Window Closing for New Yorkers to Take Advantage of Expanded Federal Tax Exclusions and Exemptions

HOW THE EXCLUSIONS IMPACT NEW YORK RESIDENTS

New York State enacted legislation in 2014 reforming its estate tax laws. One of its major changes was the gradual increase of the New York State estate tax exclusion from $1,000,000 to the federal level, anchored, however, to the exclusions provided under then-existing federal tax law. As of January 1, 2024, the New York State estate tax exclusion amount increased from $6,580,000 to $6,940,000. It is indexed for inflation with 2010 as the base year for this purpose. Although New York does not have a gift tax, gifts (other than annual exclusions gifts) made within three years of one’s death are “clawed back” and included in the New York State estate tax computation.

To take advantage of the increased federal exclusion amounts, New Yorkers should plan to maximize both spouses’ New York exclusion amounts. Unlike federal law, the state does not recognize the portability of a deceased spouse’s unused exclusion amount to the surviving spouse. As a result, many New Yorkers will continue to incorporate credit shelter trusts or disclaimer trusts in their wills to maximize the benefits of both the New York and federal law exclusion and exemption amounts.

AVOIDING THE NEW YORK ESTATE TAX CLIFF

The doubling of the federal estate tax exclusion under the TCJA and the 2024 inflation adjustment has created a $6,670,000 spread between the federal and New York State estate tax exclusion amounts. The benefits of an increased New York estate tax exclusion amount are effectively denied to wealthier New Yorkers because a “cliff” is built into the New York estate tax calculation that quickly phases out all benefits of the exclusion if the decedent’s New York taxable estate is between 100% and 105% of the exclusion amount available on the date of death. The cliff completely wipes out the benefits of the exclusion if the decedent’s New York taxable estate exceeds 105% of the exclusion amount available on the date of death.

SPREAD BETWEEN FEDERAL AND NEW YORK STATE ESTATE TAX EXEMPTIONS 

*Inflation adjustment in 2025 should increase both the federal and New York exclusion amounts. In general, the methodology used by New York is expected to produce higher inflation adjustments per annum on a percentage basis.

To avoid exceeding the New York estate tax exclusion and falling into the “cliff” range, New Yorkers should gift sooner rather than later and consider implementing the following strategies:

• New York residents can make lifetime gifts within the parameters of the temporarily expanded federal exclusion (currently $13,610,000) and permanently move assets out of the New York taxable estate without incurring any state-level gift tax. Because New York has no gift tax (although a three-year add-back applies), residents can permanently insulate gifted property from New York estate tax and may have the added benefit of reducing their New York taxable estates below the applicable exclusion amount on the date of their death. For some, this can help avoid the confiscatory impact of the New York estate tax cliff.
  • For example, a gift of $13,610,000 by a New York resident can potentially save at least between $1,644,300 to $2,177,600 of New York State estate tax (depending on the total size of the taxable estate). The New York estate tax savings could potentially be doubled if both spouses were to fully use their federal exclusions by making lifetime gifts.
• New Yorkers whose estates are within the 100% to 105% “cliff” range ($6,940,000 to $7,287,000) or whose estates only slightly exceed the New York estate tax exclusion amount may consider gifting an amount that would bring their taxable estate below the New York estate tax exclusion amount.
  • For example, a New Yorker who has assets with a current value of $7,300,000 and is in relatively good health may wish to consider gifting $400,000 at this time to their children or other intended beneficiaries. Considering the three-year clawback, it would be advantageous to make such a gift as soon as possible or to make gifts of that amount in a manner that qualifies for the annual gift tax exclusion. Suppose this person is married and has four children and eight grandchildren. If they make annual exclusion gifts of $18,000 to each child and grandchild (either outright or in a sprinkle trust) with each child and grandchild having temporary withdrawal rights, and if the person’s spouse is willing to split the gifts, then up to $432,000 (or the entire $400,000 in this example) would be treated as annual exclusion gifts that are not subject to the clawback.

The potential tax savings of such a gifting program should also be considered in tandem with the temporary expansion of the federal estate and gift exclusions and GST tax exemption before such amounts revert to pre-2018 exclusion levels on January 1, 2026. As illustrated in the below chart, if the sunset of the doubling of the federal estate and gift tax exclusions on January 1, 2026, is factored in, the combined federal and New York State estate tax savings from such gifts would be increased by another approximately $2,722,000 for an individual and $5,444,000 for a married couple for a total savings of approximately $4,366,300 for an individual and approximately $8,732,600 for a married couple, as compared to persons who do not embark on a gifting program and allow their expanded federal exclusions to revert to pre-2018 exclusion levels.

POTENTIAL FEDERAL AND NEW YORK SAVINGS IN GIFTING UP TO FEDERAL EXEMPTION

As always, the potential estate, gift and GST tax savings should be weighed against the potential cost of the loss of the step-up of income tax basis for assets included in a decedent’s taxable estate under current law.