments, enacted on or
before July 22, 1998, which predates EGTRRA (2001) and the increase in the applicable
exclusion amount (unified credit). For New York state residents, the state death tax filing
requirement for those whose date of death was on or after June 10, 1994, but before October 1,
1998 was $115,000.21 A reversion back to $115,000 triggering New York gross estate taxes was
definitely an inducement for New York residents to change their domicile to Florida, or any
other state that offered more favorable state estate tax laws. Today, New York like many other
states has decoupled itself from the federal law.
B. New York’s 2014 Estate Tax Reform
Chapter 59 of the Laws of 2014 (Part X) significantly changed estate planning for New Yorkers
and those owning tangible property in the state of New York. The most notable aspect of the
2014 tax reform was that it increased the basic exclusion amount from $1 million per person
before April 1, 2014 to $2,0625,000 per person with a gradual annual increase until April 1, 2017
to $5,250,000. In 2019, the New York exemption is anticipated to be $5,900,000 per person and
linked to the federal exemption amount.
Death on or After: Death Before: Basic Exclusion Amount*
April 1, 2014 April 1, 2015 $2,062,500
April 1, 2015 April 1, 2016 $3,125,000
April 1, 2016 April 1, 2017 $4,187,500
April 1, 2017 January 1, 2019 $5,250,000
19
Michael E. O’Connor, New York Estate and Gift Taxes, in ESTATE PLANNING AND WILL DRAFTING IN NEW YORK
3-3, 3-4 (Michael E. O’Connor, ed., NYSBA (2015 Revision).
20
N.Y. Const., Art. 3, § 22 (Am. Jan. 1, 2014).
21
Tax Law § 951(a). See also N.Y.S. Dept. Tax and Fin., N.Y.S. Estate Tax Return, Form ET-90-P (for estates of
decedents dying aft. May 2, 1990 and bef. Feb. 1, 2000).
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*For decedents dying on or after January 1, 2019, the New York basic exclusion amount will be linked to the federal
estate tax exclusion which is indexed for inflation. It is anticipated to be $5,900,000 in 2019.
The Laws of 2014 also amended the definition of the New York gross estate and taxable estate
for residents and nonresidents, created a new temporary three year look-back period for gifts,
appealed the New York GST tax, changed the income taxation of certain trusts and effected the
use of others, and in some cases will even push certain New Yorkers over “the Cliff.” (See
section B(2)(i), for detailed description of the “Cliff.”) The estate tax changes are an estate tax
relief to the moderately wealthy but will have little, if any, change for the ultra-wealthy.22
1. Resident v. Non-Resident
As an estate planning counselor, one of the first issues you must address with your client is
whether s/he is a resident or non-resident of the state of New York and if s/he is, should a change
of domicile be considered. You may have several residences, including a partial or statutory
residency, but only one domicile. Whether or not you are a resident of the state of New York
will determine what amount of estate tax you will pay the State.
If your client maintains a residence in more than one state, where the client is determined to be
domiciled will determine his or her tax liability under New York tax law. In New York, an
individual is taxed as a resident if: (1) s/he is domiciled in New York,23 or (2) s/he is a “statutory
resident.”24 Domicile is one’s permanent and primary home with the intent for it to be so. The
state regulations define “domicile, in general, as the place an individual intends to be his
permanent home – the place to which he intends to return whenever he may be absent.”25 A
statutory resident is someone “who is not domiciled in this state but maintains a permanent place
of abode in this state and spends in the aggregate more than [183] days of the taxable year in the
state.” Domicile is often a test of individual facts and evidence rather than one of law.
Surprisingly for estate tax purposes, the best way to prove that a decedent was not domiciled in
New York is to submit an Estate Tax Domicile Affidavit (Form ET-141) provided by the N.Y.
State Department of Taxation and Finance. This form addresses the decedent’s residence for the
past five years, where the decedent filed his or her taxes, where the decedent was registered to
vote and whether he or she voted there, where the decedent was employed, state licenses for
motor vehicles, professional and other purposes, etc. The ET-141 acts as an excellent resource
when reviewing a client’s domicile and what steps could be taken to effectuate a change in
domicile. It is always the taxpayers burden of proof to prove a change in domicile. New York
State presumes a continuance of domicile.26
22
TSM-B-14(6)M, New York State Estate Tax Reform (Aug. 25, 2014).
23
Tax Law §605(b)(1)(A).
24
Tax Law §605(b)(1)(B).
