Are Santa Clauses in Estate Planning Documents Always a Welcome Gift?
5.23.2025
It’s not the holiday season, but New York practitioners often have “Santa clauses” on their minds. These clauses, which are included in some New York estate planning documents, were introduced by practitioners several years ago to account for the New York “estate tax cliff” regime. Specifically, New York law provides a credit against estate tax equal in value to the tax imposed (therefore resulting in $0 tax due) for estates that meet or fall below the New York exemption amount ($7,160,000 in 2025) but quickly phases out (and then eliminates entirely) the credit for estates that exceed the exemption even by a small amount. To illustrate: in 2025, an estate having a taxable value of $7,160,000 (Estate A) would owe estate tax of $658,960 but receives a credit of equal value and pays $0 in estate tax, while a taxable estate valued at $7,400,000 (Estate B) would owe $564,000 in estate tax after the application of the available credit.
In the above examples, the taxable value of Estate B exceeds the value of Estate A by only $240,000, but Estate B owes nearly twice that amount in New York State estate tax. The New York estate tax cliff causes estates that fall within a certain range (greater than $7,160,000 but less than $7,922,685 for decedents dying in 2025) to incur estate tax in an amount that is greater than the dollar amount by which the taxable estate exceeds the exemption. In other words, once the value of the taxable estate reaches the exemption amount of $7,160,000, each additional dollar of inclusion in the taxable estate results in greater than a dollar of estate tax. The “Santa clause” addresses this anomalous result by directing a charitable bequest to be made from the decedent’s estate if that bequest will reduce the amount of New York State estate tax due by an amount greater than the bequest itself. The bequest produces an estate tax charitable deduction that reduces the value of the taxable estate to the amount of the New York estate tax exemption, thereby eliminating the New York State estate tax entirely and passing more property to the decedent’s intended beneficiaries than they would have received in the absence of the Santa clause.
If the will or revocable trust agreement governing the disposition of Estate B contains a Santa clause, the fiduciary of the estate will make a deductible charitable bequest of $240,000, thereby reducing the New York State estate tax due to $0. Accordingly, the amount passing to the decedent’s intended beneficiaries increases by $324,000 or the difference between the amount of tax that would have been due in the absence of the Santa clause and the amount passing to charity as a result of the inclusion of this clause.
While it can be a bit complex to explain to clients, the above illustration may make the Santa clause sound like a provision that should be standard in all New York estate planning documents, even if it is likely to take effect only in relatively limited situations. However, the potential estate tax savings that the Santa clause affords are not without potential costs.
This article examines Santa clauses and flags certain undesirable issues that they may create. Ultimately, use of a Santa clause may still be appropriate in some circumstances, but practitioners should be mindful of potential complications and highlight any risks to the client. These clauses should not just be buried in the boilerplate of estate planning documents without appropriate thought and consideration.
Sample Santa Clause
Below is a sample of a “Santa clause” in a revocable trust agreement:
“The Trustee shall distribute to one or more charitable organizations described in Sections 2055(a) and 2522(a) of the Internal Revenue Code that the Trustee shall select, taking into account charitable gifts and directions of the Settlor and the Settlor’s spouse, the smallest amount of trust property, if any, that will reduce the New York estate tax that would be imposed on the Settlor’s estate but for the provisions of this paragraph to zero and reduce total applicable taxes by more than the amount of such distribution.”
The sample provision above gives the trustee the discretion to decide which charity or charities to give to, but the clause can be modified to include specific charities as directed by the client. It may be preferable to name specific charities for reasons that are discussed later in this article.
In addition, to the extent that the estate planning is for a married couple and a marital deduction trust is utilized, corresponding language should be included in the provisions directing the disposition of the marital trust upon the surviving spouse’s death to account for a situation in which the surviving spouse’s taxable estate consists primarily of marital trust assets.
Potential Traps for the Unwary
While the benefits of the Santa clause have been discussed above and are by now fairly well known in the New York trusts and estates community, there has thus far been less focus on the potential problems associated with these clauses.
Added Complication
While the Santa clause can generate meaningful estate tax savings in certain situations, it can be difficult to explain to clients, both conceptually and in terms of the technical operation of the language appearing in the client’s documents. A client who may not have charitable beneficiaries in mind may have a hard time understanding why charities are identified as potential beneficiaries in their documents. To the extent that it is necessary to include a corresponding provision in the section of a client’s documents disposing of a marital trust at the death of the client’s surviving spouse, for the reasons discussed above, explaining this second provision adds another layer of potential confusion.
