New York Estate Tax Changes and the IRA Charitable Rollover

Posted on March 31, 2014

By: Philip L. Burke, Esq.

There are some NY estate and gift tax changes coming out of Albany. As a result of the Governor's budget bill, which was recently passed, there is a "good news – bad news" scenario. There is an increase in the NY estate tax exemption from $1M to $5.25M (as of April 1, 2017). This increased exemption is being phased in. As of April 1, 2014, the New York exemption will be $2,062,500; starting April 1, 2015, $3,125,000, and starting on April 1, 2016, $4,187,500. Again, as of April 1, 2017 the exemption will be $5.25M and will remain at that number for approximately 2 years. Starting January 1, 2019, the exemption will be $5M indexed for inflation going forward. This means that smaller NY estates (in excess of the old $1M exemption but under the new exemption amount) will no longer be subject to the payment of NY estate tax.That's the good news.The "bad news" involves the NY estate tax treatment of large "taxable gifts" (which are gifts made to a donee in excess of the current $14,000 per year "annual exclusion"). Under prior NY law, large gifts like this could reduce the amount of NY estate tax, even if these gifts were made just prior to death (so-called "death bed gifts") because of the way NY calculated its estate tax. Under federal estate tax law, only the appreciation realized on the gifted assets (if any) will avoid federal estate tax as the value of the taxable gift itself is added back to the donor's taxable estate. The Governor's budget bill includes provisions that would eliminate this tax benefit for New York and treat large taxable gifts in the same manner as under federal estate tax laws.It is anticipated that if the budget bill passes with these revisions, these changes, if and when passed, will become effective as of April 1st.

In deciding whether or not to make large taxable gifts, there are some matters to consider. First, since capital gains tax rates are higher than NY estate tax rates (especially with the new increased exemption amounts), gifts of appreciated property may actually result in a larger tax burden when the appreciated property is sold by the donee in the future since the tax on the gain is likely to exceed any savings in NY estate taxes. Second, if you have used any of your existing federal gift tax exemption (currently, again, $5.34M) for large taxable gifts made previously, the amount of any additional gift that you might want to make needs to take these prior gifts into account. Third, it is possible to make large gifts like this into a trust for the benefit of family members so that the assets can be held and administered for them until they reach an appropriate age/maturity level – the gift does not have to be made outright to the donee. Fourth, any large gift like this will require the filing of a gift tax return by April 15th of the following year and depending on the asset that is being transferred an appraisal may be required in order to substantiate the value of the gift.

Another tax consideration for those clients who are 70 ½ or older, involves the potential opportunity to rollover your required minimum distribution (RMD) from a retirement account and/or IRA directly to a charity and avoid having to report the distribution on your income tax return. Before you take your RMD, you should consult with your advisors to see if a charitable gift makes sense. This opportunity was available in 2013 and we expect Congress to pass similar legislation for 2014.

These are just a few of the considerations that need to be addressed in determining whether or not any of these strategies are appropriate for you. If you have any questions regarding this information you may contact Phil Burke, Esq. a Partner in the Family Wealth & Estate Planning Department or your individual Woods Oviatt Gilman attorney.

Philip L. Burke