Taxes are a part of life and if you live in New York and own a taxable estate, you’ll need to know New York’s estate tax rules. Taxes are also a part of death. And frustratingly, if we’re not careful in life, we can pass them on to our loved ones in death through inheritance taxes.
In New York, while there is no inheritance tax on gifts received as part of an inheritance or trust, estate taxes are still applicable. These taxes are calculated based on the total value of the deceased’s estate rather than on what each beneficiary receives individually. Many gifts are eligible for tax exemptions, which can significantly reduce or even eliminate the estate taxes that might have otherwise been due.
Effective estate tax planning is one of the most important plans you can make. Our Brooklyn estate tax planning lawyers at New York Legacy Lawyers can help you manage the intricacies of estate tax to protect yourself and your loved ones from paying more than what they should. Contact us today at (718) 713-8080 to schedule a consultation.
Estate Tax Vs. Inheritance Tax
Estate tax and inheritance tax are two different things. While they are both paid to the IRS, the most significant difference is who pays them. The estate pays estate taxes and covers any taxes that are levied against the assets included in the deceased’s estate. Inheritance tax is paid for by the people who are inheriting an asset. You may be able to set aside an exclusive account that can be used to help defray the cost of the inheritance tax so that your loved ones won’t be responsible for the entire amount.
You can also avoid inheritance tax by using certain types of trusts.
New York Inheritance Tax
In New York, there is no “inheritance tax” that is levied on the property and money received by an heir from an estate. The heir bears the responsibility of paying inheritance taxes. However, it’s important to note that if a New York resident owns property in another state, their heirs may be subject to that state’s inheritance tax unless proactive measures are taken to avoid it.
While the majority of a New York resident’s property is typically situated within the state, it is not uncommon for them to possess vacation homes or investment properties in states where inheritance taxes are enforced.
New York Legacy Lawyers can be your reliable partner for out-of-state inheritance tax concerns. Our skilled New York estate planning lawyers can guide you in creating thorough estate plans that effectively reduce the impact of inheritance taxes. Trust our dedicated professionals to handle your estate tax concerns with the highest level of professionalism. Contact us today to find tailored solutions that cater to your specific needs.
How Much Can You Inherit Without Paying Taxes in New York?
Understanding the difference between inheritance tax and estate tax in New York is crucial when determining what you might owe after receiving an inheritance. Fortunately for beneficiaries, New York does not impose an inheritance tax, meaning you don’t pay taxes simply because you inherit assets.
However, New York does enforce an estate tax. This tax is not paid by the inheritor but by the estate of the deceased before the assets are distributed. For the year 2024, the estate tax exemption in New York is set at $6.94 million, an increase from the $6.58 million exemption in 2023. This means that if the total value of the estate at the time of death exceeds $6.94 million, the estate must file a New York estate tax return and potentially pay estate taxes on the amount over this threshold.
It’s important to note that this tax exemption applies to the estate as a whole rather than to individual beneficiaries. Therefore, as an inheritor, you wouldn’t need to pay any taxes unless the entire value of the estate surpasses the $6.94 million mark. Beneficiaries of estates valued below this threshold are exempt from New York estate taxes.
If you are managing or expecting to inherit an estate near or above this exemption threshold, consulting a Brooklyn estate tax planning lawyer can be beneficial to understand the specifics of New York’s estate tax laws effectively. To arrange a consultation, reach out to New York Legacy Lawyers today.
Trust Options Available in New York
When undertaking estate planning, one may encounter multiple legal documents to transfer their estate to beneficiaries. Alongside creating a last will and testament, establishing a trust can offer asset protection and secure asset distribution according to the individual’s preferences. As each type of trust carries its own set of benefits and drawbacks, consulting an estate planning attorney is recommended to assess the available options thoroughly. The following are trusts that can be established in New York:
- Irrevocable Life Insurance Trust. An option to prevent your life insurance policy from being included in your estate. An irrevocable trust means that you will have to give up any ownership rights, and you will not be able to borrow money against the trust or modify the beneficiaries. When you pass away, the benefits from the policy are paid to your beneficiaries as tax-free income. This can be useful for your loved ones who may need extra money or can help pay for any remaining estate-related expenses.
- Charitable Remainder Trust (CRT). A life income gift trust is the most frequently used charitable trust. You move your assets to the trust while you’re alive, and you or a beneficiary can receive tax-free income from it for the remainder of your life. The remaining funds in the CRT are given to a charity, and you receive a charitable and income tax deduction for a part of the transfer.
- Charitable Lead Trust (CLT). A charitable lead trust is a type of trust that enables you to select the charities that will receive the interest from the assets held in the trust for a predetermined length of time. After the specific period, the remaining amount in the trust transfers to your beneficiaries or family members.
