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 $5,740,000 for 2019. Under current law, this number will remain until January 1, 2020, at which point it will rise again with inflation.

Who does the Cliff affect?

Everyone with a NYS taxable estate, in varying degrees.  For individuals passing away in 2019 with a taxable estate between $5,740,000 and $6,250,000, the portion of the estate in excess of the NYS estate tax exemption is taxed at rates of more than 100% – in some cases over 200%!  The following table illustrates this point:

To analyze the potentially extreme impact of the cliff, consider this scenario: Carlton passed away in 2019 with a taxable estate of $5,740,000.  Since he is not over the NYS exemption amount, there is no NYS estate tax due and $5,740,000 will pass to his heirs.  However, if Carlton passed away in 2019 with a taxable estate of $5,900,000, he would be over the NYS exemption amount by just $160,000, yet there would be a NYS estate tax due of $356,800, leaving only $5,543,200 to pass to his heirs.  Because of the NYS estate tax cliff, Carlton’s heirs would inherit almost $200,000 less, even though Carlton’s taxable estate was $160,000 more!

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 Carlton.  As discussed above, if Carlton did not plan for the New York estate tax cliff, $5,543,200 would pass to his heirs.  However, if Carlton had the Santa Clause provision in his Will, his favorite charity would receive a $160,000 bequest (the amount in excess of the NYS exemption) which, because of the charitable deduction, would reduce his taxable estate to $5,740,000.  There would be no NYS estate tax due, and his heirs would inherit $5,740,000.  Because of the “Santa Clause” in Carlton’s Will, his heirs would inherit almost $200,000 more, enough for them to pay off student loans, or assist them with the purchase of a home.  In addition, Carlton 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 strategy for some higher net worth NYS 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 2019, $11.4M) 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 3 years of death are clawed back to the decedent’s estate for purposes of determining NYS estate tax. Looking at Carlton again- he currently has a $10M estate. He makes a $5M gift in December 2019 and lives beyond December 2022. That $5M gift is excluded from Carlton’s taxable NYS estate, and there is no NYS estate tax owed on his remaining $5M estate. If he passes away before December 2022, that $5M gift will be clawed back to Carlton’s estate, resulting in a $10M NYS taxable estate and a $1,067,600 NYS estate tax bill. However, gifting to reduce NYS estate tax liability is still a smart strategy. If Carlton 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 Carlton outlives the 3 year “clawback”, his estate is in a much better position (no NYS estate tax is owed, saving $1,067,600).

Conclusion

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.

 

Wealthspire Advisors is the common brand and trade name used by Sontag Advisory LLC and Wealthspire Advisors, LP, separate registered investment advisers and subsidiary companies of NFP Corp.
This information should not be construed as a recommendation, offer to sell, or solicitation of an offer to buy a particular security or investment strategy. The commentary provided is for informational purposes only and should not be relied upon for accounting, legal, or tax advice. While the information is deemed reliable, Wealthspire Advisors, LP cannot guarantee its accuracy, completeness, or suitability for any purpose, and makes no warranties with regard to the results to be obtained from its use. © 2019 Wealthspire Advisors

Richard Yam, J.D.

Rich is vice president of trusts & estates, and is based in our New York office.