William Davies is an attorney at Davies Law Firm, P.C., in Syracuse, NY. His practice focuses on estate planning and estate administration. He is also a member of CNYCF’s Professional Advisor Council. Thanks to Fred Davies and Mary Anne Cody for reviewing this article.
New York is one of the few remaining states to impose a separate state-level estate tax. The state’s method of calculating the tax owed creates an “estate tax cliff” that can produce surprising and unintuitive results, making careful planning essential.
For New Yorkers who die in 2026, an estate valued in excess of $7,350,000 after deductions will be subject to taxation by New York. The Federal estate tax only affects decedents with estates of $15,000,000 or more beginning this year, 2026.
Although the policy behind the federal and state systems are similar, the calculation is different and can lead to punitive outcomes at the state level. The Federal system begins the tax calculation on the first dollar above the federal basic exclusion amount, currently $15,000,000, quickly rising to a 40% tax on the excess above the exclusion amount.
New York also uses a basic exclusion amount, but the mechanics of the calculation are different. Estates worth less than the basic exclusion amount receive a credit against estate tax owed, zeroing the tax for any estate under the exclusion amount, the same result as the federal system. However, unlike the federal system, the state estate tax calculation begins at the first dollar of the estate rather than the first dollar above the basic exclusion amount, and the tax credit phases out and ultimately disappears if the estate’s value is above the exclusion amount.
The New York Estate Tax Cliff
If an estate’s value exceeds 105% of the exclusion amount, no credit is provided and the first dollar of the estate is taxed at 3.06%, with a top rate of 16%. Loss of the credit is known as the tax cliff and results in a tax owed that may reduce the value of the estate below the exclusion amount. Oddly, heirs of estates within the cliff range would be better off if the decedent died with less money! Careful drafting can eliminate this issue.
The Santa Clause
A “Santa Clause” in estate planning is a formula provision in a will or trust that directs assets exceeding the New York State estate tax exemption to a charitable organization. It acts as a fix to avoid the “estate tax cliff”, ultimately benefiting heirs and acting like Santa for the charitable organization.
An attorney drafting estate plans for clients who may be subject to New York estate tax should consider a charitable bequest that leaves enough money to charity to reduce the estate to the exclusion amount, but only if it will result in a net savings to the estate. See the following examples:
- An estate with a net value of $8,000,000 will owe $773,200 in estate tax, leaving $7,226,800 to pass to the beneficiaries, a tax rate of slightly below 120% of the amount above the exclusion.
- If this estate included the Santa Clause, $650,000 would be left to charity, $7,350,000 passes to the beneficiaries.
- This is an extra $123,200 for the heirs.
- An estate with a net value of $7,500,000 will owe $386,400 in estate tax, leaving $7,133,600 to pass to the beneficiaries, a tax rate of greater than 250% of the amount above the exclusion. (This calculation is different than example 1 because partial tax credit is allowed for estates worth less than 105% of the exclusion amount).
- If this estate included the Santa Clause, $150,000 would be left to charity, $7,350,000 passes to the beneficiaries.
- This is an extra $216,400 for the heirs.
Once the tax rate falls below 100% of the amount above the exclusion, the Santa Clause fails because it will no longer save more money than is left to charity. This balance point for 2026 will be around $8,140,000.
See the below sample Santa Clause:
In the event my estate is taxable for New York Estate Tax Purposes, I leave an amount equal to the maximum portion of my estate that will result in a reduction of net New York estate tax, which equals or exceeds the amount so distributed, to the Central New York Community Foundation.
While the Santa Clause may be drafted to leave selection of the charitable organization to the fiduciary, doing so may force the estate or trust to register the bequest with the New York Attorney General’s office even if the estate is too small to benefit from the bequest. Directing the gift to a local Community Foundation may help avoid this additional administrative requirement for estates below the exclusion amount.
Should the Santa Clause be included in all estate plans?
The answer is no, especially for estates well below the exclusion amount. For a discussion of issues that should be considered when drafting the Santa Clause, see Are Santa Clauses in Estate Planning Documents Always a Welcome Gift? in Volume 58, No. 2, Trusts and Estates Law Section Journal, New York State Bar Association.
In addition to the existence of the Santa Clause, professionals should be aware that New York does not allow portability, the transfer of estate tax exclusion amount from a deceased spouse to the survivor. This means estate tax planning and payment of estate taxes cannot be put off until the surviving spouse’s death.
