New York Estate Planning

When putting together an estate plan or any financial plan, you should consider the various different state laws that could impact the plan in addition to federal laws.  Here are some important items to think about for individuals with ties to New York State:

Estate Taxes and Calculation

New York is one of about 15 states (and the District of Columbia) that imposes a state level estate or inheritance tax on its residents (and even some non-resident property owners) at the time of death. This tax is in addition to the estate tax imposed by the Federal government. The top NY estate tax rate is 16%.

The NY estate tax is calculated quite differently from the Federal estate tax. Generally, for NY estate tax purposes, if the value of assets passing to beneficiaries other than a spouse or charity is below a certain threshold ($6.11 million in 2022), the assets are fully exempt from tax and no NY estate taxes will be due. However, the exemption begins to phase out at values over the threshold, and if an estate is more than 5% over the threshold (which is $6,415,000 in 2022), the estate completely loses the exemption and the full value of the estate’s assets will be subject to NY estate tax. Because of this drastic drop in estate tax protection for estates over the NY threshold, the NY estate tax is often called a “cliff tax”. Estates whose value falls between the threshold amount and the 5% excess will be partially subject to NY estate tax.

Very few people understand how this works in practice. The table below can help illustrate the impact of the NY “cliff tax” on estates valued between the threshold ($6.11 million in 2022) and 105% of that amount ($6,415,500 in 2022):

Taxable Estate Table

Speak with your J.P. Morgan Advisor if you’re interested in discussing strategies that can help mitigate the effects of the NY cliff tax.

Estate Tax Portability

Portability is the ability for married couples to aggregate their unified gift and estate tax exemption amounts. In practice, this means that a surviving spouse inherits the deceased spouse’s assets and any unused portion of the deceased spouse’s estate tax exemption. Portability is only available at the federal level (and only for gift and estate tax; it does not apply to the generation-skipping transfer tax.) Portability also does not apply to the New York estate tax. This means that the NY estate tax exclusion must be used by each spouse at his or her respective death; if the first spouse to die does not use his or her exclusion, it is wasted.

If the first spouse to die leaves all assets to the surviving spouse—whether directly under a Will or Revocable Trust or because assets are held jointly with rights of survivorship—that spouse would not use up his or her exclusion amount since there is no estate tax imposed on transfers between US citizen spouses. Therefore, married New Yorkers who think they may be subject to New York’s estate tax may want to structure their estate plans so that the first spouse’s exclusion is used on the first spouse’s death while still providing the surviving spouse access to the funds during his or her lifetime. Note that certain information must be filed with the IRS on the first spouse’s death in order to get the benefit of portability.

Gift Tax

There is no NY gift tax, meaning that NY taxpayers can make gifts to beneficiaries during their lifetimes without the imposition of a NY gift tax. However, the value of gifts made within 3 years before death are included when calculating the NY estate tax, thereby imposing a “de facto” gift tax on assets given away within 3 years before death. A donor will need to survive for at least 3 years from the date of a gift to ensure that the value of a gift avoids NY estate tax upon their death. Note that there is a Federal gift tax on transfers during lifetime.

There are some exceptions to this rule, notably for real property or tangible personal property located outside of New York State. If you are concerned that you may be subject to the New York clawback, work with your tax and legal advisors to determine whether you may be able to make gifts of non-New York assets to bring your estate below the threshold.

Income Tax

As do most states, New York levies a state personal income tax in addition to the Federal income tax. NY applies 2 distinct tests to determine whether an individual is subject to the NY income tax in a given year. The first test is called the domicile test, and this covers individuals who are domiciled in NY—that is, individuals who always expect to come back to NY and treat NY as their home, regardless of whether they are physically located in NY. This is a subjective test and so it is important to work with a tax advisor to understand whether you are considered domiciled in NY.

The second test is the statutory residency test, which covers individuals who are not domiciled in NY but who both spend at least 183 days in NY and maintain a residence in NY for 10 or more months of the year. This test is more objective and should be considered as you plan your income taxes each year.

Rights of Spouses Upon Death or Divorce

Death: NY typically entitles each surviving spouse to an outright one-third of a deceased spouse’s assets upon death regardless of what the deceased spouse’s estate planning documents dictate. While many spouses may decide to provide less than this in their estate planning documents (or provide assets in trust rather than outright), the surviving spouse will have the option—unless it’s been waived in a marital or other agreement—to take what is given to them in the documents or elect to take their one-third outright.

Divorce: When a couple divorces in NY, each spouse typically receives by default one-half of the couple’s marital property—that is, the assets that the couple acquired during the marriage, plus any appreciation on both the couple’s marital property and separate property.  A spouse’s separate property—that is, the property with which they entered the marriage—typically will be kept by that spouse upon divorce. Inheritances and gifts are generally considered a spouse’s separate property and, unless they were  converted to marital property, should be protected from division upon divorce. The application of this rule is beyond the scope of this document; you should consult a family lawyer to discuss your personal situation.

Regardless of the rights upon death or divorce in NY, spouses can negotiate different rights under a pre- or post-nuptial agreement (and often do when the defaults under NY law may not be desirable).

This article discusses only a number of the many special considerations for NY residents and taxpayers as they think about their tax, trust and estate planning.  Your advisor is here to partner with you and your tax and legal advisors to ensure that your wealth plan takes into account these and other important state nuances.