New York’s estate tax cliff is a unique problem for wealthy New Yorkers, but understanding how to navigate its effects can make a significant difference in estate planning. Let’s break down the key points and considerations for implementing a “Santa clause” to mitigate the impact of the estate tax cliff.
Understanding the Estate Tax Cliff
- Estate Tax Exemption: For 2024, the New York State estate tax exemption is $6.94 million per individual. This means you can leave up to this amount without incurring estate tax.
- Cliff Range: If your taxable estate is between $6.94 million and $7.67 million, you are in the estate tax cliff range. In this range, the tax rate on the amount exceeding the exemption can be extremely high—up to 250% or more.
- Impact Beyond the Cliff: If your estate exceeds $7.67 million, the tax rate on amounts over the exemption drops significantly, making the cliff effect less dramatic beyond this threshold.
The Santa Clause
The “Santa clause” is a provision that can be added to your estate planning documents and is designed to address the estate tax cliff. Here’s how it works:
- Mechanism: The Santa clause specifies that if your estate falls within the cliff range, the portion of the estate over the cliff (and the amount that would otherwise be taxed at the cliff rate) will be donated to charity. This charitable bequest reduces the taxable estate so that it falls back to or below the exemption amount, thereby eliminating the cliff effect.
- Formula Clause: The Santa clause is usually a formula clause. It calculates the amount to be donated to charity based on the extent to which your estate exceeds the exemption amount. The charitable donation is only triggered if it will reduce the estate tax liability below the cliff threshold.
- Benefit Calculation: To illustrate, Molly has a taxable estate of $6.99 million:
- The amount over the exemption is $50,000.
- The estate tax on this $50,000 would be $133,269, which is an effective tax rate of around 266%.
- By utilizing a Santa clause and donating $50,000 to charity, Molly’s estate is reduced to $6.94 million, eliminating the estate tax liability and ensuring that her heirs receive more value.
Net Benefit Analysis
For Molly:
- Tax without Santa Clause: $133,269
- Charitable Bequest: $50,000
- Net Benefit to Heirs: $83,269
Without the Santa clause, her heirs would receive $83,269 less due to the estate tax.
Planning Tips
- Work with an Estate Planning Professional: To effectively use the Santa clause, collaborate with an estate planning attorney who can craft the necessary documents and ensure that the formula clause is correctly applied.
- Run the Numbers: Analyze your estate’s value and potential tax implications under various scenarios. This helps in making informed decisions about the size of the charitable bequest and its impact.
- Review and Update Regularly: Estate values can fluctuate, and tax laws can change. Regularly review your estate plan to make sure it aligns with your current financial situation and objectives.
- Charitable Goals: Consider your philanthropic goals when setting up the Santa clause. The charitable bequest not only helps reduce estate tax but also supports causes you care about.
By incorporating a Santa clause, you can mitigate the financial impact of the estate tax cliff and ensure that a greater portion of your estate benefits your heirs while also supporting charitable causes.
This article is for educational purposes only - to provide you general information, not to provide specific legal advice. Use of this post does not create an attorney-client relationship and information contained herein should not be used as a substitute for competent legal advice from a licensed local Queens estate attorney in NY or your state.
Call the Law Offices of Roman Aminov, P.C. at 347-766-2685 to speak to a knowledgeable estate planning attorney about whether incorporating a “Santa clause” into your estate makes sense for you.
This article is for educational purposes only - to provide you general information, not to provide specific legal advice. Use of this post does not create an attorney client relationship and information contained herein should not be used as a substitute for competent legal advice from a licensed attorney in your state.
