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May022022

Tax Planning for New York Estates

Kevin Wong, CPA, MST, MSA

05.02.22 | T&E Chat

The federal lifetime gift and estate exemption has been a hit with high net worth individuals. However, these individuals need to keep in mind that along with the federal estate tax, they may also face state inheritance and estate taxes. There are currently 17 states plus the District of Columbia that have either an inheritance or estate tax. New York is among these 17 states. The NYS estate tax rates range from 3.06% to 16%.

Even if an individual’s estate is not subject to the federal estate tax due to their estate being under the federal lifetime exemption, they could still potentially be subject to the New York estate tax. The NYS estate tax exclusion for 2022 is $6,110,000, which is significantly lower than the federal lifetime gift and estate exemption of $12,060,000. To make things more complicated for New York, taxable estates need to be wary of the “cliff,” which would exclude the estate from taking advantage of the NYS estate tax exclusion. The portion of the estate in excess of the NYS estate tax exclusion could be taxed at rates of over 200%! Why does this happen, and what are some planning strategies that can be implemented to mitigate this?

What is the “cliff” effect, and how might it affect you?

For individuals passing away in 2022, if their NYS taxable estate was below $6,110,000, they would be able to exclude the full amount from NYS estate taxes. However, New York has implemented a rule to exclude NYS taxable estates exceeding the exclusion amount from taking advantage of the exclusion available to it. For taxable estates between the exclusion and 105% of the exclusion, the estate is allowed a pro-rata portion of the exclusion. Once the taxable estate is 5% over the exclusion ($6,415,500 for 2022), no portion of the exclusion would be available to it.

The following chart illustrates how this would affect you:

Taxable EstateAmount Above NYS ExclusionNYS Estate TaxEffective Tax Rate on Amounts Above NYS ExclusionNet Estate Available to Beneficiaries
$6,110,000$0$00%$6,110,000
$6,200,000$90,000$221,281246%$5,978,719
$6,300,000$190,000$424,785224%$5,875,215
$6,400,000$290,000$551,721190%$5,848,279
$6,415,500$305,500$563,184184%$5,852,316
$6,500,000$390,000$574,000147%$5,926,000
$6,600,000$490,000$586,800120%$6,013,200
$6,700,000$590,000$599,600102%$6,100,400
$6,711,000$601,000$601,000100%$6,110,000

The “cliff” significantly reduces the amount of the net estate available to be distributed to the beneficiaries. Using the above chart, for example, a NYS taxable estate of $6,200,000 will only have a net estate distributable to beneficiaries of $5,978,719 even though the estate was only over the exclusion by $90,000.

Ways to minimize or eliminate the NYS estate tax

A strategy an individual can use to minimize or eliminate the NYS estate tax is through lifetime gifting. NYS does not have a gift tax, just an estate tax. If an individual expects their NYS taxable estate to be impacted by the cliff, the individual can make use of the federal annual exclusion and lifetime gift and estate exemption to reduce the NYS taxable estate. However, individuals have to be wary of the three-year “clawback” rule where any lifetime gifts made within three years of death are clawed back to the NYS estate.

Individuals can also include a “Santa Clause” provision as part of their Will to lower the NYS taxable estate. This provision provides for a conditional bequest for the amount in excess of the exclusion to be made to a charity. For example, if the NYS taxable estate was $6,200,000, the provision would call for $90,000 to be made to charity, thus reducing the taxable estate to $6,110,000, which would be the net estate available to beneficiaries instead of $5,978,719.

Conclusion

Individuals with New York taxable estates might consider implementing certain gift and estate planning strategies to minimize or eliminate the NYS estate tax cliff to increase the amounts passing to their beneficiaries.

Questions? I can be reached at 212.331.7441 | kewong@berdonllp.com or contact your Berdon advisor.

Kevin Wong is a Senior Manager in the Personal Wealth Services Group of Berdon LLP with nearly 10 years of professional experience. He works closely with high net worth individuals on matters involving their personal income tax, family businesses, and fiduciary, gift and estate taxes.

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