Estate tax legislative changes over the past decade created a possibility of double taxation on a New York estate’s assets if the decedent died in 2010 and elected carryover basis. Before 2010, and the changes in the federal estate tax system, New York state’s taxation structure provided for an estate tax on an estate’s assets and a corresponding stepped-up tax basis for those assets. However, the federal changes created an unfortunate situation in which the estate tax and income tax systems in New York State would no longer mesh. Because of this, the assets of a 2010 estate would be subject to both the New York estate tax and New York income tax when sold by the beneficiary without the benefit of the stepped-up basis. There is a bill proposed by New York State Assemblyman David McDonough that aims to rectify the situation, but its future is uncertain.1 The bill was referred again to the Ways and Means Committee on Jan. 4, 2012, after it languished there all of last session.

Federal Developments

This potential double taxation originated with the adoption of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). While the EGTRRA called for the lowering of income and estate tax rates, it also eliminated the federal estate tax in 2010. This created havoc with estate planning as many believed that Congress would reinstate the tax at the last minute but did not. Also, the EGTRRA added another wrinkle since it provided that property inherited from decedents, when subsequently sold, would have a carryover basis instead of the stepped-up or stepped-down to fair market value basis that normally applies.2