The 2019-2020 legislative session recessed on June 20, 2019. It is instructive to review what passed before the June recess, what failed to pass and what lies ahead when the 2019-2020 session resumes in January 2020. Several changes were enacted as part of the 2019-20 Executive Budget (the Budget), signed by Gov. Andrew Cuomo on April 12, 2019.

Among the most significant developments for the session are the following:

(1) Gift Add-Back Extended, With Small Window of Exclusion (Enacted as part of Budget, April 12, 2019). While New York does not impose a current gift tax, the New York gross estate of a deceased resident is increased by the amount of any taxable gift made within three years of death, if the decedent was a New York resident at the time the gift was made and at the time of death. New York's three-year gift add-back expired for individuals dying on or after Jan. 1, 2019, but was extended until Dec. 31, 2025 as part of the Budget (NY Tax Law §954(a)(3)). The final legislation excepts from the add-back gifts made between Jan. 1, 2019 and Jan. 15, 2019, the period prior to the Budget's release.

(2) Qualified Terminable Interest Property (QTIP) Must Be Included in the Surviving Spouse's NY Estate (Enacted as part of Budget, April 12, 2019). The Budget amended New York Tax Law §954 as a result of the holding in Estate of Evelyn Seiden, (N.Y. Surr. Ct. Oct. 9, 2018). In that case, a husband died in 2010, when his estate was not subject to federal estate tax. His executor created a QTIP trust for state purposes, making a QTIP election on the pro-forma federal return filed with the New York return. Internal Revenue Code (IRC) §2044, imposes a tax on QTIP property for which a marital deduction was previously allowed. The Surrogate found that, since there was no federal estate tax return filed, there was no previously allowed marital deduction to trigger IRC §2044's inclusion of the property in the surviving spouse's New York gross estate. Consequently, the QTIP property escaped federal and state taxation in both estates.

The new law requires QTIP property to be included in the surviving spouse's New York estate if New York previously allowed a marital deduction for that property, irrespective of whether the QTIP election was made on the New York return or via a federal pro forma return, if a federal return was not required to be filed. The change applies to estates of individuals dying on or after April 1, 2019. Accordingly, there should still be a window of opportunity to escape New York estate tax if a QTIP trust was created in the estate of a first spouse to die, no federal return was filed (either because the first spouse died in 2010 or because the value of the first spouse's estate was under the federal filing threshold), and the surviving spouse died before April 1, 2019. If taxes have been paid in these circumstances in the second estate, the executor should consider filing a refund claim. If the second return has not yet been filed, the executor should consider taking the same position as the Seiden executor.

(3) Additional Real Estate Taxes Imposed on New York City Properties (Enacted as part of Budget, April 12, 2019). Typically, the seller pays transfer taxes on the transfer of residential and commercial properties, and the buyer pays a "mansion" tax on residential property valued at over $1 million. The Budget increased both sets of taxes on the transfer of property in New York City.

Additional Transfer Tax. New York transfer tax is imposed at 0.4 percent. As of July 1, 2019, in addition to the 0.4 percent transfer tax, the Budget imposes an extra tax of 0.25 percent (total tax of 0.65 percent) on transfers of residential property in New York City, including cooperative apartments, valued at $3 million or more and non-residential property valued at $2 million or more.

Additional Mansion Tax. The New York mansion tax rate is one percent. The Budget imposes an additional incremental tax for transfers of New York City residential property valued at $2 million or more. The rate rises progressively with the value of the property, beginning with 0.25 percent for properties selling over $2 million, and rising to 2.9 percent for properties selling for $25 million or more.

Proposed Pied-à-Terre Tax on Residences Exceeding $5 Million. Assembly Bill No. 4540/Senate Bill No. 44, currently in the Assembly and Senate committees, proposes a real property tax surcharge on non-primary residences in New York City, including one to three family houses, condominiums and cooperative apartments, with market values exceeding $5 million. A progressive rate schedule, ranging from 0.5 percent to 3 percent, would be assessed against property worth up to $25 million. A flat 4 percent tax rate would be applied to property valued over $25 million.

(4) New York Does Decouple From Certain Federal Income Tax Changes for Trusts and Estates (Enacted as part of Budget, April 12, 2019). On Dec. 28, 2018, the Department of Taxation and Finance (the Department) issued Technical Memorandum TSB-M-18(6)I—New York State Decouples from Certain Personal Income Tax Internal Revenue Code (IRC) Changes for 2018 and after. The Department explained that individuals may claim some deductions on their New York returns that are no longer available for federal purposes (N.Y. Tax Law §615(a)), including state and local taxes over the $10,000 federal limit; and certain miscellaneous deductions that are no longer allowed federally, such as tax preparation fees and investment expenses.

After the TSB was released, the question arose as to whether the decoupling extended beyond individuals to non-grantor trusts and estates since IT-205—Fiduciary Income Tax Return—was silent on that point. In the absence of specific guidance, most advisors took the position that state and local taxes over the federal limit and miscellaneous itemized deductions could not be claimed on fiduciary income tax returns, a position that the Department initially affirmed on its website on March 15, 2019. However, the Budget did extend the decoupling benefit to trusts and estates, and the Department subsequently amended its website to reflect that trusts and estates can deduct state and local taxes over the federal limit and miscellaneous itemized deductions. Importantly, the decoupling benefit applies to taxable years beginning in 2018. For returns that have not yet been filed, these may be valuable deductions to take. Most returns will already have been filed. If so, advisors should consider filing amended returns.

