Relates to the estate tax treatment of dispositions to surviving spouses who are not United States citizens

This measure would amend the Tax Law to reduce the expense and clarify the procedure to obtain a marital deduction for a disposition to a non- citizen surviving spouse where no Federal estate tax return is required. Under §2056(d) of the Internal Revenue Code, an estate is not entitled to a marital deduction for bequests to a non-U.S. citizen surviving spouse unless the bequest passes to a qualified domestic trust ("QDT"), as defined in IRC §2056A. That section provides generally that when the QDT terminates or distributes principal to the surviving spouse, a tax is imposed equal to the estate tax that would have been imposed if the value of the distributed property had been added to the original decedent's taxable estate. In essence, this ensures that the marital deduction will cause a deferral of estate tax, rather than a complete elimination, if the surviving spouse is not subject to U.S. estate tax at his or her death. However, there is no corresponding New York tax imposed on the termination of a QDT or distribution of principal from a QDT.

Because the New York estate tax imposed by Tax Law §952 is based entire- ly on what the Federal state death tax credit would be if it were still in existence, it is essentially based on the size of the Federal taxable estate. If a Federal estate tax return is required, the taxable estate shown on that return is used in computing the New York tax.

However, if no Federal estate tax return is required, then the New York estate tax is based on the taxable estate computed on a hypothetical Federal return prepared for and filed with the New York estate tax return. With the current Federal applicable exclusion amount of $5,120,000 (contrasted with the effective New York exemption of $1,000,000), there are a significant number of estates that are required to file a New York estate tax return but not a Federal estate tax return. Furthermore, for decedents dying in 2010, no estates were required to file a Federal return.

For estates required to file a New York estate tax return but not a Federal estate tax return, where the surviving spouse is not a U.S. citizen, it is necessary for all dispositions to the spouse to be via a QDT in order to qualify for the Federal marital deduction on the hypothetical Federal estate tax return and thus reduce the hypothetical federal taxable estate and, ultimately, the New York estate tax. This requirement imposes a substantial burden on estates and non-citizen

surviving spouses, inasmuch as the QDT requirements in IRC §2055A are cumbersome and frequently require that a U.S. bank be a trustee. Because no New York tax is imposed on the QDT termination or distrib- utions, there is no New York purpose served by requiring the property to be placed in a QDT. In fact the QDT may be terminated and distributed to the surviving spouse almost immediately. The only consequence of the QDT requirement is the incurring of significant legal expense and adminis- trative costs, particularly where a bank is trustee.

This measure simply provides that, if no Federal estate tax return is required, it is not necessary that a QDT be created in order to obtain, on the hypothetical Federal estate tax return, a marital deduction for a disposition to a surviving spouse who is not a U.S. citizen.

This measure would have no fiscal impact on the State. It would take effect immediately and shall apply to the estates of decedents dying on or after January 1, 2010.

Legislative history

None. New proposal.