Estate and Tax Planning
Mid-Winter 2000 Report

NEW YORK REPEALS GIFT TAX, REDUCES ESTATE TAX

Gift Tax. With the repeal of its gift tax on January 1, 2000, New York has joined the majority of states that do not impose a tax on lifetime transfers. This change in the law provides donors with additional incentive to consider larger taxable gifts and take advantage of the more favorable "tax exclusive" gift tax as opposed to the "tax inclusive" estate tax.

Estate Tax. With respect to decedents dying after January 31, 2000, the New York estate tax has been replaced by a death tax equal to the amount of the State Death Tax Credit allowable for U.S. estate tax purposes. A number of credits are taken into account in calculating the U.S. estate tax payable by an estate. These include the Unified Credit (which shelters the first $675,000 of asset value for decedents dying in 2000, scheduled to increase to $1 Million by 2006), the Credit for Foreign Death Taxes paid and the State Death Tax Credit. Many states, such as Florida and Virginia, impose a state estate tax that is limited to the allowable State Death Tax Credit, which is calculated for U.S. estate tax purposes as a percentage of a decedent's adjusted taxable estate. New York now joins those states and at least 33 other states in collecting an estate tax equal to the State Death Tax Credit. This state tax is often referred to as a "sponge tax" or "sop tax," and in virtually all instances will be lower than New York's former estate tax.

The Wills of many married persons combine a Credit Shelter Trust with a Marital Deduction-qualifying disposition of the balance of the assets in order to reduce the U.S. estate tax liability to zero at the death of the first spouse to die. Often the Credit Shelter Trust refers to the maximum amount protected from estate tax by application of both the Unified Credit and the State Death Tax Credit. Unlike under prior law, the use of a formula applying the State Death Tax Credit is unnecessary in the Will of a New York resident who dies on or after February 1, 2000, the effective date of the new sponge tax, to reduce the U.S. estate tax to zero. Use of such formula language under the new law, however, could actually result in a significantly higher New York estate tax payable at the death of the first spouse to die than would otherwise be due. If the New York legislature does not soon adopt mitigating legislation, it may be appropriate to revise any Will with such a Credit Shelter Trust formula provision to simply remove the reference to the State Death Tax Credit.

Other recent changes in the New York estate tax law include:
New York estate tax waivers will not be required to collect assets of decedents dying after January 31, 2000. The due date for the tentative payment of the New York estate tax is now seven months from date of death (no longer six months).

This report is distributed as general information only. No action should be taken solely on the basis of its contents. We welcome requests for more detailed information on any topic discussed in this report.

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