The New York State Estate Tax Cliff and the ‘Santa Clause’ Fix

New York has an “estate tax cliff,” which can result in heirs paying New York estate tax at a rate exceeding 100%.

The current per-person NYS estate tax exemption is $6.94 million, which is the amount you can leave to your heirs at your death without paying NYS estate tax. If your taxable estate, however, is in the so-called “estate tax cliff range” ($6.94 million and $7.668 million for 2024), you fall off the NYS estate tax cliff and the amount over the NYS exemption is taxed at a rate of more than 100% – as much as 250% or more! There is a solution to this crazy situation. (Note that if your estate is over $7.67 million, the tax rate on amounts over the exemption declines dramatically.)

You can reduce the impact of the cliff by bequeathing to charity assets in excess of the NYS exemption amount. This bequest, which is written into estate planning documents, is sometimes called the “Santa clause.” The Santa clause would take effect, however, only if the amount that is to go to charity is less than the NYS estate tax that would be due if there were no charitable bequest. That is, the charitable bequest only takes effect when the amount over the NYS exemption amount is taxed at more than 100% (i.e., your taxable estate is in the “cliff zone”). A formula clause determines the amount of the bequest to charity; the amount is not fixed and depends on the extent to which your taxable estate falls within the cliff zone.

For example, Jane dies on January 15, 2024, with a taxable estate of $6.99 million, which is only $50,000 over the NYS exemption amount of $6.94 million. The $50,000 over the NYS exemption amount would be subject to a NYS estate tax of $133,269, a tax rate of approximately 266%! Fortunately, Jane’s estate planning documents provided for a Santa clause, so Jane’s favorite charity will receive $50,000 upon her death, which brings her taxable estate down to $6.94 million, the NYS exemption amount, resulting in no NYS estate tax owed.

The Net Benefit to Heirs

Tax without the Santa clause: $133,126
LESS: bequest to charity:       ($50,000)
Net benefit to heirs:                   $83,126

Suppose you suspect that your taxable estate at the time of your death may be within the NYS estate tax cliff range. In that case, you may want to consider using a Santa clause in your estate planning documents to hedge your bets and give more to your heirs, while also benefitting the charities of your choice. Your estate planning professional can help you run the numbers.

This article appeared in the March 2024 issue of Stroll Lloyd Harbor.