- Special Needs Trust. A special needs trust is a trust designed to supply financial assistance to a loved one with a disability for the duration of their lifetime. The assets from the trust can be used to supplement any benefits the individual may receive from government programs like Social Security, Medicare, or others.
- Dynasty Trusts. This trust allows the tax-free transfer of a large sum of money to your beneficiaries who are at least two generations younger than you.
- Qualified Personal Residence Trusts. Using these trusts can exclude the value of your personal home from your estate. This kind of trust is frequently utilized in locations with thriving real estate markets or areas where properties are expected to increase in value over time.
- Qualified Terminable Interest Property Trust. Assigns assets to specific family members if your family includes stepchildren, remarriage(s), or children from a prior marriage. The trust will give your surviving spouse an income after you pass away. Once your spouse passes away, only the beneficiaries you designate (such as your children from a previous marriage) will receive the remaining trust assets.
| Types of Trusts Available in New York | Key Features |
|---|---|
| Irrevocable Life Insurance Trust | Prevents inclusion of life insurance policy in the estate. Provides tax-free income to beneficiaries upon policyholder’s death. |
| Charitable Remainder Trust (CRT) | Transfers assets to trust while grantor is alive. Offers tax-free income for life to grantor or beneficiary. Donates remaining funds to charity, resulting in tax deductions. |
| Charitable Lead Trust (CLT) | Allows selection of charities to receive trust’s interest for a specified period. Transfers remaining amount to beneficiaries or family members. |
| Special Needs Trust | Provides financial assistance to individuals with disabilities. Supplements government benefits like Social Security or Medicare. |
| Dynasty Trusts | Enables tax-free transfer of a significant sum to beneficiaries two generations younger than the grantor. |
| Qualified Personal Residence Trusts | Excludes personal home value from the estate. Often used in thriving real estate markets or areas with expected property value appreciation. |
| Qualified Terminable Interest Property Trust | Allocates assets to specific family members in complex family situations. Provides income to surviving spouse and remaining assets to designated beneficiaries (e.g., children from a previous marriage). |
How is Inheritance Tax Calculated?
Inheritance taxes vary significantly from state to state, with rates ranging from 1% to 20%. The tax obligation can also differ within a state depending on the size of the inheritance. For example, if a state exempts the first $2 million of an inheritance and you are bequeathed $10 million, taxes would only apply to the $8 million over the exempt amount.
It’s important to consult with the administrator of the will or an estate law attorney to fully understand the applicable tax rates and the process for filling out inheritance tax forms in your state. As mentioned, in New York, there is no inheritance tax imposed. This means that while you need to be aware of these regulations if you inherit property in other states, any assets received from an estate within New York are not subject to state inheritance taxes.
Inheritance Tax Exemptions
Not all inheritances are taxable. States that have an inheritance tax allow for a certain amount of money to be received without having to pay an additional tax. Several states offer tax-exempt status to the deceased person’s spouse. Children may also qualify for this exemption. There are instances, however, in which the amount received is large enough to put the inheritance into a taxable category. The main rule of thumb is that family members usually bear some degree of tax-exempt status. The beneficiaries who have no family connection to the deceased can expect to pay a much higher inheritance tax.
As a person who is planning their estate, if you want to prevent your beneficiaries from paying any inheritance tax, you may want to look into placing your assets into trusts. This action allows you to leave whatever item or amount of money you want to any person, family or not, and possibly reduce the amount of inheritance tax they are required to pay once they receive their gifts
It is important to note, however, that when inheriting assets located in New York, there is no state-level inheritance tax. This means that residents of New York do not need to worry about state inheritance taxes when planning their estates or receiving an inheritance, regardless of the relationship to the deceased. This exemption allows for simpler estate planning and potential cost savings for New Yorkers, although considerations for property held in other states where inheritance taxes exist should still be made.
Ask New York Legacy Lawyers!
Understanding inheritance tax and its implications can be complex, especially without a solid grasp of your state’s tax laws. When navigating estate laws, having a trusted attorney to provide reliable answers is crucial. At New York Legacy Lawyers, our Brooklyn estate tax planning lawyers are equipped with the knowledge necessary to clarify your questions and ensure you have a comprehensive understanding of how your will functions and the potential inheritance tax implications for your heirs.
It’s important to highlight that in New York, there is no state-level inheritance tax. However, if you have property in other states, it’s essential to consider the inheritance laws applicable there. Our team can assist you in drafting your will and creating trusts that help minimize the tax burden on your beneficiaries, ensuring they don’t have to pay excessive taxes on the gifts they receive.
Contact us at (718) 713-8080 to explore effective estate planning strategies tailored to your needs.
https://yanafeldmanlaw.com/how-does-inheritance-tax-work/
from New York Legacy Lawyers by Yana Feldman and Associates https://yanafeldmanlaw.com/how-does-inheritance-tax-work/
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