Yes, New York has a progressive estate tax that varies from 5% up to 16%. This means that if you are a New York resident or have assets located in NY that exceeds the amount of the estate tax exemption, $5,930,000 for 2021, your estate might be subject to the New York State Estate Tax.
To complicate matters further, if the size of your assets exceeds in 5% ($6,226,500) or more the amount of the current exemption you will be taxed from dollar one. Yes! That’s exactly what you just read! This is what we call the “cliff”, a rule implemented by the New York State in which essentially takes away the possibility of using the above-mentioned exemption.
For instance, let’s consider you own a house in New York State with a value of US$5,000,000.00. In this case the New York State estate tax would be Zero (estate value below the exemption amount of $5,930,000). Now, let’s consider you own a house in the amount of 6,000,000.00. Here, your net estate value exceeds the exemption amount but is also below the “Cliff”, and so you would receive a credit to offset part of the estate tax, leaving you with an estate tax bill of $171,848.18, an effective tax rate of 2.86% of the entire value of the $6mm net estate.
Now, let’s imagine that this same house worth $6,000,000.00 has a piece of art valued at $2,000,000.00, leading your net taxable estate to have a value of $8,000,000. In this last example, your estate value exceeds the 5% the basic exemption amount, falling right off the “cliff.” Your estate would receive no credit whatsoever to offset the estate tax, resulting in a full state estate tax bill in the amount of $773,200.00 (an effective tax rate of 9.67% of the total $8mm net estate).
The last example mentioned above seems to bring an unfair and surprising result to many families that would have a taxable estate above the exemption and that do not have an estate plan in order at the time of their loved one’s death. In many situations people think that they would only be taxed on the excess of the exemption, as occurs in many other States and on the federal level. But New York rules are different and that’s why it is so important to have an estate plan in order.
Considering establishing an estate plan in advance is key to minimize and potentially avoid this type of outcome. New York rules allow individuals to take advantage planning techniques that could be used during lifetime and after death. CPL experienced attorneys can guide you through this process and make sure that your estate plan is not only tax efficient but that also takes into consideration your current and future needs and of your loved ones.
Christian is Senior Counsel of the Trusts & Estates practice area at Chaves Perlowitz Luftig, LLP. Christian is licensed in New York, New Jersey & Florida.