The potential complexities are not reason alone to forgo use of the Santa clause. After all, practitioners employ many other complex provisions in their clients’ estate planning documents that offer tax benefits or other advantages that may require explanation. But where a client’s financial circumstances at the time of drafting make it extremely unlikely that he or she will benefit from a Santa clause, one may wish to consider whether the added complexity outweighs the potential benefits. Clients whose net worth falls far below the New York estate tax exemption amount at the time the estate plan is put into place may find the inclusion of a Santa clause needlessly confusing; clients whose net worth far exceeds the exemption amount may wonder why their documents include a provision that is so unlikely to take effect.
Interaction With Non-Probate or Illiquid Assets
Another potential problem with the Santa clause is that assets passing outside the client’s will or revocable trust may be needed, but unavailable, to satisfy the charitable bequest. If a taxable estate consists largely of non-probate assets, such as retirement accounts or assets titled jointly in the name of the client and another with rights of survivorship, those assets may sidestep the intended application of the Santa clause absent further planning. Similarly, in the case of an estate or revocable trust consisting of largely illiquid assets, it may be impractical or even impossible to raise sufficient cash or distribute a portion of the illiquid assets in kind to satisfy the Santa clause bequest. And even if it were possible to pay from the non-retirement assets, there still may be a preference to satisfy the Santa clause bequest from the retirement assets so that the non-charitable beneficiaries can instead receive other property not consisting, or consisting to a lesser extent, of income that will be subject to tax when the funds are withdrawn from the retirement account by the non-charitable beneficiaries.
There may be relatively simple solutions available to estates facing liquidity problems; for example, the estate may be able to obtain a short-term loan for the purpose of funding the Santa clause bequest. On the other hand, for an estate that may need, or want, to rely on retirement account funds as a source of payment for the Santa clause bequest, the planning becomes more complicated, and potential tax hazards abound. Specifically, it is important to ensure that any course of action will not trigger additional income taxes without an offsetting charitable deduction, which would erode some or all the benefits of the Santa clause bequest in the first place. In addition, to the extent that the estate or revocable trust is named as the beneficiary of the retirement account, with the Santa clause bequest able to be funded from those assets, depending on the timing of the distribution to the charity and the terms of the will and revocable trust agreement, the non-charitable beneficiaries may lose the ability to elect to take required minimum distributions over the longest period that would otherwise be allowable by law. This is because the applicable provisions of the Internal Revenue Code provide that benefits payable to the account holder’s estate or to a charity must be distributed on a timeline that is shorter than the timeline applicable to individuals and certain trusts. When a retirement account designates the account holder’s revocable trust as the beneficiary, and under the terms of the trust the retirement benefit may be used as a source of payment for a charitable bequest, the entire account, including amounts passing to beneficiaries who would otherwise be able to take distributions over a longer period of time, will be subject to the shortest period for payment of the required minimum distributions, unless the interest of the estate and/or the charity can either be eliminated or satisfied in full by Sept. 30 of the year following the account holder’s date of death.
One potential way of ensuring retirement account funds are used to satisfy the Santa clause bequest in the most tax efficient way could be to prepare a custom beneficiary designation for the client’s retirement account that directs the amount of the Santa clause bequest to be made directly to a charitable organization, with the balance of the retirement account funds, if any, passing to the client’s non-charitable beneficiaries. The beneficiary designation would need to interrelate, to some extent, with the Santa clause in the client’s will or revocable trust agreement to express an order of priority for payment. Typically, the direction would be to pay the Santa clause bequest from estate or trust funds only to the extent that the retirement account is insufficient to satisfy the bequest in full. While this would seem to be a viable solution, it may be too complicated and cumbersome for many situations.
So, while the circumstances outlined above generally are not insurmountable, considering and implementing workarounds and the proper tax planning in these situations add an extra element of complication and cost, and potential aggravation, for the individuals administering the client’s estate.
Santa Clauses and Alternate Valuation Elections
While the overall objective of a Santa clause is to pass a greater amount to a client’s beneficiaries than they would receive in the absence of the provision, there is a scenario in which the Santa clause could backfire and cost the beneficiaries.
