New York’s 2024 Estate Tax Changes Could Cost Your Family Hundreds of Thousands – Here’s What You Need to Know
If you’re a New York resident with significant assets, the state’s 2024 estate tax changes could dramatically impact your family’s financial future. While many Americans focus solely on federal estate tax planning, New York’s unique tax structure creates dangerous pitfalls that could cost your heirs hundreds of thousands of dollars if not properly addressed in your will and trust planning.
Understanding New York’s 2024 Estate Tax Landscape
The New York State Estate Tax Exclusion amount will increase to $6,940,000 in 2024 (from $6,580,000 in 2023). While this increase might seem like good news, it’s the state’s notorious “cliff tax” provision that creates the most significant planning challenges for New York families.
The “cliff tax” comes into play if your estate’s “taxable” value exceeds 105% of the current year’s exclusion amount, at which point the exclusion is entirely forfeited. So, simply put, your estate “falls off the cliff” and is taxed from its first dollar without any exclusion benefit whatsoever. This means that if the value of an estate surpasses 105% of the exemption, which is $7.29 million for 2024, the entire estate becomes taxable, not just the amount exceeding the exemption limit.
The Devastating Impact of the Cliff Tax
To understand how severe this cliff effect can be, consider this real-world example: Sheldon passed away in 2024 with a taxable estate of $6,940,000. Since he is not over the NYS exemption amount in 2024, there is no NYS estate tax due and $6,940,000 will pass to his heirs. However, if Sheldon passed away in 2024 with a taxable estate of $7,300,000, his estate would be over the NYS exemption amount by just $360,000. Yet there would be a NYS estate tax due of $678,000, leaving only $6,622,000 to pass to his heirs. Sheldon’s heirs would actually inherit $318,000 less from Sheldon’s $7.3M estate than from his $6.94M estate!
This dramatic example illustrates why working with an experienced Wills and Trust Attorney Centereach becomes essential for protecting your family’s legacy from unnecessary taxation.
Key Differences from Federal Estate Tax
New York’s estate tax rules differ significantly from federal regulations in several critical ways. Unlike the Federal exemption, a married couple does not automatically get the benefit of double this exemption amount, but must plan in advance so that the surviving spouse doesn’t end up with an estate that is over the exemption amount. Additionally, New York does not allow “portability,” a provision under federal law that lets a surviving spouse inherit any unused portion of their deceased spouse’s estate tax exemption.
Another crucial difference involves gift tax treatment. New York does not have gift tax, but will “claw back”, or include, any gifts made within three years of date of death when calculating the value of the estate for estate tax purposes. This three-year lookback period can significantly impact last-minute gifting strategies.
Essential Planning Strategies for 2024
Given these challenges, several proven strategies can help protect your estate from New York’s punitive tax structure:
Credit Shelter Trusts
In order to preserve the New York exclusion amount of the first spouse to die, some Wills or Revocable Trusts direct that an amount equal to the spouse’s New York exclusion pass to a trust called a “credit shelter trust” or “bypass trust”. The trust can be for the benefit of the surviving spouse and/or descendants, and the assets in the trust escape taxation at the deaths of both spouses. This is a common tax planning strategy designed to preserve the state estate tax exclusion of the first spouse to die, and it remains an important tool in light of the cliff for high-net-worth individuals.
Strategic Lifetime Gifting
Reduce taxable estate through gifting. For those with estates at or slightly above the exclusion amount, they may wish consider lifetime gifts as a means of reducing their taxable estates. However, remember the three-year clawback rule when timing these gifts.
The “Santa Clause” Strategy
One innovative approach involves including charitable provisions in your will. If Sheldon had the Santa Clause provision in his Will, his favorite charity would receive a $360,000 bequest (the amount in excess of the NYS exemption) which, because of the charitable deduction, would reduce his taxable estate to $6,940,000. There would be no NYS estate tax due, and his heirs would inherit $6,940,000. Because of the “Santa Clause” in Sheldon’s Will, his heirs would inherit $318,000 more, enough for them to pay off student loans, or assist them with the purchase of a home. In addition, Sheldon will be able to benefit his favorite charity – a win-win proposition for all (except the NYS estate tax collectors).
The Importance of Professional Guidance
Overseeing the changes in New York tax environments takes considerable time, expertise, coordination, proper timing, and knowledgeable decision-making. Therefore, the advice and guidance of a skilled and highly experienced New York estate planning lawyer is mandatory for your success.
Estate planning firms like Fratello Law, with offices in Nassau and Suffolk Counties, specialize in helping Long Island families navigate these complex tax challenges. Their team understands that every client’s situation is unique and takes time to develop personalized strategies that protect family wealth across generations.
Don’t Wait to Act
Nonetheless, it is still important to revisit your estate plan in light of the current exclusion amount. Even if the cliff does not impact you, the provisions of your Will or Revocable Trust may operate differently now that the law has changed. The stakes are simply too high to leave your family’s financial future to chance.
With New York’s estate tax rates ranging from 3.06% to 16%, and the cliff provision potentially eliminating your entire exemption, proper planning isn’t just advisable – it’s essential for protecting your legacy and ensuring your loved ones receive the inheritance you intended.