BILL NUMBER: S6080

SPONSOR: HOYLMAN
 
TITLE OF BILL:

An act to amend the estates, powers and trusts law, in relation to
providing a presumption that credit shelter bequests be construed to set
aside the maximum amount that may be shielded from both federal and
state estate taxes

 
PURPOSE:

The purpose of this bill is to overcome the presumption that credit
shelter bequests be construed to set aside the maximum amount that may
be shielded from both federal and New York state estate taxes.

 
SUMMARY OF PROVISIONS:

Section 1: Amends the estates, powers and trusts law is amended by
adding a new section 2-1.12-A to overcome the presumption that credit
shelter bequests be construed to set aside the maximum amount that may
              

be shielded from both federal and New York state estate taxes.

Section 2: Provides for an immediate effective date.

 
JUSTIFICATION:

Currently, New York's estate tax exemption is $5,250,000, much less than
the current $11,200,000 federal estate tax exemption. Section 952(c)(1)
of the New York Tax Law (the "NYTL"), enacted in 2014, has been raising
the New York estate tax exemption amount periodically over the past few
years, and may eventually eliminate the disparity with the federal
exemption. Specifically, the law recently increased the state's
exemption amount from $4,187,500 to $5,250,000 (effective April 1,
2017), and ultimately to the then federal exemption on January 1, 2019.
For all subsequent years, the New York State exemption will equal the
federal exemption, indexed for inflation.  Under NYTL Section 952(c)(1),
individuals with taxable estates less than or equal to the applicable
New York State exclusion amount will pay no state estate tax. However,
the New York exemption is phased out rapidly for estates valued between
100% and 105% of the state exclusion amount, with individuals whose
taxable estates exceed 105% of the exemption amount effectively taxed on
the entire estate.

It is common for married testators to take advantage of the federal
estate tax exemption by including dispositions in their testamentary
documents intended to transfer the remaining federal exemption to indi-
viduals other than the surviving spouse without intending to trigger any
estate tax upon the first spouse's death. These bequests are typically
drafted with a formula designed to capture the full federal exemption
amount effective and available at the time of the first spouse's death.
Such "credit shelter bequests" remain prevalent in estate planning docu-
ments despite the introduction of portability at the federal level by
which the second spouse to die may use the predeceased spouse's remain-
ing federal exemption. Indeed, many testators still include these
bequests in order to utilize any remaining generation-skipping transfer
tax exemption, provide creditor protection, direct the ultimate disposi-
tion of the devised property or capture the appreciation on such proper-
ty free of federal estate tax. Unfortunately, recent changes to the
federal and state tax laws may create unintended consequences for dece-
dents whose estate plans have not been updated. For decedents dying
after March 31, 2019, the effective federal tax exclusion amount is so
high, at $11,200,000, that it is unlikely that an individual would ever
intentionally set aside the full federal exemption amount, particularly
when portability is an option. However, because many testators' estate
planning documents have not been (and may not be) revised to account for
the recent change to NYTL Section 952(c)(I), a significant number of New
York estates may be subject to this unintended consequence.

To avoid an influx of reformation actions in the courts, the state
legislature has enacted remedial legislation to address unexpected
consequences arising from changes in tax law. For example, in the year
2000, in light of the elimination of the state death tax credit, the
legislature enacted EPTL Section 21.12. Under this EPTL Section, certain
testamentary documents executed prior to February 1, 2000 containing
formula bequests which reference the credit for state death taxes are
construed without regard to the reference. Further, in response to the
2010 repeal of the federal estate tax and the generation-skipping trans-
fer tax, the legislature enacted EPTL Section 2-1.13 to require inter-
pretation of certain formula bequests as if they were made pursuant to
the Internal Revenue Code provisions in effect prior to the repeal.

Therefore, the EPTL should be modified to incorporate proposed Section
2-1.12-A in order to remedy the effects of NYTL Section 952(c)(1) on
decedents whose testamentary documents include credit shelter bequests
or other dispositions of the federal exemption amount.

 
LEGISLATIVE HISTORY:

2017-18 - A.11049 - Referred to Ways and Means

 
FISCAL IMPLICATIONS:

None.

 
EFFECTIVE DATE:
This act shall take effect immediately