New York Residents Should Be Mindful

of the New York Estate Tax

September 2024

Clients increasingly ask about strategies for coping with the pending reduction in the Federal transfer tax exemption that will be effective as of January 1, 2026. Absent legislation, the Federal exemption is expected to be reduced from

$13,600,000 to approximately $7,000,000. New York residents, though, should not lose sight of the New York State transfer tax rules that are equally worthy of attention. Here is a short list of important information to know about the New York transfer tax regime:

• New York does not have a Gift Tax.

Like most states, New York does not have a tax on transfers during lifetime. However, the New York estate tax law provides that gifts made within the last three years prior to death are to be added back to the gross estate for purposes of calculating the New York estate tax at death (the “claw-back”).

• New York has an Estate Tax and an Exemption.

The current exemption is $6,940,000 for persons in the year 2024. Because it is indexed for inflation, the New York exemption will increase again in 2025.

• New York Estate Tax is subject to a “Cliff.

When the value of assets in a New York gross estate exceeds 105% of the amount of the available exemption, the use of the exemption is lost. For this reason, the New York estate tax is referred to as a “Cliff” tax. An example: if a New York resident dies with a taxable estate of $6,940,000 in 2024, the New York estate tax due will be $0.

However, if the resident dies with an estate of $7,300,000, the exemption will be lost and the estate tax payable will be $678,000.

• There are ways to avoid the “Cliff” tax in certain estates.

A Will or Revocable Trust can provide a bequest to charity of a sufficient amount of assets in excess of the New York exemption to reduce the New York estate tax to $0. It can be conditional, so that the bequest will not be made unless the amount passing to charity is less than the New York tax that would have been due if the bequest had not been made. This conditional bequest is sometimes referred to as a “Santa Clause.”

• Other Techniques are available regardless of the size of the estate of the New York Resident.

The New York estate claw-back for lifetime gifts is only triggered if the donor dies within three years of making the gift. Consequently, anyone making a sizable gift prior to 2026 in order to make use of his or her Federal exemption will also benefit from removing it from his or her New York gross estate – but without using any of his or her available State exemption – as long as the donor lives for three years.