How Do Recent Changes in New York Law Affect Trust and Estate Tax Planning?

Estate Planning

What Is the New York “Cliff Tax” and Does It Affect My Estate or Trust Planning?

If you plan to draft a trust or estate plan in New York, you must be aware of the state’s “cliff tax.” To qualified and diligent New York state estate planning lawyers, the “cliff” refers to a unique tax rule that can significantly affect the taxes you pay on your estate.

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.

New York State’s estate tax exclusion amount for 2024 is $6,940,000. This amount is adjusted annually for inflation or as new laws affecting the tax exclusion amount are implemented. To put this into perspective, it is a vast and significant increase from the $1,000,000 exclusion amount before the 2014 legislation changed it.

However, how can you know if the cliff tax affects you and your estate? Even if you are a seasoned veteran and attempt to keep up with New York’s state tax laws, they can permanently be changed, and New York’s estate tax (and other state tax rules) can vastly differ from those of almost all other states.

Therefore, if your estate is even close (or is growing) to the exclusion amount, the only way to know how you and your estate are currently affected is to have your estate and its value diligently evaluated by a skilled and thorough New York estate planning law team.

Are There Any Viable Ways to Avoid “Falling Off the Cliff?”

Of course, all experienced estate planning lawyers know that all estates and their value and circumstances differ. If your estate is well under the current exclusion amount, “falling off the cliff” is not a pressing issue.

However, reviewing your estate plan regularly is always prudent, as any changes in New York tax laws may alter how your Will, Trust, or Estate plan operates. Only by analyzing and understanding your estate plan will your estate planning lawyer know how to approach issues they may discover; and yes, there are things they can do to help, such as,

  • Analyze and reassess your entire estate so that you know how it will function under the current laws.
  •  Possibly use a credit shelter trust to preserve the proper exclusion amount of the first spouse that may die. This can be critical as New York’s exclusion isn’t portable between spouses.
  • Significantly reduce your taxable estate through gifting; this will manage your estate’s size relative to the exclusion amount.
  •  Provide needed financial flexibility using elements like disclaimer trusts and more.

Always note that managing and controlling the effect of the New York cliff tax effect is always a challenging task. However, with the proper legal guidance and professional advice, you can mitigate its impact on your estate.

Are There Changes Coming to New York State’s Tax Exemptions?

In New York, it’s probably wise to always assume and look for changes in the state’s tax laws.

For example, estate tax exemptions are currently at an all-time high but are scheduled to “sunset” sometime in 2025. Planning may allow you to take some financial advantage of changing tax laws.

Keeping in mind that current estate tax exemption rates are the highest they’ve ever been, they now allow an individual to donate (or give away) an unprecedented $13.61 million and, if married, $27.22 million during their life or at death, tax-free.

However, as stated, this exemption is scheduled to sunset on December 31, 2025. At that time, unless Congress or other legislation is enacted, it will revert to only about $7 million for an individual (adjusted for inflation).

These current exclusion levels may provide you with a significant opportunity. However, although you shouldn’t wait until the last minute before optimizing your plan across present tax environments, rushing ahead may also cause you missteps, so timing is critical.

Some of the pitfalls your estate planning lawyer is aware of that require careful timing are:

  • Attempting to immediately gift an irrevocable trust with liquid, rather than harder-to-evaluate, assets due to perceived time pressures. This may result in insufficient liquidity later in life
  • Immediately gifting company stock to a trust that, down the line, has unexpected, spectacular growth without the use of alternative tools that could have ensured access to the funds
  • Gifting any of your retirement assets to a trust without fully understanding their structure could result in more restricted access than you anticipated.

Gifting your assets has advantages, but you must also be sure you use the correct strategies. 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.

If Tax Changes Are on the Horizon, Is There Anything I Can Do Now?

If you’re a New York resident, certain financial situations, such as stock market volatility, depressed values for assets such as residential and commercial real estate, and temporarily increased federal tax options, open the door for significant gifting opportunities; however, you don’t want to come close to or trigger the New York estate tax “cliff.”

The best path to making sound decisions is to discuss your overall options with your well-versed and thorough estate planning law team, who knows your unique financial situation.

One example, however, would be taking advantage of the currently increased federal exclusion amounts. As a New Yorker, you should probably plan to maximize both spouses’ exclusion amounts. Unlike federal tax laws, N.Y. state law does not recognize the portability of a deceased spouse’s unused exclusion dollar amount. Therefore, your estate planning lawyer may suggest that you incorporate credit shelter trusts or disclaimer trusts in your will to maximize the benefits of both the New York and federal law exclusion amounts.

So, yes, there are things to do, but correct and up-to-date professional legal guidance is critical.

I Need More Information on How N.Y. Tax Laws May Affect Me; How Should I Proceed?

The first thing to do is obtain a current analysis of your estate plan or trust so your estate planning lawyer can assess their strength and possible present or future liabilities. Is it improbable that you are familiar with all the current New York state tax laws, let alone the future ones that may be on the verge of being implemented or changing?

The professional, highly knowledgeable, and passionate estate planning lawyers at the Davidov Law Group have been professionally and empathetically advising New Yorkers on best reaching their future financial goals since 2001. Using strategies such as fixed-fee pricing and having all the resources and experts on their in-house team, they can effectively and passionately meet your specific needs.

Call them today at 516-253-1366 for a free consultation. They will work diligently and tirelessly to protect your family’s future and legacy.

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