Santa Clause

When the words “Santa Clause” come to mind, the first instinct may be to think of an old man in a red suit. The lesser-known “Santa Clause,” however, is an estate planning provision often added to wills or revocable t

rusts. 

What is a “Santa Clause”?

It is an estate planning tool and a charitable strategy that allows grantors to maximize beneficiaries’ inheritance while supporting meaningful causes. It is primarily used by residents of states with an estate tax “fiscal cliff,” which occurs when an estate’s total value exceeds the government’s tax-exemption limit, causing it to suddenly owe a large estate tax instead of paying little or none. These provisions are most commonly used in New York to navigate and avoid the state’s unique and harsh estate tax fiscal cliff. This tax is not annual, but is addressed and taxed once after death. In New York, when estates exceed the “cliff” by more than 5%, they are taxed on the entire estate, not just the excess, leaving beneficiaries with significantly less. This is markedly different from the federal estate tax, where the tax applies only to the value exceeding the exemption, never the entire estate value.

As of 2025, the New York State estate tax exemption is $7.16 million. Because the cliff is triggered at 105% of this exclusion amount, an estate exceeding approximately $7.518 million would fall over the cliff.

How does it work? 

A Santa Clause is a charitable bequest that directs the executor to donate only the amount necessary to reduce the taxable estate to the applicable exemption threshold. It is typically drafted as a formula clause, calculating the charitable gift based on how much the estate exceeds the exemption amount. Because the charitable donation is deducted from the estate before taxes are assessed, the overall estate tax liability is significantly reduced. As a result, beneficiaries often receive a larger net inheritance than they would if no charitable gift were made. Santa Clauses can be coordinated with other planning tools, such as lifetime gifts or trusts, to further reduce taxes.  Beyond mitigating the harsh effects of the estate tax “cliff,” a Santa Clause also allows the grantor to support charitable causes of their choosing, ensuring that excess wealth is directed toward meaningful purposes rather than lost to taxes.