New York’s estate tax cliff can lead to heirs in the state paying estate tax at a rate that surpasses 100%. The existing per-person New York state estate tax exemption is $6.11 million. This is the amount that a person can pass on to heirs at his or her time of death without being obligated to pay New York state estate taxes.
Provided a person’s taxable estate falls into the “Estate tax cliff range”, which occurs between $6.11 million and $6.711 million in 2022, a person falls off the estate tax cliff in New York state, and the amount surpassing the exemption is taxed at a rate greater than 100%. Fortunately, various solutions exist to this challenging situation.
Utilizing Charitable Bequests
A person can reduce the cliff’s impact by passing on assets to charity by surpassing the state’s exemption amount. This bequest can be found in a person’s estate planning documents and some people even refer to it as the “Santa” clause. The “Santa” clause becomes effective only if the amount that a person intends to pass a charity is lower than the New York estate tax that would be due if charitable bequests did not exist. Charitable bequests only come into play if the amount of the New York State exemption amount is taxed at greater than 100%. A formula exists to assess the amount that can be passed on to a charity. This amount is influenced by the degree to which a person’s taxable estate falls within the range of the “cliff”.
# 2 – Relocating Your Assets
One extreme solution and method around the tax class is that either you physically relocate or you relocate the assets. You might decide to shift the property’s location outside of the state. Remember, any property physically located outside the state of New York is not subject to New York’s estate tax.
# 3 – Give Gifts
People who reside in New York state should debate making gifts greater than the basic exclusion
Amount. This way a person can reduce his or her taxable estate. While New York lacks a gift tax, its neighbor Connecticut has a gift tax and the federal gift tax exemption threshold is at an all-time high. Gifting provides the additional advantage of letting appreciation of the assets that are gifted occur outside of the gift giver’s taxable estate. If you reside in New York and you’re worried about making too many, you might consider utilizing something like a spousal lifetime access trust.
Stay Alert to New York’s Tax Cliff Range
If you believe that your taxable estate at the time you pass away will fall within the New York state “tax cliff range”, you should consider utilizing available options to pass on more to your loved ones while simultaneously passing on the most possible to your charitable goals.