New York, unlike many states, has an estate tax. That means people with multimillion-dollar estates often need to take steps to help ensure that the assets they leave to their loved ones and others aren’t needlessly devalued by taxes – both federal and state.
The 2023 tax exemption (exclusion) amount is over $6.5 million. The amount typically rises each year. Estates valued at under the exclusion amount won’t be taxed. Note that this is considerably less than the federal estate tax exemption amount, which is nearly double that. Further, the tax rate is graduated (from 5% to 16%), depending on the value. The federal estate tax rate is a whopping 40%.
For estates valued at over the exemption rate, however, there’s a big difference between the federal taxation and state taxation. Federal estate taxes only apply to the amount that’s over the exemption limit – not to the full amount.
The same applies to New York estate tax up to 5% over the exclusion amount. However, if an estate is valued at more than 5% over the limit, the entire estate is subject to New York estate tax. That amount where your entire estate becomes subject to New York estate taxes is referred to as the “tax cliff.”
How to avoid “falling off the cliff”
There are a number of ways you can avoid having any of your estate taxed, but it requires careful planning and potentially updating your plan if its value increases over the years. For example, if you leave assets to your surviving spouse, they aren’t taxable at the federal or state levels.
Strategically planned gifts, while you’re still alive, can help reduce the value of your taxable estate as well. Just be careful of the state’s “clawback” rule.
The “Santa Clause”
New York also has something referred as the “Santa Clause” provision. It involves designating a bequest to charity that will be made only if an estate’s value ends up being over the amount that would send it off the “cliff” (or some other amount that can be specified). That way, part of your estate is going to charity instead of the state. Of course, if you want to ensure that a charitable organization gets part of your estate, don’t include it solely in your “Santa Clause.”
Our state has a number of unique rules like this. That’s why it’s crucial to have experienced legal as well as tax and financial guidance as you develop and maintain your estate plan.