On March 31, 2014, broad changes were made to the New York estate and gift tax laws.  In addition to increasing the New York basic exclusion amount for taxable estates, a New York estate tax “cliff” was introduced that phases out the New York basic exclusion amount for taxable estates between 100% and 105% of the exclusion amount.  As a result, taxable estates that exceed 105% of the New York basic exclusion amount will lose the benefits of the exclusion entirely.

In 2019, the New York basic exclusion for taxable estates is $5,740,000 per person.  In addition, as of January 1, 2019, taxable gifts made within three (3) years of death are no longer included in a New York decedent’s estate for estate tax purposes.  The combination “cliff” and elimination of the three-year look back has created a valuable gifting opportunity available to New Yorkers.

Below is a chart indicating various New York taxable estates, the amount of New York State estate tax due, the amount that would ultimately pass to beneficiaries, the total benefit from gifting, and the generated savings (i.e. the amount that would be saved in taxes that exceeds the amount that would be gifted).

New York State Taxable Estate New York State
Estate Tax
Applicable Credit Total Passing to Bene-ficiaries Without Gifting Amount Gifted Total Passing to Bene-ficiaries With Gifting Total Benefit from Gifting Generated Savings
(Savings From Taxes Less Gift)
$5,740,000 $0 $479,600 $5,740,000 $0 $5,740,000 $0 $0
$5,740,100 $219 $479,393 $5,739,881 $100 $5,740,100 $219 $119
$5,750,000 $25,170 $455,630 $5,724,830 $10,000 $5,750,000 $25,170 $15,170
$5,800,000 $146,746 $340,054 $5,653,254 $60,000 $5,800,000 $146,746 $86,746
$5,850,000 $259,774 $233,026 $5,590,226 $110,000 $5,850,000 $259,774 $149,774
$5,900,000 $356,804 $141,996 $5,543,196 $160,000 $5,900,000 $356,804 $196,804
$5,950,000 $434,397 $70,403 $5,515,603 $210,000 $5,950,000 $434,397 $224,397
$6,000,000 $493,493 $17,307 $5,506,507 $260,000 $6,000,000 $493,493 $233,493
$6,001,960 $495,709 $15,326 $5,506,251 $261,960 $6,001,960 $495,709 $233,749
$6,027,000 $514,040 $0 $5,512,960 $287,000 $6,027,000 $514,040 $227,040
$6,100,000 $522,800 $0 $5,577,200 $360,000 $6,100,000 $522,800 $162,800
$6,150,000 $529,200 $0 $5,620,800 $410,000 $6,150,000 $529,200 $119,200
$6,200,000 $535,600 $0 $5,664,400 $460,000 $6,200,000 $535,600 $75,600
$6,250,000 $542,000 $0 $5,708,000 $510,000 $6,250,000 $542,000 $32,000
$6,286,697 $546,697 $0 $5,740,000 $546,697 $6,286,697 $546,697 $0
$6,300,000 $548,400 $0 $5,751,600 $560,000 $6,300,000 $548,400 $0
$6,400,000 $561,200 $0 $5,838,800 $660,000 $6,400,000 $561,200 $0
$6,500,000 $574,000 $0 $5,926,000 $760,000 $6,500,000 $574,000 $0
$6,600,000 $586,800 $0 $6,013,200 $860,000 $6,600,000 $586,800 $0
$6,700,000 $599,600 $0 $6,100,400 $960,000 $6,700,000 $599,600 $0
$6,800,000 $612,400 $0 $6,187,600 $1,060,000 $6,800,000 $612,400 $0
$6,900,000 $625,200 $0 $6,274,800 $1,160,000 $6,900,000 $625,200 $0
$7,000,000 $638,000 $0 $6,362,000 $1,260,000 $7,000,000 $638,000 $0
$7,500,000 $705,200 $0 $6,794,800 $1,760,000 $7,500,000 $705,200 $0
$8,000,000 $773,200 $0 $7,226,800 $2,260,000 $8,000,000 $773,200 $0
$8,500,000 $844,400 $0 $7,655,600 $2,760,000 $8,500,000 $844,400 $0
$9,000,000 $916,400 $0 $8,083,600 $3,260,000 $9,000,000 $916,400 $0
$9,500,000 $991,600 $0 $8,508,400 $3,760,000 $9,500,000 $991,600 $0
$10,000,000 $1,067,600 $0 $8,932,400 $4,260,000 $10,000,000 $1,067,600 $0

