The New York State Senate and Assembly have recently released proposals to change the New York State estate tax. The proposals are part of the so-called “Budget bills” promulgated by each group. It is important to emphasize that Governor Cuomo has not proposed an increase to New York State estate tax in his proposed Budget bill. Thus, the Senate and Assembly proposals should be regarded as proposals, and not as faits accomplis.
The State Senate proposal would increase the tax rate at the various brackets by 2%. So, for example, the 3.06% bracket (applicable for taxable estates up to $500,000) would become 5.06%.
In contrast, the State Assembly proposal would raise the marginal rate for just the top bracket, taxable estates of $10.1 million and above, from 16% to 20%, but otherwise leave the rates for the lower brackets unchanged.
Several points bear mention. First, the New York State exemption remains unchanged under either proposal (for 2021, it is $5.93 million). Although the State Senate proposal would seem to affect only the brackets above $5.1 million, this is not the case. Once the New York taxable estate exceeds 105% of the applicable exemption, New York begins taxing estates at the first dollar in the taxable estate. Thus, the increases in the marginal rates for the brackets below the New York exemption are relevant.
Second, the “bottom line” effects of both proposals would be ameliorated by the federal estate tax deduction for state estate tax. For an estate which is paying federal estate tax, there is a deduction for state estate tax. Given a current federal estate tax rate of 40%, the overall effect of an increase is 60% of the applicable rate. Thus, a 4% increase effectively translates to a 2.4% increase in the overall tax payable (4% x 60%).
At present, the threshold for application of the federal estate tax is $11.7 million (reduced by any taxable lifetime gifts made after 1976). Of course, given the change in administrations, it is possible that the federal exemption will be decreased and/or marginal rates will increase. In that case, the deduction for state estate tax would have a greater overall offset.
The changes would be effective in each instance for decedents dying on or after April 1, 2021. At this point, the legislative prospects are uncertain. Nonetheless, the proposals bear watching.
If you would like more information, please contact a member of Harter Secrest & Emery LLP’s Trusts and Estates Practice Group at 585.232.6500.