WATCH OUT FOR THE CLIFF!
The following chart illustrates the onerous impact of the New York State “Cliff” tax on any New York resident who has a NYS taxable estate more than 5% over the exemption amount, which for 2020 is $5,850.000:
TAXABLE ESTATE NEW YORK STATE ESTATE TAX
$5,850,000 $0
$5,900,000 $124,000
$6,000,000 $342,000
$6,100,000 $490,000
$6,200,000 $535,600
$6,300,000 $548,400
$6,400,000 $561,200
In each of these instances, the tax is MORE than 100% of the amount by which the taxable estate exceeds the exemption! At its most extreme, consider someone who passes away with a NYS taxable estate of $5,900,000, which exceeds the exemption amount by a mere $50,000. Yet the tax imposed on that mere $50,000 is a whopping $124,000, nearly 2 ½ times the excess over the exemption amount! That means that your loved ones would actually receive LESS than if the decedent’s estate was worth $5,850,000 ($5,900,000 - $124,000 = $5,776,000)!
HOW TO AVOID THE CLIFF?
GET MARRIED
The unlimited marital deduction provides that anything left to a lawfully wedded spouse gets deducted before determining your taxable estate. As long as the amount passing outside of your spouse equal to or less than the exclusion amount there would be no NYS estate tax. If getting married is too much of an extreme measure then consider…
BE CHARITABLE
: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”.
Looking at the prior example, if the decedent had the Santa Clause provision in his Will, his favorite charity would receive a $50,000 bequest (the amount in excess of the NYS exemption) which, because of the charitable deduction, would reduce his taxable estate to $5,850,000. There would be no NYS estate tax due, and his heirs would inherit $5,850,000. Because of the “Santa Clause” in Sheldon’s Will, his heirs would inherit about $124,000 more,! Good for your children, good for your favorite charity, bad for NYS Department of Taxation.
LIFETIME GIFTING:
New York State has no gift tax on lifetime transfers. Although there is a federal gift tax but each individual may make gifts up to $15,000 per person per year gift tax free AND still has the federal estate and gift tax exemption (in 2020, $11.58M) before any federal gift tax is owed on taxable gifts. However bear in mind that while New York 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. Of course even it it were “clawed back” the NYS estate tax would be the same as if the gift was never made so there is no penalty for trying.