Avoiding New York’s estate cliff tax

The current estate tax rate in New York ranges from 3.06% to 16%. According to these tax rates, estates over 6.11 million per individual in 2022 are subjected to taxation. In addition to these tax rates, the state has a tax cliff that mainly targets larger estates. According to the estate tax cliff provision, if the value of a decedent’s estate exceeds the New York tax exemption threshold by 5%, then the whole estate will be subjected to the current estate tax.

If the estate exceeds the current threshold by less than 5%, only the excess value is taxed. This stipulation means that people with large estates need to develop strategies to reduce their estate size to avoid the tax cliff tax. Below are some of the main estate planning methods to help keep an estate manageable.

Passing on assets to a charitable bequest

One of the most common strategies individuals use to avoid falling at the estate tax cliff is making conditional bequests to another person or to anon-profit organization. Additionally, the estate assets above New York’s exemption amount can be transferred through the charitable bequest. The charitable bequests are usually included in an individual’s estate planning documents and are also referred to as the Santa clause. It is important to note that this strategy is only effective when the amount that an individual plans to pass to a charitable bequest falls below the estate tax that would be due if the bequest were not available.

Making lifetime gifts

Another way to reduce the size of your estate to avoid the estate cliff is by making lifetime gifts. New York does not impose a tax on gifts; however, there is a three-year “clawback” rule that indicates that any value of gifts made within three years before death should be added to the estate tax amount. With this, a donor willing to make lifetime gifts must survive for at least three years from the date of the last gift to ensure that the amount transferred is not included in the estate tax.

Breaking domicile with New York

Another way to mitigate the New York estate cliff tax is by leaving the state before death. For example, Florida or New Jersey does not have any estate taxes. However, one must provide enough evidence to show that the location change is real and there are intentions to make the new state the place of a principal residence.

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