How To Avoid The New York Estate Cliff Tax

As New York sees estate and gifting limits change for 2022, it's crucial to understand how to best protect your assets during estate planning. Estate tax doesn't have to be a concern when handled properly.

First, a look at the previous and current New York estate tax rates

New York uses a graduated estate tax rate that ranges from 3.06% to 16%. While the rate range will remain the same going into 2022, the threshold at which the state charges estate tax has changed. For 2021, estates worth over $5.92 million were subject to taxation.

2022 sees this increase to $6.11 million, an adjustment that accounts for inflation. Whether you're in need of estate planning for yourself or a relative, it's important to make the process as simple as possible for the expected beneficiaries.

There are a couple of methods commonly used by New York residents to avoid estate tax. Each one revolves around keeping the estate small enough that it doesn't fall over the tax cliff. Here's an example of how estate taxes can impact the inherited amount:

If in March of 2022, a New York resident passes away and the taxable value of the estate is below the $6.11 million mark, it would not be subject to New York estate tax. Let's say the estate was actually worth $7.1 million. New York has a so-called “tax cliff” for large estates: If the total value of the estate is more than 105% of the exempt amount ($6.11 million for 2022), then the entire estate is taxed.

Since 105% of $6.11 million is $6,415,500 million, a $7.1 million estate would exceed the limit and be taxed in its entirety. So in our example above, the amount over the exemption would be taxed on top of a base rate. That means we have a base rate of $522,800 and an estate tax of 12.8%.

However, there’s one more step! New York also has a rate threshold, which means that only the excess left after subtracting this threshold from the total estate will be left. For this tax bracket, the threshold is $6.1 million. If we subtract that from $7.1 million, we’re left with $1 million. 12.8% of that is $128,000, which we’ll add to the base rate of $522,800 for a grand total of $650,800, which is what the estate would owe in taxes.

How to avoid the New York estate tax cliff

Outlining in your will or revocable trust exactly how your assets should be handled makes your estate executor’s job much easier. If you want to make sure you pass on as much wealth as possible to your loved ones, it can actually benefit you and your family to conditionally give some away.

New York estate planning regularly uses conditional bequests to allow residents the option of donating to charity if certain requirements are met. Making the amount donated conditional on exceeding the $6.11 million limit means only the funds that would exceed the limit are donated. This leaves the estate just below the threshold and no longer subject to the New York estate tax.

Gifting assets to loved ones is also a straightforward way to reduce the size of an estate while still giving the money to specific individuals. In 2022, the federal estate and gift tax exemption is $12.06 million with New York having its own "clawback" rule in place. To keep it concise, any assets gifted within three years prior to your passing will be considered part of the estate's value, even though they were already gifted.

There are multiple benefits to keeping a small estate

Aside from not being subject to New York's estate tax, trying to keep an estate at a manageable size should be part of any estate planning. The smaller the estate, the faster processing will be for your beneficiaries.

Estates worth less than $50,000 are even able to skip probate and immediately transfer to a voluntary administrator. If the estate is worth more and goes through probate, the probate fees will be based on the total value of the estate. Always take time to verify that every possible fee and tax has been accounted for during the estate planning.

By educating yourself on how to avoid estate taxes and minimize fees, you're creating a legacy that makes the most out of New York estate laws. For expert help during your estate planning, we encourage you to reach out to our team at Clear Estate for a free consultation.

We understand that every estate is unique and will work with you from start to finish. Let us help you now and your beneficiaries later. Our work doesn't end until every beneficiary and piece of the estate is properly settled.