New York State has an estate tax “cliff”, which means that if an estate exceeds 105% of the New York estate tax exemption then the estate will receive absolutely no exemption from New York estate taxes and the entire value of the estate is subject to New York’s estate tax. Since the 2021 NYS exemption amount is $5.93 million, estates larger than $6,226,500 are subject to New York State estate tax rate. The New York estate tax rate ranges from 5% to 16%. This estate will receive absolutely no exemption from New York estate taxes. Hence the necessity to avoid the dreaded estate tax cliff, if possible.
To illustrate: a New York resident passes away in January 2021, leaving a taxable estate of $5,930,000. No federal or New York estate tax is due. However, if the estate was valued at 105% of the exemption amount which is $6,226,500 (exceeding the exemption amount by $296,500) the New York estate tax due is $538,992. The estate pays estate tax on the entire $6,226,500. The heirs of the decedent’s estate would be in a better financial position if the estate was valued at only $5,930,000 (heirs receive $5,930,000), rather than $6,226,500 (heirs receive $5,687,508).
Charitable Bequests Can Mitigate Estate Taxes
Therefore, anyone with an estate hovering at or above the New York exemption, should consider charitable bequests. The harsh impact of the cliff can be reduced, or eliminated, by making conditional charitable bequests in a Will or Trust. The size of the bequest would be the value in excess of the New York exemption. The bequests are structured so that they occur only if the excess going to charities is less than the New York estate tax that would be due if the gifts were not made. That is, only if the bequest avoided the estate tax.
Lifetime Gifts Can Also Protect Assets
Another solution is to consider making lifetime gifts to move assets out of an estate. Any individual may make lifetime gifts up to the federal gift tax exemption amount of $11,700,000 before any federal gift tax is owed. However, all gifts made by a New York decedent within a three-year period before death is included in the value of the estate for purposes of calculating New York estate tax. If the decedent outlives the three-year period, his or her beneficiaries are in a much better position because no New York estate tax would be due at the time of death.
Additionally, a surviving spouse cannot utilize a deceased spouse’s unused NYS exemption, as can be done with the federal exemption using the portability election. New York State does not recognize portability. However, the spouse’s NYS exemption can be captured with a properly drafted Will or Trust.