25
NYCRR 105.20(d).
26
In re Newcomb’s Estate, 192 N.Y. 238 (1908).
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a) The Resident New York Taxable Estate
If a decedent was a resident of the state at the time of his death, the taxable estate is the gross
estate minus allowable deductions for determining the federal taxable estate, except for
deductions relating to real or personal property located outside the state of New York. The
gross estate of a deceased resident is the decedent’s federal gross estate, regardless if a federal
estate tax return is filed, minus any real or personal property located outside the state of New
York, plus amounts related to limited powers of appointment created before September 1, 1930,
plus the value of any gifts given that would have been taxable under IRC § 2503 within three
years of the decedent’s death ending on their date of death. N.B., Gifts are not added back into
the New York estate if they were either real or personal property located outside the state of New
York, or if the gift was made when the decedent was a non-resident of the state of New York,
was gifted before April 1, 2014 or will be gifted on or after January 1, 2019.27
b) The Non-Resident New York Taxable Estate
The non-resident taxable estate is computed in the same manner as the taxable estate of a
resident and includes any and all real and tangible property located in the state.28 It, however,
does not include:
The value of intangible property (bank accounts, brokerage accounts, mortgages, bonds,
etc.) included in the non-resident decedent’s gross estate.29 Intangible personal property
is defined by statue in New York as to what it is not.30 Taxing a non-resident’s
intangible personal property for estate tax purposes is constitutionally barred in New
York, unless the property was used for business purposes in the state.31
Works of art that are loaned to, or are en route, to a public museum or gallery in New
York for exhibition purposes at the time of the decedent’s death. The value of the art
would be included in the New York taxable estate if any of the net earnings from the
public gallery or museum inure to the benefit of any private stock holder or individual.32
2. Inclusion of New York Resident and Non-Resident Taxable Estate Assets
Let’s look at an example of how this plays out in the real world.
27
TSB-M-14(6)M, supra.
28
Tax Law § 960.
29
TSB-M-14(6)M, supra.
30
Tax Law § 951-a(c).
31
N.Y. Const. art. 16, §3.
32
TSB-M-14(6)M, supra.
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Sisters Ann (“A”) and Beth (“B”) are both residents of the state of New York. Upon retirement
Ann moves to Boca Raton, Florida and becomes a Florida domiciliary and resident, but keeps
her New York apartment, which she owns, to stay in when she visits. Ann also decides that
although she loves living in Florida, she has done so well with her brokerage account and advisor
in New York she is going to leave her money in New York. Ann decorates her home in Florida
in a flamingo theme. On one of her trips to New York, Ann decides to bring some of Florida
with her and takes her favorite flamingo print with her. (American Flamingo, value $197,900,
Christie’s Rockefeller Plaza, June 25, 2004.)
Beth is still employed in New York and plans on staying in her home in Oyster Bay, on Long
Island once she retires. Beth is a resident of New York. During the winter of 2014, Beth
decides to visit her sister in Boca on her way back from a trip to the Caribbean. Beth invests all
her money with a money manager and bank she learnt about in Tortuga before arriving in Boca.
In Tortuga, Beth buys a brooch of a Flamingo she gives to her sister. Beth misses her sister and
buys a home in Florida to be near her for visits, furnishes it with antiques, and buys an
automobile to leave there for when she is in Florida.
The Audubon society of New York contacts Ann requesting to borrow a set of original John
James Audubon prints she owns, entitled, The Birds of America, valued at $422,500, for a public
exhibit they are having in November of 2016.
While shopping in NYC, Beth purchases a Flamingo Pink colored handbag at Hermés as a
surprise for her sister to use during the gallery opening. She leaves the handbag in Ann’s New
York apartment. On a visit to Florida, while in the cab on the way back from the airport, Ann
and Beth are hit by a giant flamingo float intended for a parade. Ann and Beth both die instantly.
What assets are included in the sisters’ New York taxable estates?
Sister A has changed her domiciliary to Florida and is a non-resident of the state of New York.
Only her real and personal tangible property located in New York are subject to New York estate
tax. The value of A’s New York apartment will be included in her New York taxable estate, but
not her Florida property. A’s brokerage account, although located in and managed in New York,
will not be taxable in New York because she has nonresident status. The print, American
Flamingo, housed in her New York apartment, and falling into the category of tangible
personalty, will be part of her New York taxable estate. The Birds of America prints located in
New York at the time of her death will not be part of A’s New York taxable estate because they
are on loan to a public gallery in New York exclusively for exhibition purposes. (If the gallery
were to reproduce posters of A’s prints and she received a percentage of the sales, those amounts
of monies would be includable in A’s New York taxable estate, because the prints were being
used to carryon business in the State.)
