The New York State Estate Tax Cliff and the “Santa Clause” Fix

March 30, 2022 | Patricia C. Marcin | Trusts & Estates

New York has an “estate tax cliff,” which can result in heirs paying New York estate tax at a rate exceeding 100%. The current per-person NYS estate tax exemption is $6.11 million, which is the amount you can leave to your heirs at your death without paying NYS estate tax. If your taxable estate, however, is in the so-called “estate tax cliff range” (between $6.11 million and $6.711 million for 2022), you fall off the NYS estate tax “cliff,” and the amount over the NYS exemption is taxed at a rate of more than 100% – as much as 250% or more! There is a solution to this crazy situation. (Note that if your estate is over $6.711 million, the tax rate on the amounts over the exemption declines dramatically.)

You can reduce the impact of the “cliff” by bequeathing to charity assets in excess of the NYS exemption amount. This bequest is written into your estate planning documents and is sometimes called the “Santa clause.” The Santa clause takes effect, however, only if the amount that is to go to charity is less than the NYS estate tax that would be due if there were no charitable bequest. That is, the charitable bequest only takes effect when the amount over the NYS exemption amount is taxed at more than 100% (i.e., your taxable estate is in the “cliff zone”). A formula clause determines the amount of the bequest to charity; the amount is not fixed and depends on the extent to which your taxable estate falls
within the “cliff zone.”

For example, Jane dies on July 1, 2022, with a taxable estate of $6,160,000, which is only $50,000 over the NYS exemption amount of $6,110,000. The $50,000 over the NYS exemption amount would be subject to an NYS estate tax of $126,480, a tax rate of approximately 253%! Fortunately, Jane’s estate planning documents provided for a “Santa clause,” so Jane’s favorite charity will receive $50,000 upon her death, which brings her taxable estate down to $6,110,000, the NYS exemption amount, resulting in no NYS estate tax owed.

The net benefit to heirs:

Tax without the Santa clause $126,480
LESS: bequest to Charity $(50,000)
Net benefit to heirs $76,480

If you suspect that your taxable estate at the time of your death may be within the NYS estate tax “cliff” range, you may want to consider using a “Santa clause” in your estate planning documents to “hedge your bets” and give more to your heirs, while also benefitting the charities of your choice. Your estate planning professional can help you run the numbers.

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