Ordinarily, assets are valued on the date of a decedent’s death for estate tax purposes. However, Internal Revenue Code Section 2032(a) and New York Tax Law Section 954(b) provide that under certain circumstances, an estate can elect instead to be valued as of the “alternate valuation” date, which is six months following the decedent’s date of death, provided that if the alternate valuation election is made, assets sold prior to the alternate valuation date are valued as of the date of sale. Importantly, for both federal and New York State estate tax purposes, the alternate valuation election can be made only if the effect of the election is to lower both the value of the gross estate and the total amount of estate taxes due. Specifically, New York Tax Law Section 954(b)(2) provides:
“no election may be made under this paragraph unless such election will decrease the value of the New York gross estate and the amount of tax imposed by this article (reduced by credits allowable against such tax). [emphasis added]”
If a taxable estate valued as of the decedent’s date of death exceeds the New York estate tax exemption amount, but the estate would fall below the exemption amount if valued on the alternate valuation date, the traditional Santa clause will render the alternate valuation election unavailable. This is because the effect of the Santa clause is to reduce the New York estate tax to zero. Accordingly, making the alternate valuation election would not lower the total estate tax due, and the estate will be ineligible to make the election. With a traditional Santa clause, this scenario causes an “unnecessary” charitable gift to be made; the client’s intended beneficiaries receive less as a result of the Santa clause than they would have received in its absence.
To mitigate against this issue, practitioners might consider modifying their Santa clause so that some small amount of estate tax results. For example, instead of reducing the estate tax to $0, the Santa clause could be drafted to produce an estate tax of, say, $100. While this fix may solve for the situation in which the alternate valuation election causes the value of the taxable estate to drop below the exemption amount, resulting in $0 tax due, thereby fulfilling the requirement that the alternate valuation election must reduce the total estate tax due, further refinement is needed to ensure that the formula bequest will not disqualify the estate from making the alternate valuation election when the election itself does not entirely eliminate the need for the Santa clause bequest. To illustrate:
- Assume that a decedent’s gross estate is valued at $7,800,000 as of the date of death on Jan. 1, 2025. After deducting debts and administration expenses, the taxable estate is $7,600,000. A Santa clause bequest of $439,965 will reduce the estate tax due from $718,800 to $100.
- Assume now that the decedent’s gross estate as of July 1, 2025 (six months after the date of death) is $7,400,000. After deducting debts and administration expenses, the taxable estate is $7,200,000. In this case, a Santa clause bequest of only $39,965 ($400,000 less than in the preceding scenario) is needed to reduce the estate tax due to $100. However, a Santa clause formula that results in $100 of estate tax regardless of whether assets are valued as of the decedent’s date of death or the alternate valuation date will disqualify the estate from making the alternate valuation election, with the consequence that an “unnecessary” charitable bequest of $400,000 must be made.
Interest on Legacies
Another complication to consider is the potential effect of paragraph (3) of Section 11-A-2.1 of the New York Estates, Powers and Trusts Law, which provides that the payment of an outright pecuniary bequest more than seven months after (i) a decedent’s date of death, if letters are not required to pay the bequest, or (ii) the date that letters, including preliminary or temporary letters, are granted if letters are required, accrues interest at the target federal funds rate as of the first business day of each calendar year, or if the target federal funds rate is expressed as a range of rates, the high of the range, less 1%, but in no event less than 0.5%.1
The Santa clause produces a bequest of a pecuniary amount that is paid outright to one or more charitable organizations; accordingly, it falls within the ambit of Section 11-A-2.1(3) of the Estates, Powers and Trusts Law. The interest generated under Section 11-A-2.3(3) can be meaningful. For 2025, the applicable rate is 3.5%. A taxable estate of $7,750,000 would need to make a Santa clause bequest of $590,000 to save $149,200 in estate taxes. If interest accrues at 3.5% for the entire year, that amounts to an additional $20,650 that must be paid to charity. Interest will continue to accrue, at a rate that may fluctuate, until the bequest is satisfied in full. It may be difficult if not impossible to pay the Santa clause bequest by the applicable seven-month deadline – particularly if the bequest is made under the client’s revocable trust agreement and the trust is funded prior to the client’s death, and/or by a transfer taking effect at death by operation of law, thereby rendering letters unnecessary to pay the bequest and causing the seven-month clock to start running at the date of death. Furthermore, since the amount of the Santa clause bequest depends in part on the estate’s deductible administration expenses, the final amount of the bequest may not be known with certainty for several years following the client’s death, particularly if the fiduciaries of the estate want to wait to pay the bequest until an estate tax closing letter is issued and/or their accounting is complete (the need for an accounting is discussed in the next section of this article). Accordingly, the interest obligation can become substantial, which erodes the benefit of making the Santa clause bequest in the first place.
