New York State has long imposed the highest gift and estate taxes in the nation. New legislation signed by Governor Pataki in August, however, will bring New York into line with other states which impose a much lower rate of transfer tax. After the new law has been phased-in, New Yorkers who maintain a residence both in the south and in New York will no longer need to be concerned that spending more than six months in New York could cause deleterious estate tax consequences.
While the federal unified credit shelters up to $600,000 of lifetime transfers, New York currently imposes transfer taxes of up to 21% on transfers greater than $115,000. Although a federal credit against federal estate tax is available for state estate taxes paid, no federal tax is owed on estate worth less than $600,000. Thus, for estates worth less than $600,000, the federal credit against state estate tax has no application.
For decedent’s dying on or after October 1, 1998, New York’s unified credit will shelter $300,000 in transfers. That amount will gradually increase until reaching the federal unified credit amount by February 1, 2000. The current state estate tax will then be repealed and be replaced by a “sop” tax, which is currently imposed by states such as Florida, South Carolina, Arizona and California. Under this tax regime, states impose an estate tax equal to the maximum federal credit. In this way, no additional estate tax liability is imposed on the estate. The state simply receives a larger share of the tentative federal estate tax. (New York State’s gift tax, for which no federal credit was ever available, will also be repealed in phases over the next two and one-half years.)
Because of these changes in estate tax, existing Wills should be reviewed to ensure that “credit shelter” or “bypass” trusts contain a formulation which results in the largest tax-free gift possible. Rather than utilizing a numerical amount, the Will might contain language providing that the gift over should be the maximum amount which can fully utilize the existing federal unified credit.
The new law will also occasion some quirks. For example, since New York currently imposes tax on estates worth more than $115,000, many credit shelter trusts contain a provision which allows an additional $42,424 beyond the $600,000 to be placed in the trust. Taking into account the federal credit for state estate taxes, this results in an additional $42,424 being removed from the estate at a cost of only $2,545 in additional New York State estate taxes.
Under a “sop” tax, there would be no New York estate tax on an estate of $600,000. However, an estate worth $642,424 would be entitled to a maximum credit against state death taxes of $15,697. New York would quickly proceed to impose this “sop” tax. The cost of shifting the additional $42,424 would rise to $15,697. Therefore, it will generally no longer be desirable to fund a credit shelter trust with more than $600,000, or the actual exemption amount, if higher.