Sister B is a resident of New York state, so all her property, except real and personal property
located outside of New York, is subject to New York estate taxation. Thus, B’s New York
taxable estate includes her home in Oyster Bay and her Caribbean investments. Even though all
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her investments are located in Tortuga and are being managed there, because B is a New York
resident all her intangibles, wherever located worldwide, will be taxed in accordance with New
York law. The Florida home, antiques and vehicle will not be taxed as part of B’s New York
estate because they are categorized as real and tangible property owned and located outside of
the state of New York. Both the Flamingo brooch and the Hermés handbag were tangible gifts
made by Beth within three years of her death. The brooch, located in Florida, will not be drawn
back into B’s estate because it is located out of state, but the handbag located in her sister’s New
York apartment will be drawn back into B’s New York estate. (We can assume that B already
made gifts in the amount of the annual exclusion amount of $14,000 to her sister in both 2014
and 2016.)
C. Gifts
Although New York has not had a gift tax since its repeal in 2000, the Laws of 2014 have added
a temporary gift tax component to gifts made by New Yorkers between April 1, 2014 and
December 31, 2018. This only applies to taxable gifts and does not include annual exclusion
gifts of $14,000 per donee or payments made directly for tuition or medical expenses.
Gifts made between April 1, 2014 and December 31, 2018 will be added back into the decedent’s
estate if made within three (3) years from the decedent’s date of death. Any gifts made when
the decedent was not a resident of New York are not included, e.g., decedent moved to New
York two year before death and made a gift of $1 million immediately before moving. This gift,
even though made within three years of death, is not includable in the decedent’s New York
taxable estate as it was made when s/he was a non-resident. The gift add-back, however, appears
to include gifts of real and tangible personal property located outside the state of New York,
which if owned at death would not have been part of the decedent’s estate.33
D. GST Tax
New York has repealed its GST tax applicable to both taxable distributions and terminations
when made to “skip persons.”34 That means that gifts to persons who are two or more
generations younger, or 37.5 years younger, than the donor will not be subject to the New York
generation skipping transfer tax rate of 16%.
33
TSB-M-14(6)M, supra.
34
Id.
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E. Trust Income Tax and the New “Throw-back” Tax
New York beneficiaries may now be subject to a “throw-back” tax on distributions of
accumulated income from “New York Resident Trusts.” A “New York Resident Trust” was a
trust created by a New York resident that was not taxed for income tax purposes when (1) none
of the Trustees were domiciled in New York during the taxable year in question, (2) no trust
income or capital gain was derived from a New York source and (3) no real or tangible trust
property was located in New York. If the above conditions were met, then the trust would be
considered an “exempt trust” for New York income tax purposes. Under the new rules,
distributions to New York beneficiaries will be taxed.35
F. ING Trusts
An ING Trust, or what sometimes can be referred to as a “Delaware” or “Nevada Trust,” is an
incomplete gift non-grantor trust created by a New Yorker in another state (usually one that is
tax favorable) to avoid New York income tax on the income and capital gains earned by the trust
without having any current gift tax liability. ING trusts are now treated as grantor trusts for New
York purposes and subject to New York income tax.
Any New York Resident Trust and/or ING Trust has now become an administrative and
accounting nightmare. Additionally, with an ING trust, there will be reporting inconsistency
between the State and Federal income tax return for the same trust. For New York state the
income will be characterized as derived from a grantor trust, while for federal purposes the
income will be reported as coming from a non-grantor Trust.36
G. Valuation
Estates may be valued either on the decedent’s date of death or on the alternate valuation date
(six months after the date of death). Whatever valuation is used on the state return must also be
used on the federal return and vice versa. If New Yorkers choose not to file a federal return, but
want to claim an alternative valuation, they must use the same manner of tax preparation they
would have used on the federal return, i.e., alternate valuation cannot be elected unless it will
decrease the value of the New York gross estate and tax owed.37
H. QTIP Elections and Portability
A QTIP trust, or marital deduction trust, is a trust created for the benefit of a surviving spouse
that qualifies as Qualified Terminable Interest Property (“QTIP”). A QTIP trust qualifies for the
35
Id.