As detailed in the above chart, the beneficiaries of a New York decedent in 2019 with a taxable estate of $5,740,100 would actually receive less in assets than if the decedent died with an estate of $5,740,000. If such decedent had gifted $100 the day before he/she died, his/her beneficiaries would have received an additional $119 in assets.  The total benefit in this case would therefore be $219 (which equals the estate tax that would have been due to New York State on his/her death).  These potential savings increase exponentially as the taxable estate increases.  In fact, a New York decedent in 2019 with a $6,001,960 taxable estate could save $495,709 by gifting $261,960 the day before he/she died.  The result is a realization of $233,749 in generated savings.

Lifetime gifting, as described above, not only permanently removes such gifted assets from the donor’s taxable estate without any loss to the ultimate amount inherited by his/her beneficiaries, but also eliminates the future appreciation on such gifted assets from the donor’s taxable estate.  With the 2019 federal estate exemption of $11,400,000 ($22,800,000 for married couples), many New Yorkers could take advantage of this gifting opportunity.

The gifting described above works best when done with cash or cash equivalents.  Using highly appreciated assets for such gifting may offset any gains achieved from such gifting as a result of the loss of a stepped-up cost basis in such assets on the donor’s death.  Individuals should always consult with a tax professional prior to any lifetime gifting to ensure that such gifting would not result in adverse gift or income tax consequences.

Note: On January 15, 2019, Gov. Andrew Cuomo released his proposed 2019 Executive Budget which would revise the New York Tax Law to reinstate the three-year look back for taxable gifts made within three (3) years of death in a New York decedent’s estate for estate tax purposes for gifts made before December 31, 2025.

The New Jersey Tax Amnesty Program applies to state tax liabilities for tax returns due on or after February 1, 2009 and prior to September 1, 2017. The program provides incentives for taxpayers who come forward and pay delinquent state tax liabilities during the amnesty period. Taxpayers who take advantage of the program are relieved from half of the otherwise applicable interest and any late payment penalty, late filing penalty, cost of collection, delinquency penalty, or recovery fee is abated. This can result in significant savings.

A taxpayer who has not filed a tax return to report the tax for which he or she is seeking amnesty must file the return by the end of the amnesty period (ie, January 15, 2019). In addition, a taxpayer’s participation in the program represents a waiver of all administrative and judicial rights of appeal concerning the payment, and no payment made under the program is eligible for refund. Taxpayers are still required to pay any civil fraud or criminal penalty arising from an obligation imposed under any state tax law. Taxpayers under criminal investigation or charge for any state tax matter at the time of payment are not eligible for the program.

It is in an eligible taxpayer’s best interest to take advantage of the program. Taxpayers who are eligible but do not take advantage of the program may be charged a post-amnesty penalty of an additional 5% of any eligible amount not paid during the amnesty period. The New Jersey Division of Taxation is not permitted to waive or abate this penalty.

In our experience, the Division of Taxation is invested in meeting revenue goals by the end of the amnesty period, and is more amenable during this period to resolving all types of tax disputes more favorably to taxpayers.

On November 15, the IRS announced the official estate and gift exclusion amounts for 2019 in Revenue Procedure 2018-57.

