Like many states, New York has a progressive tax rate that starts at 3.06% for estates at or over $5.74 million and extends up to 16% for estates that exceed the exemption limit by $10.1 million or more. But unlike other states, if the estate exceeds the exemption level by more than 5%, the New York estate tax is applied to the entire amount of the estate, instead of just the amount over the limit.* The fact that all estate assets are subject to taxation beyond a certain level is known as the New York "Fiscal Cliff."
For example, in 2021 an estate worth $5.93 million would be subject to $0 taxation, but an estate worth $6.25 million would "fall off" the cliff and be subject to $542,000 in estate taxes to an increase of only $320,000. By employing one of the strategies below to stay below the exemption level, you can save your estate more than $500,000.
There are many ways our estate tax attorneys can help you avoid this cliff and safeguard your wealth. Some possibilities include:
1. Credit Shelter Trusts
Married couples can utilize credit shelter trusts, also known as A/B trusts. These are irrevocable trusts created upon the death of a married individual. Because a trustee manages the assets in such a trust, the decedent's assets are not added to the estate of the surviving spouse and can effectively double the couple's state-level estate tax exemption to $10.98 million. These trusts can also be designed to also allow the surviving spouse to maintain certain rights to trust income and assets during his or her lifetime for health, education, maintenance and support purposes. After the second spouse's death, the credit shelter trust is transferred to the next generation without being subject to estate taxes.
2. Non-Grantor Trusts
Non-grantor trusts are irrevocable trusts made during one's lifetime that can provide estate tax relief. In a non-grantor trust, the creator of the trust, the settlor/grantor, transfers assets to an independent trustee who has been designated to make decisions on behalf of the trust's beneficiaries. In exchange for giving up certain rights to control the disposition of trust assets, non-grantor trusts can provide trust grantors with more advantageous tax benefits than grantor trusts. You also can establish a non-grantor trust in a different tax jurisdiction from your residency. For example, a resident of New York can establish a non-grantor trust in New Hampshire, a state with no state-level income or estate tax, and protect assets that exceed the New York estate tax exemption from the "Fiscal Cliff".
Dynasty Trusts – Dynasty trusts are a type of non-grantor trusts that ease wealth transfer between generations. Assets allocated as gifts to these trusts are tax-free below the Generation-Skipping Transfer and Lifetime Gift Exemption limits – which were increased to $11.4 million per individual by the 2017 Tax Cuts and Jobs Act. Once part of the dynasty trust, assets are exempt from transfer taxation for the duration of the trust, which may result in estate tax savings for several generations.
3. Changing Your Domicile
Although they are often used interchangeably in colloquial speech, domicile, statutory residence and residence are distinct legal terms in the world of estate planning. Legally, your "domicile" is the state where you maintain your permanent tax "home". It determines where your will is probated and how your estate will be taxed. If you have such ties or property in multiple locations, it may be possible to change your domicile to the most tax-friendly state. It is important to consult with your estate planning attorney if you are considering a change in residence or domicile to ensure you arrange your affairs so that the relocation is respected by tax authorities.
4. Strategic Gifting
New York does not have a gift tax, which is a tax applied to gifts made during an individual's lifetime. This means that if you seek to minimize the amount of your estate, making strategic gifts to loved ones, rather than naming them as beneficiaries in your estate may be a wise course of action. Gifts given within the three-year period before your death, however, may still be counted towards the total amount of your estate and may not be exempted from an estate tax, so it is prudent to plan these gifts far in advance.
5. Charitable Formula Gifts
One excellent way to minimize estate taxation while aiding philanthropic causes, is to include a formula clause in your estate instrument specifying that any assets in excess of the New York estate tax exemption not being transferred to a spouse or credit shelter trust will be given to a charitable organization of your choosing. This protects your entire estate from falling off the "Fiscal Cliff," meaning that your heirs will receive more assets, and also avoids taxation on your charitable donation, thereby increasing the impact of your philanthropic legacy.
6. Discounted Valuation of Closely-Held Businesses
A family-owned or closely-held private business is often among the most valuable estate assets. If you are interested in minimizing your taxes, making lifetime gifts of closely-held business stock to your family members or heirs may be wiser than naming these individuals as the beneficiaries of these stocks. Transferring these stocks during your lifetime can help you to reduce income and estate taxes.
7. Discounted Values of Fractional Interest in Real Estate
Your interest in real estate is considered part of your taxable estate under New York law. Fractional ownership of real estate can enable you to become eligible for valuation discounts that are not available to individuals who possess full ownership of a property. This is due to the restrictions on your ability to market and control your asset that are inherent to partial ownership. Our attorneys can assist you in maximizing these discounts during your property valuation.
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*If the estate exceeds the limit by less than 5%, it is applied only to the amount of assets that exceed the limit. Note that when accounting for the taxable estate, the total value will include even “non-probate” assets such as your home, IRAs and life insurance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.