Importantly, EPTL 11-A-2.1(3) allows for a will or trust to waive interest on an outright pecuniary bequest. For the foregoing reasons, drafters of estate planning documents utilizing Santa clause provisions should consider including such a waiver by express reference to Section 11-A-2.1(3) of the EPTL.
Attorney General Involvement
Another often-overlooked consequence of the Santa clause is the fact that in many cases, use of the Santa clause will subject the estate to a regime of oversight by the Charities Bureau of the New York Attorney General’s Office.
Section 8-1.4(d) of the EPTL provides that every “trustee” (defined in paragraph (a) of that section to include any executor or trustee “holding and administering property for charitable purposes, whether pursuant to any will, trust, other instrument or agreement….over which the attorney general has enforcement or supervisory powers”) must file with the attorney general, within six months after any property held by the trustee is required to be applied to charitable purposes, a copy of the instrument providing for his or her title, powers and duties. Paragraph (h) directs the attorney general to “make rules and regulations necessary for the administration of this section, including rules and regulations as to the time for filing reports, the contents thereof, and any manner of executing and filing them.”
The applicable regulations are located primarily in Chapter V (Charitable Uses and Purposes) of Title 13 of the Official Compilation of Codes, Rules & Regulations of the State of New York). Section 92.1 of Title 13. clarifies that only an estate or trust from which a bequest is payable either to an unnamed charity or in an unspecified amount is required to register with the attorney general. Trusts and estates in which the only charitable interest is a specific gift (either a specific amount of money or specific property) are exempt from registration, as are trusts “in which and so long as the charitable interest is deferred or contingent.”2
Registration and Reporting Requirements
When a charitable bequest to an unnamed organization or in an unspecified amount is directed to be made from an estate, Section 1409 of the Surrogate’s Court Procedure Act provides that the attorney general must receive a notice of probate in connection with the probate proceeding. Once letters testamentary (or preliminary letters, as the case may be) have issued, the executor, or preliminary executor, must register with the attorney general by mailing copies of the notice of probate and the will, together with any codicils, to the attorney general.3 These materials must be postmarked within six months after the earlier of the date on which letters or preliminary letters are issued.
In addition to the registration requirement, paragraph (c) of Section 92.2 of Title 13 of the N.Y.C.R.R. obligates the fiduciary to file a “final financial report” on such forms as may be prescribed by the attorney general. The final report takes the form of an informal or judicial accounting of the estate administration and must be accompanied by a filing fee determined by reference to the total amount passing to the charitable beneficiary, or beneficiaries, named in the Santa clause. Based on the maximum possible amount of the Santa clause bequest in 2025, the applicable filing fee will not exceed $100. However, the preparation of the final accounting – even if it is presented informally, rather than settled judicially – is likely to be a costly undertaking that may delay the administration significantly and come as an unwelcome surprise to clients.
Any estate that fails to comply with the registration or final reporting requirements faces a fine of up to $1,000, but more significantly, a fiduciary’s failure to account to the attorney general and the other beneficiaries exposes him or her to ongoing potential liability in connection with the administration of the client’s estate.
Registration and Reporting for $0 Santa Clause Bequests?
Because the pecuniary amount directed to pass to the charitable beneficiary of a Santa clause bequest is unspecified, a literal reading of the applicable statutes and regulations suggests that the fiduciary of every estate and trust that incorporates a Santa clause must register with the attorney general. However, if the Santa clause is unlikely to take effect (typically because the client’s estate either falls far below or far exceeds the New York estate tax exemption amount, as discussed above), is the fiduciary nevertheless subject to the requirements of Estates, Powers and Trust Law 8-1.4? If not, how should a fiduciary determine whether registration is required? Because administration expenses can vary widely even among estates of roughly equivalent value (for example, costly appraisals may be needed for an estate that consists primarily of non-marketable assets, which would not be the case for an estate of similar value consisting mainly of cash and securities), it would be difficult to formulate rules of general application to delineate which estates subject to a Santa clause must register and which should be exempt. However, expending time and resources on making a “protective” registration with the attorney general, particularly with its attendant requirement to submit a final accounting, seems like a waste of both client and government resources that the Legislature likely did not intend.
