Estate tax cliff
An estate tax cliff is a feature of a state estate tax in which an estate that goes slightly over the stated exemption amount has its entire value taxed. Owners of businesses, real estate and private investments meet the term when they compare how a state treats estates near its exemption.
How it works
New York's estate tax exemption phases out for estates above the exemption amount. The exemption disappears at a stated point above that amount, and the entire estate becomes taxable.
Where it shows up for owners of businesses, real estate and private investments
Massachusetts removes the tax cliff by taxing only the amount above its threshold. Under that design, an estate that exceeds the threshold has tax computed on the excess.
New York works the opposite way for an estate that exceeds the exemption by a small margin. The whole estate becomes the tax base.
Points that are easy to confuse
A phase-out of the exemption is a different mechanic from a tax on the excess.
Thresholds and rates change. Check the state's own current figures.
Common questions
What does a tax on the excess do to the tax base?
The Massachusetts estate tax applies only to the amount above the threshold. The portion of the estate at or below the threshold is not part of the tax base, which is why the law is described as removing the cliff.
What happens to the exemption in New York?
New York's exemption phases out above the exemption amount and disappears once a taxable estate passes a stated point. At that stage the entire estate is taxable, and practitioner commentary calls the result a cliff.