As part of Tax Cuts and Jobs Act of 2017, the U.S. federal estate tax exemption amount increased to approximately $12.92 million per individual or $25.84 million per couple (2023). As a result, many families are no longer subject to federal estate tax due to the high estate tax exemption amounts. However, several individual states impose their own estate or death taxes, and many have much lower estate tax exemption thresholds.

New York is one of the states that administers its own estate tax and has a relatively low estate tax exemption amount. Even if a deceased person’s estate is not large enough to owe federal estate tax, individuals may still owe an estate tax to the state of New York. The New York estate tax exemption amount is currently $6,580,000 (2023).

Early estate planning is recommended to avoid a diminished legacy due to the New York estate tax. One reason to plan early is that New York’s estate tax law includes a drastic provision commonly referred to as the “New York estate tax cliff” that can lead to significantly increased taxation when estate values pass a certain threshold. This article reviews the basics of the New York estate tax law and discusses estate planning strategies that can be used to reduce the New York estate tax and help people avoid “falling off the New York estate tax cliff.”

Review of New York Estate Exclusion, Estate Tax Rate and Spousal Exemption

There are many unique aspects to calculating an estate tax on a decedent’s estate. To make things more complicated, New York has laws that are considerably different from the federal estate tax and other states’ estate taxes.

What is the New York estate tax exclusion? The basic exclusion amount for New York’s estate tax for deaths in 2023 is $6,580,000. The estate of a New York resident must file a New York estate tax return if the amount of the New York resident’s federal gross estate, plus the amount of any includible gifts, exceeds the current New York exclusion amount at the date of death. Each year this New York estate tax exclusion amount is adjusted slightly for inflation. For example, the basic exclusion amount was previously $5,850,000 for deaths in 2020.

What is the New York estate tax rate? The New York estate tax rate is much lower than the federal estate tax rate (40%). Specifically, the New York estate tax rate starts at 5% and goes up to a maximum rate of 16%. Calculating the New York estate tax is done by using the tax tables provided on Form ET-706. Estate executors must file and pay the tax to the New York State Department of Taxation and Finance within nine months after the decedent’s death.

Does the New York estate tax have a spousal exemption? Any amount of property left to a surviving spouse is exempt from both federal and New York estate tax (this is referred to as the “marital deduction”). There is a big distinction between New York state and federal law, however. The federal estate tax exclusion amount left unused is transferrable (or “portable”) between spouses. However, any unused amount of the New York estate exclusion may not be transferred and later used by the surviving spouse.

This means that if the deceased spouse’s exclusion is not used by passing gifts to non-spouse beneficiaries or a trust, it cannot be used in the future. For example, this may happen when a spouse directs that their entire estate pass outright to the surviving spouse. When the surviving spouse passes, that spouse will only have their own New York estate tax exclusion amount available, but no additional amount from the predeceased spouse (under federal law the deceased spouse’s unused exemption amount may be carried over and added to the surviving spouse’s exemption). By not passing the first spouse’s New York exemption amount to non-spouse beneficiaries or a trust, the family could face significant future New York estate taxes.

Are there any special considerations for Non-New York Residents with New York Property? If the decedent is a nonresident owning real property or tangible personal property in New York State, the property is subject to the New York estate tax above the exemption amount. The decedent’s other assets are not. This could occur when a nonresident owns real estate valued over the exemption amount. However, there are many planning techniques that may be used to mitigate a New York estate tax on property owned by nonresidents.

What Is the New York Estate Tax Cliff? How Does an Individual Fall Off the Cliff?

One distinct part of the New York estate tax law that catches many families by surprise is known as the New York estate tax cliff. The New York estate tax cliff law is unique compared to federal estate tax. Under federal law, only the amount above the exemption amount is subject to estate tax. For example, if the exemption amount is $12.92 million and the taxable estate is $13.92 million, then only the excess $1 million above the exemption amount would be subject to federal estate tax.

The operation of New York’s estate tax law is very different. When a New York estate exceeds the exemption amount by greater than 5%, the entire estate is subject to New York estate tax (under 5% only the excess amount is taxed). This can lead to interesting outcomes.

For example, if someone dies in January 2023, leaving a taxable estate of $6,909,000, the estate exceeds the New York estate exemption of $6,580,000 by $329,000. Since this amount exceeds $6,909,000 (5% of the basic exclusion amount), the entire $6,909,000 estate is subject to New York estate tax with an amount payable of $626,365 (calculated on Form ET-706). In other states or at the federal level, the estate would pay tax on the excess amount ($329,000 in this case). However, in New York, a tax is now owed on the entire estate. The heirs in this example would avoid paying $626,352 in estate tax and have a better financial outcome if the estate were valued only $330,000 less! In fact, heirs don’t receive an additional dollar of benefit until the estate is worth in excess of $7,251,389.  Please see the chart below for a more detailed calculation:

Taxable EstateAmount Above NYS ExemptionNYS Estate TaxTax Rate on Amount Above NYS ExemptionTax Rate on Taxable EstateNet Estate Remaining After NYS Estate Tax

It’s easy to see that the New York estate tax can quickly become a large taxable event for many families and it often surprises individuals. Many practitioners call this the New York estate tax cliff due to the harsh tax treatment triggered by only exceeding 5% of the exemption limit. Fortunately, there are advanced estate planning techniques that individuals approaching or anticipating being near these New York exemption amounts should consider—but they require taking early action. If properly implemented ahead of death, these strategies may successfully mitigate the negative effects of the New York estate tax cliff and leave larger post-tax legacies.