(5) Estate Tax Treatment of Dispositions to Surviving Spouses Who Are Not U.S. Citizens Extended (Enacted July 3, 2019). In order for a disposition to a surviving spouse who is not a United States citizen to qualify for the federal marital deduction, the disposition must pass in a Qualified Domestic Trust (QDOT). For estates below the federal filing threshold, the New York estate tax is based on the taxable estate computed on a pro-forma federal return. Although not required for New York purposes (there is no New York tax imposed on the termination of a QDOT or a principal distribution from a QDOT), dispositions to non-U.S. citizen spouses had to be in QDOT form because federal elections on the pro-forma return flow through to the New York return. This artificial need to create a QDOT resulted in significant unnecessary administrative burdens and legal fees.

A law enacted in December 2013 eliminated the requirement to create a QDOT if no federal return was required to be filed and the disposition would otherwise have qualified for the federal estate tax marital deduction. The law, which was set to sunset on July 1, 2019, has been extended to July 1, 2022 (N.Y. Tax Law §951(b)).

(6) Proposal Regarding 'Pour Over' Wills (Passed Assembly and Senate). Estates, Powers and Trusts Law (EPTL) §3-3.7 permits an individual to make a testamentary "pour over" disposition into a trust. Assembly Bill No. 7519/Senate Bill No. 5513 would remove an apparent conflict between EPTL §§3-3.7 and 7-1.18 by clarifying that the trust does not need to hold any assets prior to the individual's death.

Additionally, the proposal would change the current requirement that the trust agreement is executed prior to or contemporaneously with the will. This would address the harsh result in Matter of D'Elia, 40 Misc.3d 355 (Nassau County Surr. Ct. 2013), in which the court ruled that a residuary gift to a trust was not valid because, although the testator executed the trust prior to his will, the trustee did not sign the agreement until seven days later. Under the proposal, as long as the grantor signed the trust agreement prior to or contemporaneously with his will, the trustee need only sign prior to the testator's death.  

(7) Proposal To Extend the Attorney-Client Privilege to Lifetime Trustees (Passed Assembly and Senate). Pursuant to Civil Practice Law and Rules (CPLR) §4503(a)(2), the attorney-client privilege extends to a client who is a personal representative. Under that section, absent an agreement to the contrary, no beneficiary of the estate is treated as a client of the attorney solely by reason of his status as beneficiary, and the existence of the fiduciary relationship between the personal representative and the beneficiary does not by itself constitute a waiver of the privilege between the attorney and the personal representative. CPLR §4503(a)(2) does not extend to lifetime trustees the attorney-client privilege afforded to personal representatives. According to the memorandum in support of Assembly Bill No. 7601/Senate Bill No. 6409, the omission of lifetime trustees from the definition of "personal representative" was on oversight and there is no reason to exclude lifetime trustees from the protection of the attorney-client privilege. This proposal simply includes "lifetime trustee" in the definition of personal representative. Additionally, the measure makes clear that a fiduciary does not waive the privilege merely by asserting he or she relied upon the advice of counsel when acting in such capacity.

(8) Proposal To Enact the Uniform Voidable Transaction Act (Passed Assembly and Senate). The Uniform Voidable Transactions Act (UVTA) seeks to strengthen creditor protection by providing remedies when a debtor transfers assets or incurs additional debts that hinder the creditor's ability to be fully repaid. For example, a transfer is voidable by a creditor if made by a debtor with actual intent to hinder, delay or defraud a creditor. Under Assembly Bill No. 5622/Senate Bill No. 4236, New York would adopt the UVTA, thereby modernizing its laws, which have not been significantly updated in over 90 years. Forty-four states, the District of Columbia, and the U.S. Virgin Islands have the enacted some version of the UVTA. However, there has been concern that, while the UTVA legitimately is intended to prevent debtors skirting valid debts, certain official comments to the UVTA undercut an individual's ability to create a domestic asset protection trust. The New York City Bar submitted a memorandum in support of New York's enacting the UVTA in March, 2019, including the opinion that those comments are inconsistent with New York law, are not supported by the text of the UVTA, and should not be considered when interpreting the UVTA in New York. Similarly, the New York State Bar Association submitted a memorandum in May 2019 in support of the UVTA, conditioned on the understanding that those comments are not being adopted by New York.

(9) Proposal Regarding Commissions of Donees of a Power in Trust (Passed Assembly and Senate). Assembly Bill No. 7522/Senate Bill No. 5512 amends the Surrogate's Court Procedure Act to conform the calculation of commissions of donees of powers in trust, including donees of powers during minority and incapacity, to the commission computation for trustees.

(10) Proposal To Reform the Power of Attorney (Passed Assembly, Introduced in Senate). Assembly Bill No. 5630/Senate Bill No. 3923 would reform New York's Power of Attorney (POA) form to: (1) eliminate the Statutory Gifts Rider (SGR), which has different execution formalities from the POA and insert the SGR gifting provisions in the POA's Modifications Section; (2) allow for substantially compliant language instead of the exact statutory wording; (3) provide safe harbors for those who accept a POA in good faith without actual knowledge that the signature is not genuine; (4) allow sanctions against third parties who unreasonably refuse to accept a properly executed POA, including costs and attorney's fees; and (5) expand an agent's power to make gifts in a calendar year that aggregate $5,000 instead of the current $500.

Next?

After many years in the making, it is anticipated that a New York Trust Code, which would modernize and harmonize New York law in a centralized code, will likely be considered in the next legislative session.

Sharon L. Klein is President of Family Wealth for the Eastern US Region at Wilmington Trust, N.A. Jenna M. Cohn, a Family Wealth Advisor, assisted in the preparation of this article. This article includes developments through Aug. 12, 2019.