2022 New York State Estate Tax & Strategies to Mitigate

New York State Estate Tax & Strategies to Mitigate

In 2022, the New York estate tax exemption is $6,110,000 (up from $5.93mm in 2021). This means that a New Yorker passing away with more than the exemption amount (or a non NY resident with tangible or real property in NY in excess of the exemption) must pay a state estate tax.  Although the NY estate tax rate ranges from 5% to 16% and is much lower than the Federal estate tax (i.e. the federal estate tax is 40% of the value of the estate that exceeds $12.06mm per person or $24.12mm per couple in 2022), the NY state estate tax has a “cliff” and the estate is taxable on the entire amount (not just the excess) if the excess is over 5% the exemption.  Another major difference between the NY estate and federal estate taxes is that the NY estate tax does not allow for portability (i.e. using the deceased spouse’s unused exemption).

To illustrate how the NY estate tax works, consider the following example:

A New Yorker dies in January 2022 with a taxable estate of $6,440,000.  In this instance, the estate exceeds the NY exemption by $330,000; because $330,000 is greater than 5% of the exemption (5% would be $305,500, or a total estate of $6,415,000), the entire $6,440,000 is taxed! If the NY taxable estate were lower only by $25,000, hundreds of thousands in estate tax would not have to be paid!

What can you do to avoid “falling over the cliff” and being responsible for a hefty NY estate tax?

One or a combination of the following strategies can be employed:

  • Outright lifetime gifts. Giving away assets is a great strategy but of course merits many considerations. New York will claw back any gifts made within 3 years back into the estate (so will the federal government). New York does not have a gift tax.  The federal gift and estate tax is combined and thresholds are stated above.  In 2022, gifts of up to $16,000 per person ($32,000 per married couple) can be made to an unlimited number of individuals without having to file a gift tax return.
  • Gifts to trusts. Various forms of irrevocable trusts can diminish the value of your estate.  Many, such as Spousal Lifetime Access Trusts (SLATs), can provide for your spouse during their lifetime but lock away the principal for growth outside of your taxable estate.  Irrevocable Life Insurance Trusts (ILITs) are a great mechanism to ensure that life insurance proceeds are not includable in your estate.  All irrevocable trusts that result in assets being transferred out of your estate, must be weighed against capital gains considerations as a carry over basis will follow with all fully made gifts.
  • Gifts to charities
  • Certain clauses in Wills referred to as “Santa Clause” provisions. These provisions ensure that if a NY estate tax is triggered, a charitable bequest will be made, and will only take effect if the excess that would go to charity is less than the NY estate tax that would be due if the gift was not made.  In our example above, a charitable bequest of $330,000 would be made (because this is the amount exceeding the exemption), and the full exemption amount of $6,110,000 would go to the decedent’s beneficiaries.   Otherwise a tax that is greater than $330,000 would be payable to NYS.

Working with your financial planner and a qualified estate planning attorney is crucially important in taking into consideration the multitude of factors that go into making the right planning decisions for you.  Call us today at 347-699-5529 to start the conversation.