While the large increase in the federal estate tax exemption has provided many with federal estate tax relief, New Yorkers must continue to plan for New York estate tax. For a quick review of the New York Estate Tax “Cliff” basics, see the “Understanding New York’s Estate Tax “Cliff” blog post.
What is the current exemption from New York estate tax again?
The current New York estate tax exemption amount is $6,940,000 in 2024 (up from $6,580,000 in 2023). Under current law, this number will remain until January 1, 2025, at which point it will rise again with inflation.
Who does the Cliff affect?
Everyone with a NYS taxable estate, in varying degrees. This includes NYS residents, and non-residents with NYS situs real or tangible personal property which value exceeds the New York estate tax exemption. For individuals passing away in 2024 with a NYS taxable estate between $6,940,000 and $7,660,000, the portion of the estate in excess of the NYS estate tax exemption is taxed at rates of more than 100%. For those individuals, the NYS estate tax owed is greater than the amount their NYS taxable estate exceeds the NYS estate tax exemption! Furthermore, if your NYS taxable estate is greater than 105% of the NYS estate tax exemption (105% x $6,940,000= $7,287,000), your NYS taxable estate does not get the benefit of the NYS estate exemption to reduce NYS estate tax due.
To analyze the potentially extreme impact of the cliff, consider this scenario: Sheldon passed away in 2024 with a taxable estate of $6,940,000. Since he is not over the NYS exemption amount in 2024, there is no NYS estate tax due and $6,940,000 will pass to his heirs. However, if Sheldon passed away in 2024 with a taxable estate of $7,300,000, his estate would be over the NYS exemption amount by just $360,000. Yet there would be a NYS estate tax due of $678,000, leaving only $6,622,000 to pass to his heirs. Sheldon’s heirs would actually inherit $318,000 less from Sheldon’s $7.3M estate than from his $6.94M estate!
How can I mitigate the Cliff?
With good estate and gift planning, one can lessen the impact of the cliff.
Santa Clause provision:
In your Will or Revocable Trust, make a conditional bequest to your favorite charity of the estate assets in excess of the NYS exemption amount. The bequest to charity will only take effect if the excess that would go to charity is less than the NYS estate tax that would be due if the gift to charity was not made. The result is that the charitable bequest only takes effect if the amount in excess of the NYS exemption amount is taxed at more than 100%. This type of provision is often referred to as the “Santa Clause”.
By way of illustration, let’s reexamine the above example with Sheldon. As discussed above, if Sheldon did not plan for the New York estate tax cliff on his $7.3M estate, $6,622,000 would pass to his heirs. However, if Sheldon had the Santa Clause provision in his Will, his favorite charity would receive a $360,000 bequest (the amount in excess of the NYS exemption) which, because of the charitable deduction, would reduce his taxable estate to $6,940,000. There would be no NYS estate tax due, and his heirs would inherit $6,940,000. Because of the “Santa Clause” in Sheldon’s Will, his heirs would inherit $318,000 more, enough for them to pay off student loans, or assist them with the purchase of a home. In addition, Sheldon will be able to benefit his favorite charity – a win-win proposition for all (except the NYS estate tax collectors).
If You Can, Give It Away:
Another effective strategy for some higher net worth NY individuals is to make lifetime gifts right now. There is a federal gift tax, but each individual may make gifts up to the federal estate and gift tax exemption (in 2024, $13.61M) before any federal gift tax is owed. While NYS does not impose a gift tax, it does apply a 3-year “clawback” rule where any lifetime gifts made within three years of death are clawed back to the decedent’s NY taxable estate for purposes of determining NYS estate tax. Let’s look at Sheldon again. He now has a $10 million estate, well over the NY estate tax exemption, but under the remaining 2024 federal estate and gift exemption. He makes a $5M gift on January 1, 2024. If he lives beyond January 1, 2027, that $5M gift is excluded from Sheldon’s taxable NY taxable estate, and there is no NYS estate tax owed on his remaining $5M estate. In the worst-case scenario where Sheldon passes away before January 1, 2027, that $5M gift will be clawed back to Sheldon’s estate, resulting in a $10M NY taxable estate and a $1,067,600 NYS estate tax bill. However, gifting to reduce NYS estate tax liability is still a smart strategy. Why? If Sheldon did not make the $5M gift, he would also be left with a $10M NYS taxable estate. So, the 3-year “clawback” puts his estate in no worse position (NYS estate tax owed is the same = $1,067,600), but if Sheldon outlives the 3-year “clawback”, his estate is in a much better position (no NYS estate tax is owed, saving $1,067,600 for his heirs).
By implementing certain estate and gift planning strategies, a New York individual can minimize the impact of the New York estate tax cliff and increase the amounts passing to their heirs, no matter the size of their NY taxable estate.