Falling Over the Cliff

READER QUESTION:

Lawrence, I take care of my godfather and have now put him in an assisted living home. I am in charge of all his finances, co-signer on all his accounts, and executor of his will. His finances have just reached the maximum NYS tax threshold for estate taxes. Besides gifting, which has a 3-year lookback, and charitable donations, what are some other ways I can get and keep that threshold under the NYS maximum tax threshold? Can he make withdrawals or purchases to keep his account down? Thank you.

MY RESPONSE:

I don’t blame you for worrying about this. New York has a crazy system where if you die with assets valued at more than 5% of the exemption, currently $7.35 million ($7,717,500), then you fall over the CLIFF, lose your exemption, and are taxed on dollar one. Appropriately, we call this the CLIFF TAX.

If you are getting near the CLIFF, then you need to proactively put measures in place to avoid it, and you have identified some of them. Here are some of the best:

1. Consume the money. If you spend the money, it won’t be there to be taxed. This works as long as you don’t buy something of similar value.  Consumer goods are a good start; on the other hand, just because you spend $100,000 on your house doesn’t mean that your house is now worth $100,000 more. Be strategic.
2. Gifting can be a very good strategy. The first $19,000 per person, per year is gift-tax free. If your godfather had 10 relatives he would want to gift to, he could reduce his estate by $190,000. He could even do this the day before he died. There would be no clawback.
3. Gifts beyond the $19,000 per person per year are subject to a three-year clawback.  If we have the time, this is very effective.
4. Charitable gifts are all tax-free.
5. Paying for someone’s tuition (directly to the institution) is a completely tax-free gift. Are you ready to go to law school?

The key is to reduce the size of the taxable estate without simply exchanging one asset for another of equal value. When an estate is close to the cliff, a little planning can save a lot of tax!

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