The ''Santa Clause'' in Estate Planning

The current New York estate tax exemption stands at 5.93 million while the Federal exemption is at 11.7 million. The Biden administration has proposed to lower the Federal exemption to 3.5 million. While the Federal government only taxes the amount over the Federal exemption, New York takes a different approach. Once you go over the exemption amount in New York, they tax the whole estate!

New York's "fiscal cliff", as it has been termed, leads to the absurd result that you would end up with less after taxes on a 6 million dollar estate than on a 5.93 million dollar estate.

The "Santa Clause" is intended to avoid the tax "fiscal cliff" by providing that any amounts that would cause the fiscal cliff to be triggered are to be given to charity. This lowers the amount of the estate subject to estate tax to no more than the exemption amount.

Another way to avoid the fiscal cliff is to give lifetime gifts to your children (preferably, in the form of trusts to protect the gifts from children's divorces, lawsuits and creditors and pass by blood instead of by marriage). Currently, New York has no gift tax and the Federal exemption from gift tax is 11.7 million. The strategy here is to give away to your children's trusts so much of your estate as to get you under the New York exemption. One caveat is that New York state has a "claw back" provision whereby, if you die within three years of the date of the gifts, the gifts are brought back into your estate for estate tax purposes.

If you act this year, you can also get your estate under the looming 3.5 million Federal exemption which we may very well see by next year. These gifts are sometimes referred to as an "estate tax freeze" because not only are the gifts now outside of your estate, but also all of the appreciation on those gifts between now and the time you die are also exempt from estate tax. In essence you are "freezing" the amount subject to tax at today's value.

The bottom line is that if you have an estate of over 3.5 million, now is the time to act to save estate taxes for your heirs.