In fact, EPTL 8-1.4, enacted in its original iteration in 1997, predates the estate tax cliff concept of New York Tax Law Section 952(c), which became effective on April 1, 2014, by nearly two decades. Since practitioners developed the Santa clause in reaction to the estate tax cliff, the drafters of EPTL 8-1.4 likely did not contemplate the future prevalence of a charitable bequest such as a Santa clause in their constituents’ estate planning documents. Then again, other somewhat similar types of charitable bequests (such as gifts to split-interest charitable trusts that are dependent upon certain variables determined as of the date of the client’s death) have been a part of the estate planner’s toolkit for many decades, so there is an argument to be made that the statute is still functioning as it should, even with respect to Santa clauses.
There is also an argument to be made that a Santa clause bequest is “contingent,” within the meaning of EPTL 8-1.4(b)(8), as of the moment of the decedent’s death, and therefore should not be considered indefeasibly vested until the estate’s fiduciary has detailed information sufficient to make a determination that the Santa clause is certain to take effect. Under this interpretation, the registration requirement of EPTL 8-1.4 would not operate to require unnecessary, or unintended, noticing of the attorney general, provided that the governing document containing the Santa clause bequest names one or more specific charitable beneficiaries, rather than giving the client’s fiduciaries the discretion to determine which charities should benefit. Even with all the variables involved in determining whether a Santa clause bequest is payable and in what amount, it cannot be inferred with certainty from a plain reading of the statute that such a bequest is truly contingent within the meaning of EPTL 8-1.4(b)(8). Despite the lack of clarity, an interpretation of the statute that would require any estate subject to a Santa clause, however unlikely it is that the bequest will take effect, to register with the attorney general would overburden both clients and the attorney general’s office in a way that surely does not align with the spirit and purpose of EPTL 8-1.4.
Conclusion
While the Santa clause can generate meaningful estate tax savings for certain estates, the use of the Santa clause creates traps for the unwary that could undermine its purpose and value. Additionally, the circumstances under which a Santa clause is likely to take effect are relatively limited. Practitioners must carefully consider the asset composition of their clients’ estates when planning with a Santa clause, as well as the extent to which assets may pass outside the provisions of the documents containing the Santa clause. Only after a client-specific analysis can a practitioner truly determine whether the potential advantages of employing a Santa clause are likely to outweigh the potential disadvantages.
Marjorie W. Hornaday, Benjamin Millard, and Michael S. Schwartz are attorneys at Day Pitney.
Day Pitney Trusts and Estates Partner Marjorie W. Hornaday advises high net worth individuals and families regarding their estate planning needs, working closely with clients to address personal, family and business concerns, as well as opportunities to mitigate federal and state wealth transfer taxes. She also counsels public and private charities and corporate fiduciaries.
Day Pitney Trusts and Estates Associate Benjamin Millard advises high net worth individuals and families on wills and trusts, lifetime gift planning and estate planning.
Day Pitney Trusts and Estates Partner Michael Schwartz advises high net worth individuals, fiduciaries and family offices on sophisticated private client matters involving trusts and estates, including tax and succession planning.
This article appears in a forthcoming issue of Trusts & Estates Law Journal, a publication of NYSBA’s Trusts & Estates Law Section. For more information, please visit NYSBA.ORG/TRUSTS.
Endnotes
1. The target federal funds rate in effect as of Jan. 2, 2025 was expressed as a range from 4.25% to 4.5%. Accordingly, pecuniary bequests made outside of the seven-month period incur interest during 2025 at a rate of 3.5% (the high of the range, 4.5%, less 1%) per annum.
2. EPTL 8-1.4(b)(8).
3. Registration materials should be mailed to the attorney general’s office’s New York City address, to the attention of the Charities Bureau, unless the estate is located in Albany, Columbia, Fulton, Greene, Hamilton, Montgomery, Rensselaer, Saratoga, Schenectady, Sullivan, Ulster, Warren, or Washington county.
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