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:

  1. Make significant charitable contributions to reduce the value of your taxable estate.
  2. 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
  3. 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. 

 


MORE READING FROM HOLM & O’HARA

NEWSLETTER ARCHIVE

Is It Time to Sell Your Multifamily Investment Property?

Some Potential Good News for Investors in New York’s New Rent Laws

A Conversation with Landlord Tenant Attorney Michelle Maratto Itkowitz

Investor Perspective: Multifamily Outlook Under the New Rent Laws

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

Trusts & Estates Update – Spring 2019

Real Estate Alert: New Taxes on High Value NYS Transactions Take Effect July 1, 2019

Multifamily Property Transactions: A View from the Closing Table

Naughty and Nice: Tips for Post-Holiday Estate Planning

Environmental Site Assessments: Essentials for Real Estate Investors

Fall Update: What’s Happening in Real Estate

Estate Planning: The Fun and the Factual

Trusts & Estates Update – Spring 2018

Altman Ruling Offers Clarity – and Opportunity – for NYC Real Estate Investors

Promises and Pitfalls for Real Estate Investors: The New Tax Law

The New Tax Law and You: Some Essentials

Estate Planning: Why It Matters

NNN Properties: An Opportunity For Real Estate Investors

Time To Reevaluate Your Estate Plan

December 2016 Trusts & Estates Update

Now is the Time to Distribute Shares in Your Family Business

Planning for a Rainy Day – Using a Life Insurance Trust To Care For Your Loved Ones and Provide Liquidity For An Estate

March 2016 Trusts & Estates Update

Make §1031 Like-Kind Exchanges Work for You

Engaging the Inevitable: Considering Your Estate Plan

Non-U.S. Taxpayers Selling U.S. Real Estate Should Prepare for Higher Withholding

Eye on Estate Planning

Plan Now to Realize §1031 Capital Gains Deferment

Avoid the Estate Tax Cliff with Proactive Planning

Non-Resident Aliens and the Sale of U.S. Real Property

IRC §1031 Like-Kind Exchange: Versatile Tax Deferral Strategy for Real Estate Investment Gains

 


Top of Page