It’s Gotten Easier to Fall Off NY’s Estate Tax Cliff—Again

Following federal estate tax reforms that took effect in 2014, New York State also revised its estate tax law so that estates of deceased New York residents worth less than $5 million (adjusted for inflation, currently $5.74 million) are no longer subject to estate tax. The basic exclusion amount was previously just $1 million. Rather than impose a marginal tax on anything over the new exclusion amount, however, the New York law instituted what has become known as the “estate tax cliff.” When an estate exceeds the exempted amount by 5% or more, the entire estate is subject to New York State estate tax, which starts at 3.06% for the first $500,000 and rises to 16% for estates over $10.1 million.

Late Gifting May Be Too Late

Gifting would seem to be a logical tool for those seeking to avoid New York’s estate tax cliff, while also minimizing any federal estate tax exposure. New York eliminated its gift tax in 1999 and the federal estate and gift tax exemption is a not insubstantial $11.4 million for 2019 (in addition to the annual gift allowance of $15,000 each to unlimited individuals). However, when New York originally changed its estate tax laws in 2014 (see Chapter 59, Laws of 2014, Part X), legislators were concerned about the potential loss of revenue due to the exponentially higher exclusion amount. Legislators determined that significant revenues could recouped on deathbed and late life gifts, so the law included a provision based on the Internal Revenue Code’s old three year gross up rule (§2035(a), prior to 1997). This provision looks back 3 years from the date of death and adds the value of any gift made during that time to the total value of the estate. The provision expired briefly at the beginning of 2019, but was reinstated effective January 15, 2019. It is currently set to expire in 2026.

Exceptions

Two types of gift are not subject to the look-back provision:

Gifts made to charity, which are not taxable in any event.
Real and tangible property located in another state.

In addition, gifts made while the decedent was not a resident of New York State are not considered.

3 for 3: Strategies to Avoid the 3 Year Lookback

New York State’s estate tax laws have always been quirky. For example, any unused spousal estate tax exclusion amount is not transferrable to the surviving spouse, as it is for federal estate tax purposes. Early and aggressive planning is essential in order to avoid unnecessary loss of assets to taxes. Three strategies in particular may be useful:

Make significant charitable contributions to reduce the value of your taxable estate.
Purchase tangible property—such as real estate—in states with more favorable tax environments. This can be part of a broader strategy to reduce capital gains taxes using IRC §1031 like-kind exchanges.
Change your domicile from New York to a state that does not have death transfer taxes. Note that this can take as long as 183 days—just more than half a year. However, if you succeed, any property you maintain in New York will be subject to your new state’s tax laws.

To evaluate your options for creating a flexible estate plan that helps you achieve your current and long-term objectives, contact your Holm & O’Hara LLP estate planning attorney.