36
Id.
37
Id.
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estate tax marital deduction deferring estate taxation until the death of the surviving spouse. A
QTIP trust can elect to qualify for a partial marital deduction, eliminating New York estate tax.
New York does not provide for a separate QTIP election for state estate tax purposes. Had the
legislature supported the QTIP election, New Yorkers could have taken the largest exemption
possible for federal tax purposes and claimed a smaller exemption for state tax purposes,
avoiding state estate taxation at the first spouse’s death; such an election could cause greater
state estate taxation at the surviving spouse’s death if he or she has a large estate.
In New York, a QTIP election is not allowed when a federal return is required to be filed and no
QTIP election is made on the federal return. A QTIP election is only allowed in New York if it
is also elected on the federal return. If no federal estate tax return is required to be filed, then a
QTIP election may be made on the New York estate tax return, using a pro forma federal return
attached to the New York return. A federal return is required to be filed if the taxable amount of
the estate is greater than the federal applicable exemption amount or the estate is not a taxable
estate but portability is desired and elected. The Senate version of the budget bill introduced in
2014 included a provision for a separate New York QTIP election to be made when the federal
estate tax return was being filed exclusively for electing portability, but that did not make it into
the final version of the Executive Budget.38 New York does not provide for spousal portability
as part of state estate tax exemption.39 So, if you have a non-taxable federal estate, you must
choose between filing a federal estate tax return to elect portability for estate tax preservation,
which dictates an outright distribution to your spouse, or not filing a federal return to make the
New York QTIP election, providing for more planning flexibility and financial preservation, but
wastes the portability exemption.
I. Planning for Portability and the QTIP Election
Portability should not be considered an estate planning tool, but a post-mortem one in most cases
unless you are dealing with extremely wealthy clients when a surviving spouse can make a gift
of the decedent spouse’s DSUE to a grantor trust for grandchildren or other descendants. New
York does not provide for state portability. The Assembly had expressed an interest in including
portability for the unused New York exemption, but it was not included in the final Executive
Budget, most likely because of the complications it would cause with the “Cliff.”40 (See section
B(2)(i), for detailed description of the “Cliff.”).
A way to take advantage of portability with larger federally taxable estates is to use basic marital
trust planning with a QTIP election to transfer potential estate tax to the second to die. Let’s
assume a New York married resident dies with an estate of $15 million and made no taxable
gifts. Upon that spouse’s death, two trusts are created, a credit shelter non-qualified trust and a
38
Id.
39
TSB-M-11(9), Supplemental Information on New York State Estate Tax Filing Requirements Related to the
Federal 2010 Tax Relief Act (July 29, 2011)
40
TSB-M-14(6)M, supra.
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marital trust with a QTIP election. The credit shelter trust would be funded with $4,187,500,
using a portion of the first deceased spouse’s federal applicable exclusion amount along with the
full New York basic exclusion amount, $4,187,500 for October of 2016. The second trust, or
the marital QTIP trust, would be funded with the remaining estate assets, or $10,812,500, for
which both the federal and state QTIP elections would be made. The first deceased spouse’s
executor would then make a portability election on the federal estate tax return to transfer the
DSUE to the surviving spouse. Contingent upon how long the surviving spouse lives, how much
of the assets are spent down, and in what state the surviving spouse is domiciled at death will
determine if any estate taxes will be due.
Seldom should portability be used as the primary strategy for planning a married couple’s estate.
New Yorkers must still defer to the old-school use of trusts to both preserve assets at death and
reserve the flexibility of making them available to the decedent’s loved ones
J. New York Estate Tax Rates
The New York estate tax rates for a taxable estate for either a resident or non-resident estate are
calculated based upon the same rates. The lowest rate on a New York taxable estate for an estate
not over $500,000 is 3.06%. The highest New York estate tax rate is 16% for taxable estates
over $10,100,000. In 2014, the Governor’s budget bill recommended a rate reduction to 10%,
however the Executive Budget retained the top rate at 16%. Estates valued in excess of 105% of
the New York basic exclusion amount will pay the same estate tax they would have paid prior to
2014.41 Taxable estates within the 5% of the basic exclusion amount fall into what is termed the
“Cliff.”
