How do exclusions affect New Yorkers?
New York State enacted legislation in 2014 to reform property tax laws. One of the major changes was the gradual increase in the New York State property tax exemption from $1 million to the federal level, but with the exceptions provided for by the then-existing federal tax code. As of January 1, 2023, the New York State estate tax exclusion amount has increased from $6,110,000 to $6,580,000. It is indexed for inflation with 2010 considered as the base year for this purpose. Although New York has no gift tax, gifts (other than annuity exclusion gifts) made within three years of a person’s death are “recaptured” and included in the New York State estate tax calculation.
To take advantage of the increased federal exclusion amounts, New Yorkers should plan to maximize the New York exclusion amounts for both spouses. Unlike federal law, the state does not recognize the transferability of a deceased spouse’s unused exclusion amount to the surviving spouse. As a result, many New Yorkers will continue to incorporate trust shelter trusts or disclaimer trusts into their wills to maximize the benefits of both New York and federal law exclusion amounts.
Avoid the New York real estate tax cliff
Doubling the federal estate tax exemption under the TCJA and inflation adjustment of 2023 created a difference of $6,340,000 between the amounts excluded from federal estate taxes and the New York State amounts. Wealthy New Yorkers are denied the benefits of increasing the New York estate tax exemption amount because a “cliff” is built into the New York estate tax calculation that quickly nullifies all exclusion benefits if the deceased’s taxable New York estate is between 100% and 105% of the available exemption amount on the date of death. The cliff completely erases the benefits of the exclusion if the decedent’s New York taxable estate exceeds 105% of the available exclusion amount on the date of death.
Spread between federal and New York state tax credits
|date of death||Federal exemption||New York exemption||spread|
|January 1, 2023 – December 31, 2025||$12,920,000*||$6,580,000*||$6,340,000*|
|January 1, 2026 onwards||$6,460,000||$6,580,000||The New York exemption exceeds the federal exemption by $120,000.*|
*Inflation adjustments in 2024 and 2025 should increase the federal exclusion amounts and the New York amounts. Overall, the methodology used by New York is expected to result in higher inflation adjustments annually on a percentage basis.
To avoid going over the exclusion from New York property taxes and falling into the “cliff” zone, New Yorkers should give gifts 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 exemption (currently $12,920,000) and permanently move assets outside of a New York taxable estate without incurring any state gift tax. Because there is no gift tax in New York (although a three-year addition period applies), residents can permanently insulate the gifted estate from New York estate tax and may have the added benefit of having their New York taxable estate reduced below the exclusion amount. applicable to the date of their death. For some, this could help avoid the confiscating effect of New York’s real estate tax cliff.
- For example, a gift of $12,920,000 from a New York resident could save at least $1,534,000 to $2,067,200 in New York State estate tax (depending on the total size of the taxable estate). It is possible to double the estate tax savings in New York if both spouses use their federal exemptions in full by making lifetime gifts.
- New Yorkers whose estates fall within the 100% to 105% “cliff” range ($6,580,000 to $6,909,000) or whose estates slightly exceed the New York estate tax exemption amount may consider gifting an amount that would make their taxable estate less New york property tax exemption amount.
- For example, an unmarried New Yorker with assets currently valued at $6,980,000 and in relatively good health may want to consider gifting $400,000 at this time to his or her children or other intended beneficiaries. Given the three-year payback, it would be beneficial to make such a gift as soon as possible or to make gifts of that amount in a way that would qualify for the annual gift tax exclusion. Let’s say this person is married and has four children and eight grandchildren. If they give annual exclusion gifts of $17,000 per child and grandchild (either directly or in a splash fund) with each child and grandchild receiving temporary drawing rights, and if the person’s spouse is willing to split the gifts, then up to $408,000 (or will be dealt The entirety of $400,000 in this example) as annual exclusion gifts are non-refundable.
The potential tax savings of this gift program should also be considered in conjunction with the temporary expansion of the federal estate, gift, and GST exemptions before the federal exemptions return to pre-2018 levels of exemption on January 1, 2026. As shown in the chart below, If the end of doubling of the federal estate and gift tax exclusions on January 1, 2026 is taken into account, combined federal and New York State estate tax savings from these gifts would be increased by another approximately $2,584,000 for an individual and $5,168,000 for a married couple for a total savings of approximately $4,118,000 for an individual and approximately $8,236,000 per married couple, compared to people who do not initiate the gift program and allow their expanded federal exceptions to return to pre-2018 levels of exemption.
Potential Federal and New York Savings in Gifting Even Federal Exemption
|Gift amount before 2026||Minimum savings for New York State property taxes||Federal estate tax savings for deaths after 2026||Combine federal and New York estate tax savings on death after 2026|
|$12,920,000 per person||About $1,534,000||About $2,584,000||About $4,118,000|
|$25,840,000 per couple||About $3,068,000||About $5,168,000||About $8,236,000|
As always, the potential estate, gift and GST tax savings should be weighed against the potential cost of losing the income tax basis escalation for assets included in a taxable estate under current law.