Mind the Cliff – Bringing New York’s Fuzzy Estate Tax Rules into Focus

Mind the Cliff – Bringing New York’s Fuzzy Estate Tax Rules into Focus

I’ve fallen off plenty of cliffs in my time, and I’m not speaking metaphorically.

There was that time back in 1979, climbing the sheer sides of a waterfall near the Great Meadows campground on the Skyline Drive in Virginia. It seemed the right thing to do, scaling that crumbling slope, a shortcut to the trail – look at those bare roots to grasp – like a ladder, I youthfully reasoned. Nothing too it.

Snap! I fell 30 feet I reckon, onto some uncomfortable rocks, but I was only 19, hardly lost my wind. The indestructibility of youth, which somehow has persisted into my older age. Good thing, too.

An example: I fell off the city wall in Hue, Vietnam. This was around six years ago. It was raining, winds gusting down the Perfume River, and I found a bolt hole that got me up on the ancient battlements ringing the citadel. It was clearly marked ‘forbidden’, but in the foul storm, there were no guards around, and you know how it goes.

Nothing dramatic caused the spill: I was taking a photo, the wind blew up, I slipped and fell down, brains first. I had a really nice camera back then, a Leica M6 with a snazzy, expensive lens. “Hold it up, don’t let it hit the ground!” was all I thought, in those seconds before my backside did just that.

I’m not sure what I landed on, but it was piled high, dry and spongy. It didn’t smell half bad or good. Something they spread on the ornamental gardens to make the flowers grow, I imagine. It was felicitous to me, this material, and to the local folk, who are not unfamiliar with farm life, I don’t suppose it made me smell odd at all.

Hue is a funny old town, full of tuk-tuk bicycle pumpers who says things like, “Still many VC here, better watch out, ha-ha!” Hah, hah, get me on the plane back to Saigon-Saigon, as the bitter, unforgetting citizens call their town. Saigon has the same vibe as New York City, combative but welcoming, worldly yet warm (and no Viet Cong), and I fit right in, maybe better than I do at home.

Some kinds of crazy, I dig. But the unreasoning nonsense that springs up in the US sometimes, I don’t know. I have friends urging me to move back to New York; we’d all have such fun. Hmm. I recast the old saying: New York; too small to be an independent country, too big to be an insane asylum.

Our case in point: New York has its own estate tax, added on top of the federal tax levied on your assets at death. Never been a fan of state estate taxes, but there they stand, like odorous piles waiting for someone to stumble. It’s easy to slip if you’re a wealthy New Yorker, because the law is opaque, and a bit nasty.

The currently applicable estate tax law was enacted in 2014. The rate starts at 3.06% for the first $500,000 in estate value, rising in steps to the top tax of 16%, which is slapped on estates worth more than $10,100,000 million.

To your good fortune, there is an exclusion: this year, it reaches $6,110,000. Most reasonably, the exclusion is indexed to inflation each year.

This all sounds much better than the earlier law, when the state exclusion was a mere $1,000,000. However, in the old days, taxable estates did not face the perils of the “cliff”.

The 2014 law held a curious intent: legislators did not want everyone to benefit from the exclusion. Here’s what they ruled: If one’s taxable estate was worth more than 5% of the exclusion amount at death, the estate could not avail itself of the exclusion, at all. So if your taxable estate was too big for the state legislature’s liking, it would, in a curiously chosen metaphor, fall off the cliff.

Tossed off a tall rock, more accurately. New York’s estate tax law recalls Ancient Rome’s Tarpeian Rock (I’ve stood at its edge, survived), from which foul traitors and miscreants were thrown to grisly death. Yet the crimes fit for punishment did not include being too rich.

Plunge off New York’s cliff and your entire estate is taxable – every single dollar of it. There is a further, odious problem. Consider: federal estate tax exclusions are ‘portable’ – if I die first, and leave my estate to my wife, she inherits my exclusion. In New York state, this isn’t the case. In the same scenario, when my wife dies, her estate – our entire estate – will only benefit from a single exclusion. By passing my estate directly to my survivor wife, I never used the New York exclusion; and so, it is lost.

So what can wealthy New Yorkers do to prevent bringing a smile to that old bother and brute, the state tax man?

In the case of one spouse dying first, the solution to preserving the first party’s exclusion is to have your estate planning team establish a credit shelter trust (or bypass trust, as they are sometimes called). The trust supports the surviving spouse or other heirs in life, and protects the assets from estate taxation at the deaths of both spouses (a married couple is no more than two people in NY, just now; check back for updates).

Reducing the size of your overall estate while you still breathe is a traditional way to avoid estate tax, and in particular, the NY cliff. Consider rewarding your heirs now, while the federal gift tax exclusion is high, or donating to charity. The latter can be done today or at death, because even grabby New York allows charitable deductions at the taxpayer’s demise.

For wealthy New Yorkers, and their number is great, there are more strategies at hand to keep away from the cliff edge and reduce the eventual estate tax bill, come the day. Estate planning teams have had plenty of time to assemble the tools, so give them a ring.

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