New York Estate Tax Planning Techniques to Avoid Falling Off the New York Estate Tax Cliff

Given these New York estate tax limits and the unique operation of the New York estate tax cliff, there are strategic options when positioning investment strategies and other financial planning considerations. The New York state legislature is intent on not matching the federal estate tax exclusion amount or adopting the federal rule on portability between spouses. Thus, planning is vital to minimize possible New York estate taxation as this law will be around for the foreseeable future.

Certain gifts will also not be subject to New York estate tax. This includes:

  1. Gifts made when the decedent was not a resident of New York.
  2. Gifts of real property or tangible personal property located outside New York at the time the gift was made.
  3. Gifts made to charity (never taxable to an estate).

Properly Using Life Insurance Trusts – Younger families with growing balance sheets may not think much about estate tax planning or death, but they may own significant life insurance policies. An unexpected life insurance payout not structured properly may push one spouse well over the New York estate tax cliff. Properly transferring existing policies to a life insurance trust (ILIT) or purchasing new life insurance policies through an ILIT to hold insurance proceeds is essential for families who may be near or above the New York estate tax exemption amount when considering current life insurance coverage as an asset of the overall estate.

“Santa Clause” Provision in a Will and Charitable Giving – Commonly known as a “Santa Clause” provision among estate planning practitioners, it is possible to make a conditional bequest in a will or revocable trust to a charity that will happen only if an estate is valued over a certain amount (most commonly the New York estate tax cliff number). This may be a great way to plan for an unexpected increase in asset size before death and is often used in conjunction with other New York estate tax planning methods. Families would rather have the excess money go to a charity of their choice rather than the state of New York.

Preserve New York State Estate Tax Exclusion Amount With an Exemption Trust – As discussed above, the New York estate tax exemption is not portable between spouses (“use it or lose it”). One way to preserve this amount is by establishing a trust equal to the estate tax exemption (federal or New York). Transfers to these trusts leave an individual’s estate and are technically subject to the estate tax (or gift tax). This ensures that the remaining money and growth will not be taxed again when the second spouse dies.

These special trusts are also known as credit shelter trusts, AB trusts or bypass trusts. There are many ways to structure these trusts to provide flexibility to the grantor, surviving spouse and family at death. This may include setting up a spousal lifetime access trust, which can, in certain circumstances, retain some ability to access the funds during the life of the grantor. Ultimately, the goal is for assets in the trust to avoid taxation at the deaths of both spouses to maximize a wealth transfer to other estate beneficiaries.

Breaking Domicile With New York – Some individuals are motivated to leave the state of New York before death to avoid estate tax. This may be an effective strategy to mitigate the New York estate tax, as well as New York income tax. However, careful planning is needed to demonstrate that sufficient ties are broken to escape taxation (see our article on residency versus domicile for more information on leaving high-tax states).

Moving Assets Into Non-New York Tangible Property – Increasing assets that are not New York situs may be another strategy to consider (most often real estate). This can be part of a broader strategy using Internal Revenue Code Section 1031 like-kind exchanges or opportunity zones. Using a properly structured like-kind exchange, New York investment property may be exchanged into other non-New York investment property with no federal tax liability.

It is important to note that cooperative apartments are considered an intangible asset that are not subject to New York estate tax for non-New York residents. Non-New York residents can essentially copy this legal structure for other property by creating a special residence trust or limited liability company for their New York property. These structures convert the tangible property to intangible property and avoid the imposition of the New York estate tax for non-New York residents.

Integrating New York Estate Planning Into a Family’s Financial Plan

An integrated financial plan not only considers New York legal and estate tax rules but also the subjective needs of the individual family. Families may feel uncomfortable gifting assets to their spouse or children, setting up irrevocable trusts or engaging in other more permanent planning strategies. A strategy that works for one family might not be suitable for another family with different goals and values.

Considering changing laws and potential changes in personal circumstances and maintaining flexibility in your estate plan is important. One thing is certain, laws and planning needs will change. Families must develop a plan that not only is tax-efficient and tax-compliant but also suits the goals and circumstances of their desire to protect and build the family’s wealth for current and future generations. Working together with an experienced financial advisor, attorney and accountant are essential for families with these goals in mind. Cerity Partners can also help families integrate their investment strategy with their estate plan for longer-term peace of mind.

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