K. The New York Estate Tax “CLIFF”
The dreaded “Cliff,” don’t fall off or you will end up in a New York state tax abyss; that is, if
you died after April 1, 2014 or will die before January 1, 2019. In 2014, the basic exclusion
amount in New York rose from $1,000,000 to the following:
Death on or After: Death Before: Basic Exclusion Amount*
April 1, 2014 April 1, 2015 $2,062,500
April 1, 2015 April 1, 2016 $3,125,000
April 1, 2016 April 1, 2017 $4,187,500
41
Id.
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April 1, 2017 January 1, 2019 $5,250,000
*For decedents dying on or after January 1, 2019, the New York basic exclusion amount will be linked to the federal
estate tax exclusion which is indexed for inflation. It is anticipated to be $5,900,000 in 2019.
This increase in the basic exclusion amount is a great benefit to those in the middle and upper-
middle classes but quickly ends there. The benefits of the increased basic exclusion amount
begin to fade quickly if a decedent’s taxable estate falls within 5% of the maximum New York
exclusion amount in the year of death, and disappears completely if the estate exceeds 5%. This
5% phase-out of the basic exclusion amount is referred to as the “CLIFF.” If an estate is within
the 5% range of the CLIFF, the phase-out of the increased exclusion amount deteriorates rapidly.
The phase-out levels do not give the estate the protection of the basic exclusion amount at all.
Taxable estates that exceed the CLIFF phase-out (105%) receive no exemption. The estate
is taxed from dollar one ($1.00)!
Each percent above the basic exclusion amount (“BEA”), up to four percent (4%), reduces the
Applicable Credit Amount (“ACA”) by an additional 20%. In New York, the State imposes a
tax on the decedent’s entire taxable estate and allows a credit, the ACA, against the tax. The
Applicable Credit Amount (“ACA”) only provides a credit for certain estates and is contingent
upon the size of the estate and the date of death. If the New York taxable estate is less than or
equal to the BEA, the ACA creates a wash. If the estate is between the BEA and the CLIFF, the
ACA is limited and based upon a formula. The formula is calculated by multiplying the BEA by
one (1) minus the fraction created. The fraction’s numerator equals the NY taxable estate minus
the BEA. The fraction’s denominator equals five percent (5%) of the BEA. If the New York
taxable estate is greater than 105% of the BEA, then no credit is allowed.42
The chart below illustrates the time period for when a date of death occurs, the basic exclusion
amount (“BEA”), the maximum phase-out amount, the 5% CLIFF amount, the actual amount of
New York state tax due, and the marginal rate increase the additional amount is liable for.
Basic
Death on or Max. Phase- The 5% NY Estate Marginal Rate
Exclusion
before: Out Amount CLIFF Tax due Increase
Amount
4/1/2014 to 109% or
$2,062,500 $103,125 $2,165,625 $112,050
4/1/2015 108.65454%
4/1/2015 to 133% or
$3,125,000 $156,250 $3,281,250 $208,200
4/1/2016 133.248%
4/1/2016 to 155% or
$4,187,500 $209,375 $4,396,875 $324,050
4/1/2017 155.01076%
42
Id.
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4/1/2017 to 164% or
$5,250,000 $262,500 $5,512,500 $430,050
1/1/2019 163.82857%
For dates of death occurring after January 1, 2019 the New York BEA will be linked to the Federal applicable
exclusion amount which is estimated to be $5,900,000 per person. The New York state estate tax on $5,900,000,
provided there is no state estate tax increase, will be $498,800.
These numbers clearly illustrate the onerous tax burden New Yorkers of wealth continue to face
and why the State may still have to contemplate the relocation of many of its citizens to more
favorable tax climates. The marginal tax rate this year of 155% and rising to 164% is untenable.
The concept of the amount of tax (presently $324,050) exceeding the culpable amount
($209,375) is illogical. No estate planning attorney should allow his or her client to fall into the
Cliff zone. The good news is, however, we can still achieve favorable planning results and
possibly eliminate New York estate tax (contingent upon the size of the estate) by using trusts,
such as, credit shelter trusts, and encouraging charitable giving for the amounts that would put an
estate over the Cliff.
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III. APPENDIX
A. Form 706: Federal Estate Tax Return
B. Form 709: Federal Gift Tax Return
C. Form E.T. 706: New York State Estate Tax Return
D. Form E.T. 141: New York State Domicile Affidavit
Page 20 of 20
181182
Form 706 United States Estate (and Generation-Skipping Transfer)
Tax Return
(Rev. August 2013) OMB No. 1545-0015
a Estate of a citizen or resident of the United States (see instructions). To be filed for
Department of the Treasury decedents dying after December 31, 2012.
