State death taxes come in two basic forms: inheritance taxes and estate taxes. Prior to 2005, many states levied an estate tax in the exact amount of the Internal Revenue Code Sec. 2011 credit for state death taxes allowed under the federal estate tax laws. This was often referred to as a “pick-up” tax. In such states, the states’ estate tax laws essentially picked up any slack created under the federal laws. However, in 2005, the credit for state death taxes was fully phased out of the federal tax law and replaced with a deduction for state death taxes. As a result, some states simply eliminated their “pick-up” inheritance tax, while others “decoupled” from the federal tax changes and still use some of the old provisions of the federal tax law in calculating the amount of the state estate tax. Some states have estate tax laws that are independent of the federal estate tax laws.
An inheritance tax is levied on the right to receive property by inheritance. Beneficiaries are divided into classes according to the closeness or remoteness of their relationship to the decedent, with different exemptions and tax rates applied to each class. Generally, the closer the relationship, the greater the exemption and the lower the tax.
New York imposes a “pick-up” estate tax intended to absorb the difference between the New York estate taxes paid and the maximum credit against the federal estate tax. However, the New York estate tax conforms to the federal tax code and related amendments only through July 22, 1998. Therefore, New York did not adopt the decreases in the federal estate tax credit for state death taxes applicable after 2001. Instead, an estate must compute the New York estate tax owed using federal tax rates that were applicable to deaths prior to 2002.
Deductions. When calculating the taxable estate for New York estate tax purposes, most deductions are taken directly from page 3, Part 5, line 23, of federal Form 706. In addition, for dates of death after 2003, New York provides a separately listed qualified “family-owned business interests” (QFOBI) deduction, even though this deduction is eliminated entirely for federal estate tax purposes beginning in 2004. As mentioned earlier, New York did not adopt the most recent federal estate tax changes, which included the phaseout of the QFOBI deduction.
Returns. The New York State Estate Tax Return (Form ET-706) must be filed within nine months after the decedent’s death (unless an extension to file is granted). For resident decedents who die after February 1, 2000, and before January 1, 2004, the individual’s estate must file a New York estate tax return if a federal estate tax is required. Since New York did not adopt the current federal estate tax changes, the state filing threshold will remain at $1 million and a New York estate tax return may be required in 2004 and beyond even if a federal return is not required (due to higher federal filing thresholds being in effect).
Similar filing requirements apply to nonresident decedents, except that filing is dependent on the estate including real or tangible personal property having an actual physical location (or situs) in New York State. Also, the estate must submit Form ET-141, New York State Estate Tax Domicile Affidavit.
Generation-skipping transfer tax. New York imposes a generation-skipping transfer tax equal to the federal credit.