New York is one of a minority of states that has its own estate tax separate from the federal estate tax. The state also has laws that can prevent people from actively trying to avoid this tax.
That means that if you’ll have a multimillion-dollar estate when you pass away, it’s crucial to find out more about the law and to take steps to prevent estate taxes from lessening the amount that your loved ones and other beneficiaries will be able to inherit. You can achieve this aim with careful estate planning.
What is the “cliff?”
New York’s estate tax is calculated differently from the federal tax. Typically, when determining whether a estate is large enough to be subject to New York estate tax, only the amount that is designated to go to any person besides the surviving spouse or a charity is counted. If that amount is below the threshold, which increases each year, it’s not subject to New York estate tax. For 2023, that threshold is $6.58 million.
There’s still some exemption available on any amount slightly over the threshold. However, if the estate’s value is more than 5% over it, that’s what’s known as the “cliff,” and the entire amount is subject to tax.
What about gifting to decrease the value of your estate?
Gifting during one’s lifetime is a popular strategy – particularly because New York. unlike some states, has no gift tax. (The federal government does, so you need to be aware of that.) You may choose to give jewelry, art, stocks, real estate, cash and other assets to family while you’re still around. This will bring down the value of your estate.
It’s crucial to be careful about the timing of these gifts. New York has a three-year “clawback” rule. That means if a person passes away within three years after they’ve gifted assets, the value of those assets is “clawed back” to the estate. This can make late-in-life attempts to reduce your estate value fruitless. Note that assets not located in New York typically aren’t subject to clawback.
It’s a lot to consider. That’s why it’s wise to take the time and consideration needed to protect your assets for future generations and the causes you care about. It can help to work with financial and tax advisors in addition, of course, to seeking sound legal guidance, when crafting an approach.