Internal Revenue Service a Information about Form 706 and its separate instructions is at www.irs.gov/form706.
1a Decedent’s first name and middle initial (and maiden name, if any) 1b Decedent’s last name 2 Decedent’s social security no.
3a City, town, or post office; county; state or province; country; and ZIP or 3b Year domicile established 4 Date of birth 5 Date of death
Part 1—Decedent and Executor
foreign postal code.
6b Executor’s address (number and street including apartment or suite no.; city, town,
or post office; state or province; country; and ZIP or foreign postal code) and
phone no.
6a Name of executor (see instructions)
6c Executor’s social security number (see instructions)
Phone no.
6d If there are multiple executors, check here and attach a list showing the names, addresses, telephone numbers, and SSNs of the additional executors.
7a Name and location of court where will was probated or estate administered 7b Case number
8 If decedent died testate, check here a and attach a certified copy of the will. 9 If you extended the time to file this Form 706, check here a
10 If Schedule R-1 is attached, check here a 11 If you are estimating the value of assets included in the gross estate on line 1 pursuant to the special rule of Reg. section 20.2010-2T(a) (7)(ii), check here a
1 Total gross estate less exclusion (from Part 5—Recapitulation, item 13) . . . . . . . . . . 1
2 Tentative total allowable deductions (from Part 5—Recapitulation, item 24) . . . . . . . . . 2
3a Tentative taxable estate (subtract line 2 from line 1) . . . . . . . . . . . . . . . . 3a
b State death tax deduction . . . . . . . . . . . . . . . . . . . . . . . 3b
c Taxable estate (subtract line 3b from line 3a) . . . . . . . . . . . . . . . . . . 3c
4 Adjusted taxable gifts (see instructions) . . . . . . . . . . . . . . . . . . . 4
5 Add lines 3c and 4 . . . . . . . . . . . . . . . . . . . . . . . . . 5
6 Tentative tax on the amount on line 5 from Table A in the instructions . . . . . . . . . . 6
7 Total gift tax paid or payable (see instructions) . . . . . . . . . . . . . . . . . 7
8 Gross estate tax (subtract line 7 from line 6) . . . . . . . . . . . . . . . . . . 8
Part 2—Tax Computation
9a Basic exclusion amount . . . . . . . . . . . . . . . 9a
9b Deceased spousal unused exclusion (DSUE) amount from predeceased spouse(s), if
any (from Section D, Part 6—Portability of Deceased Spousal Unused Exclusion). . 9b
9c Applicable exclusion amount (add lines 9a and 9b) . . . . . . . 9c
9d Applicable credit amount (tentative tax on the amount in 9c from Table A
in the instructions) . . . . . . . . . . . . . . . . 9d
10 Adjustment to applicable credit amount (May not exceed $6,000. See
instructions.) . . . . . . . . . . . . . . . . . . 10
11 Allowable applicable credit amount (subtract line 10 from line 9d) . . . . . . . . . . . 11
12 Subtract line 11 from line 8 (but do not enter less than zero) . . . . . . . . . . . . . 12
13 Credit for foreign death taxes (from Schedule P). (Attach Form(s) 706-CE.) 13
14 Credit for tax on prior transfers (from Schedule Q) . . . . . . . 14
15 Total credits (add lines 13 and 14) . . . . . . . . . . . . . . . . . . . . . 15
16 Net estate tax (subtract line 15 from line 12) . . . . . . . . . . . . . . . . . . 16
17 Generation-skipping transfer (GST) taxes payable (from Schedule R, Part 2, line 10) . . . . . . 17
18 Total transfer taxes (add lines 16 and 17) . . . . . . . . . . . . . . . . . . . 18
19 Prior payments (explain in an attached statement) . . . . . . . . . . . . . . . . 19
20 Balance due (or overpayment) (subtract line 19 from line 18) . . . . . . . . . . . . . 20
Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and
belief, it is true, correct, and complete. Declaration of preparer other than the executor is based on all information of which preparer has any knowledge.
FF
FF
Sign
Signature of executor Date
Here
Signature of executor Date
Print/Type preparer’s name Preparer’s signature Date PTIN
Paid Check if
self-employed
Preparer
Firm’s name a Firm's EIN a
Use Only
Firm’s address a Phone no.
For Privacy Act and Paperwork Reduction Act Notice, see instructions. Cat. No. 20548R Form 706 (Rev. 8-2013)
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