As part of the Tax Cuts and Jobs Act (TCJA) of 2017, lifetime estate and gift tax exemptions are set at $13.61 million for individuals and $27.2 million for couples in 2024, adjusted for yearly inflation. This huge exemption increase was a relief to many families, as they were no longer subject to federal estate tax as long as their estate value fell below this threshold. However, some states, such as New York, have imposed their own estate taxes.

What is the New York estate tax exemption?

The 2024 New York estate tax exemption is $6.940 million and will be adjusted for inflation in 2025. This is significantly less than the federal estate tax exemption. The estate of a New York resident must file a New York estate tax return if the estate’s federal gross estate amount plus any includible gifts exceeds the current New York estate tax threshold at the time of the estate owner’s death.

The marital deduction applies to both the New York and federal estate tax. The value of any property left to a surviving spouse is exempt from both New York and federal estate taxes.

Under New York estate tax law, if a spouse does not use part of the New York estate exclusion, it cannot be transferred to the surviving spouse. A deceased spouse would lose any remaining estate tax exclusion if they did not pass gifts to non-spouse beneficiaries or a trust at the time of their deaths. This differs from the federal estate tax exclusion, where unused, excluded gift amounts can be passed to the other spouse.

What is the New York estate tax cliff?

According to the federal estate tax law, only the estate or gift that exceeds the lifetime estate and gift tax threshold is subject to taxes. For example, if someone dies in 2024 and their individual estate is valued at $14.61 million, Only the million that exceeds the exemption threshold is taxed.

According to New York estate tax law, if the value of the estate exceeds the current New York state estate tax exemption by more than 5% of the basic exclusion amount, then the entire estate is subject to New York estate taxes. If the estate value exceeds the exemption by less than 5%, then only the amount that exceeds the threshold is subject to taxation.

A family’s estate will pay taxes on its entire value if it exceeds the $6.940 million threshold by more than 5% of the basic exclusion amount. An estate value of even a couple hundred thousand more ($7.287 million as opposed to $6.940 million) can have significant financial implications if the value of the estate is more than 5% higher than the threshold. Your heirs may actually inherit less money after taxes if your estate exceeds $7.287 million, compared to a valuation of several hundred thousand dollars less.

Summary of New York estate tax law:

• If a New York estate is valued at equal to or less than the exclusion amount, it would not be subject to New York estate tax.
• If a New York estate is valued between 100% and 105% of the exclusion amount, the estate would pay estate taxes on the value of the estate that exceeds the threshold.
• If a New York estate is valued at more than 105% of the exclusion amount, the estate would pay estate taxes on the entire value of the estate.

How can you reduce the risk of paying excess New York estate taxes?

If you are a New York resident or own property in New York, it is essential to consult with your estate planning attorney to learn how to avoid falling off the New York estate tax cliff.

Life Insurance Trusts

Families that own significant life insurance policies may not consider the impact of a premature death and a life insurance payout on their estate taxes, but they should. If their life insurance policy is not properly structured, the surviving spouse could exceed the New York estate tax cliff when their spouse dies.

Transferring life insurance policies to a life insurance trust or purchasing new life insurance policies using a life insurance trust can help reduce potential estate taxes for families that may be near or above the New York estate tax threshold.

Santa Clause provision

As part of a comprehensive estate planning strategy, some families may add a provision to their will or revocable trust. They will make a conditional bequest to a named charity in the amount that their estate exceeds the New York estate tax cliff amount.

The Santa Clause provision is especially valuable when an estate experiences an unexpected increase in value that pushes its value over the New York estate tax cliff. Most families would prefer to see this excess money go to their charity rather than to pay their tax bill.

Gifting early

Lifetime gifting is another way to reduce your taxable estate in New York. Currently, the federal estate and gift tax exemption is quite high, at $13.61 million for individuals and $27.2 million for couples. Estate taxes apply in New York, but gift taxes do not. If gifts are made in New York within three years of death, the value of the gifts is clawed back and added to the decedent’s New York estate and, therefore, is subject to New York estate taxes. Gifting early in life can help reduce a New York estate value and mitigate the New York estate tax cliff.

Other strategies to consider include moving out of New York or purchasing assets outside of New York. Work with your estate and financial planning professionals to develop a comprehensive estate plan that minimizes the impact of the New York Estate tax cliff, preserving more wealth for your heirs.

If you have questions about transferring wealth across multiple generations or want to learn how to protect your assets and property with a comprehensive set of estate planning tools, contact your NYC estate planning attorney today for expert guidance and personalized strategies.

If you have questions about transferring wealth across multiple generations or want to learn about how to protect your assets and property with a comprehensive set of estate planning tools, contact us.