For an estate of any decedent dying during calendar year 2019, the applicable exclusion is increased from $11.18 million to $11.4 million.  This change increases not only the applicable exclusion amount available at death, but also a taxpayer’s lifetime gift applicable exclusion amount and generation skipping transfer exclusion amount.  This means a husband and wife with proper planning could transfer $22.8 million estate, gift and GST tax free to their children and grandchildren in 2019.   If no new tax law is passed, the increased exclusion amounts are scheduled to expire on December 31, 2025, which would mean a reduction in the exclusion amounts to $5 million plus adjustments for inflation.

The estate, gift and GST tax rate remains the same at 40% and the gift tax annual exclusion remains at $15,000.

The gift tax annual exclusion to a non-citizen spouse has been increased from $152,000 to $155,000.  While gifts between spouses are unlimited if the donee spouse is a United States citizen, there are restrictions when the donee spouse is not a United States citizen.

The New York exclusion amount was changed as of April 1, 2014, and does not match the federal exclusion amount.  In 2018, the New York exclusion amount is $5.25 million.  Beginning in 2019, the exclusion is scheduled to increase to $5.49 million, and then will increase with inflation each year thereafter.  It is important to note that, unlike the Federal exclusion amount, the New York exclusion amount is not portable, meaning if the first spouse to die fails to utilize his or her full exclusion amount, the surviving spouse will not be able to utilize the first spouse to die’s unused exclusion amount.

On November 1, the IRS announced cost of living adjustments for various retirement accounts, including IRAs and 401(k) plans.  The changes are as follows:

  • For the first time since 2013, the IRA contribution limit will increase from $5,500 to $6,000 in 2019. Catch up contributions if you are age 50 or older remain unchanged at $1,000 for IRAs.
  • For 401k plans (and 403(b) plans), the retirement plan contribution amount will increase from $18,500 to $19,000. Catch up contributions for age 50 and older participants remain unchanged at $6,000.
  • The income phase-out for taxpayers making contributions to Roth IRAs will increase from $122,000 to $137,000 for singles and heads of household and for married couples filing jointly, the income phase-out is from $193,000 to $203,000.
  • The limitation on the annual benefit for defined contribution plans (i.e. 401(k) plans and profit sharing plans) will increase from $55,000 to $56,000.
  • The annual compensation limit will increase from $275,000 to $280,000.

The New Jersey Appellate Division recently issued its opinion in Estate of Van Riper v. Dir., Div. of Taxation, No. A-3024-16T4 (N.J. Super. Ct. App. Div. Oct. 3, 2018), upholding the Tax Court’s finding that the full fair market value of a marital home transferred to a trust was subject to New Jersey Inheritance Tax.  The case highlights the importance of understanding the effect of transferring property into trusts for estate planning and tax purposes.

A husband and wife transferred their home into an irrevocable trust and retained the right to live in the home until the death of the survivor.  Any assets remaining after their deaths were to be distributed to their niece.  It appears that this trust was created in connection with Medicaid planning.  The NJ Tax Court held that, due to the fact that the couple retained a life interest in the property and delayed their niece’s enjoyment of it until both their deaths, the value of the home in the trust was subject to Inheritance Tax.  Estate of Van Riper v. Dir., Div. of Taxation, 30 N.J. Tax 1 (2017).  

On appeal, the Estate argued that each spouse held only one-half ownership interest in the property at the time they transferred it to the trust, so the Inheritance Tax should only apply to one-half of the value of the home.  The appellate court upheld the assessment of the full value of the home because the couple owned the property as “tenants by the entirety,” meaning they each “held an interest in the entire estate, not fifty-percent interests.”  Van Riper, slip op. at 8-9.  This reasoning was further supported by the fact that at the first spouse’s death no Inheritance Tax was paid on the property as it qualified as an exempt transfer from husband to wife under New Jersey law.  See N.J.S.A. 54:34-2(a)(1).

This cautionary tale warns New Jersey taxpayers of the complications that may arise from retaining interest in property during one’s lifetime, even if such property has been placed in an irrevocable trust.  It is strongly advised that taxpayers seek the assistance of an estate planning attorney to better understand the tax and other consequences of certain planning techniques.