New York State - New and Proposed Legislation Affecting Trusts and Estates

New York State - New and Proposed Legislation Affecting Trusts and Estates

In 2013, New York undertook a comprehensive review of the state's tax structure and made recommendations to improve and simplify the current tax system. This article discusses the findings of that review and the resulting legislation to implement changes.

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New York State Reform and Fairness Commission Report Recommendations

In December of 2012, Governor Andrew M. Cuomo formed The New York State Tax Reform and Fairness Commission (the "Tax Reform and Fairness Commission"). It was tasked with undertaking a comprehensive review of New York State's tax structure and making recommendations to improve and simplify the current tax system. The final report issued by the Tax Reform and Fairness Commission (the "Tax Reform Report")… makes the following recommendations: 

  1. Increase the State Tax Exemption to $3M. The Tax Reform and Fairness Commission found that New York's estate tax currently available exemption of $1 million is outdated. [The New York State estate tax exemption is based on the federal estate tax law in effect in 1998, except that it provides for a federal applicable exemption amount of $1 million instead of the lower amount then in effect. See New York Tax Law § 951(a).] … [T]he Tax Reform and Fairness Commission recommended increasing the estate tax exemption from $1 million to $3 million, thereby eliminating the estate tax for almost three-quarters of all New York estates. The exemption for estates valued in excess of $3 million would be phased out gradually.
  2. Reinstate the Gift Tax or Add Back the Value of Taxable Gifts. … The "preferred" option is for New York to reinstate a gift tax, which would subject gifts above a certain threshold to tax at rates comparable to the New York estate tax rates. Alternatively, the Commission suggested that New York require estates to add back the value of any gifts above a certain threshold before determining the value of an estate…
  3. Repeal the Generation-Skipping Transfer Tax. … The Tax Reform and Fairness Commission advised that because the federal GST tax operates with the same purpose [as New York State’s GST], the state GST tax is not necessary…
  4. Close the Resident Trust Loophole. This recommendation is aimed at a particular income tax loophole that utilizes certain trusts, transfers to which are treated as incomplete gifts for federal gift tax purposes (and thus are not subject to federal gift tax) but as completed transfers for federal income tax purposes. These trusts are commonly known as Delaware Incomplete Non-Grantor Trusts ("DING trusts")… [T]o address the resident trust loophole[,… the first [altenative] is to treat the trust as a grantor trust for New York income tax purposes and thereby subject the settlor of the trust to tax on the trust's income. The second proposal adopts California's approach which provides for the taxation of distributions of accumulated income to resident beneficiaries by trusts not subject to California tax (the "California throwback rule").

New York State Tax Relief Commission Final Report Recommendations

In October 2013, Governor Cuomo formed the New York State Tax Relief Commission (the "Tax Relief Commission") to collaborate with the Tax Reform and Fairness Commission and identify ways to reduce the State's property and business taxes in order to provide relief to New York's homeowners and businesses.

The Tax Relief Report recommendations with respect to estate and gift taxes were much more limited than those of the Tax Reform and Fairness Commissions. The Tax Relief Commission recommended increasing the state's threshold from $1 million to $5.25 million, indexed for inflation, and lowering the maximum tax rate from 16 percent to 10 percent.

Similar to the Tax Reform and Fairness Commission, the Tax Relief Commission noted that although a $1 million estate may have at one time been considered an indication of wealth, increases in real property values and other assets have resulted in taxable estates for many middle-class households.

The Tax Relief Commission found that the combination of an increase in the state estate tax exemption to $5.25 million and a reduction in the top estate tax rate would exempt nearly 90 percent of all estates from the imposition of the estate tax, thereby protecting family farms and small businesses and eliminating the incentive for middle-class and wealthy New Yorkers to leave the State to avoid the tax.

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The 2014-15 New York State Executive Budget Bill

On January 21, 2014, Governor Cuomo released his 2014-15 New York State Executive Budget, which included a bill that incorporates some of the recommendations of each of the commissions (the "Executive Budget Bill")...

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The New York Nonprofit Revitalization Act of 2013 (2013 N.Y. Laws 539)

On December 18, 2013, Governor Cuomo signed into law the New York Nonprofit Revitalization Act of 2013 (the "Act"), which makes significant changes to the New York Not-for-Profit Corporation Law, the Estates Powers & Trusts Law (the "EPTL"), and Article 7-A of the Executive Law. Most provisions of the Act are effective July 1, 2014. The Act applies to any nonprofit organization that is incorporated in New York or operates or solicits charitable contributions in New York.

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The Act is based on recommendations from the Leadership Committee for Nonprofit Revitalization, convened by New York Attorney General Schneiderman. The Act was intended to eliminate administrative burdens for nonprofits and to modernize the law. Under the provisions of the Act, nonprofit organizations can incorporate, can dissolve and merge without having to go to court, can communicate and hold meetings using modern technology and enter real estate transactions more easily. The Act also includes oversight and governance reforms intended to help protect taxpayer dollars and preserve public trust, including stricter oversight of financial audits and related-party transactions...

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Conclusion

The American Taxpayer Relief Act of 2012 seemingly ended years of uncertainty in the estate planning area by enacting "permanent" federal gift, estate and generation-skipping transfer tax laws. The proposals of both the Tax Reform and Fairness Commission and the Tax Relief Commissions, as incorporated in the Executive Budget Bill, if enacted, will provide New Yorkers with some degree of conformity with those laws. It will add, however, a new level of complexity with respect to the income taxation of trusts. In addition, following the New York Nonprofit Revitalization Act of 2013, nonprofit organizations and their advisors will need to review existing governance documents and reporting requirements to ensure that the organizations are in compliance with the provisions of the Act.

 

Information referenced herein is provided for educational purposes only. For legal advice applicable to the facts of your particular situation, you should obtain the services of a qualified attorney licensed to practice law in your state.

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LEXIS users can view the complete commentary HERE. Additional fees may apply. (Approx. 9 pages)