Understanding Estate Taxes in New York State

Estate planning can feel overwhelming, especially when it comes to understanding estate taxes in New York State. When someone passes away, the property they own, also known as their estate, may be subject to taxes depending on its value. In New York, the rules for estate taxes can be complex, and many people are unsure of what to expect. This guide will help break down how estate taxes work in New York and provide some basic information on what you should know when planning for the future. Estate taxes are important to consider if you are trying to pass down your wealth to loved ones while making sure that the value of your estate is protected as much as possible. At, Cole, Sorrentino, Hurley, Hewner & Gambino, P.C. , we are here to guide you through the legal process and help you navigate the complexities of your case.

What is an Estate Tax?

An estate tax is a tax on the property that someone leaves behind after they pass away. This can include homes, land, bank accounts, investments, and other valuable possessions. Estate taxes are sometimes called “death taxes” because they apply to the estate after the person has died. In New York State, estate taxes are separate from federal estate taxes, which means that your estate may need to pay both state and federal taxes if it meets certain conditions.

Estate taxes are different from inheritance taxes. While inheritance taxes are paid by the people who inherit money or property, estate taxes are paid by the estate itself before the assets are distributed to heirs. It is important to understand this difference when thinking about how much of your estate will be passed on to your beneficiaries.

Who Has to Pay Estate Taxes in New York?

Not every estate in New York is required to pay estate taxes. The amount of tax owed depends on the total value of the estate at the time of the person’s death. In New York, if the value of the estate is below a certain threshold, no estate tax will be due. As of 2024, this threshold is set at $6.58 million. If the value of the estate exceeds this amount, it becomes taxable.

For estates that are valued above the threshold, New York uses a progressive tax system. This means that the higher the value of the estate, the higher the percentage of estate tax that will be applied. However, it is important to remember that only the portion of the estate above the threshold is subject to the tax.

The Estate Tax Cliff in New York

One important thing to understand about estate taxes in New York is what is known as the “estate tax cliff.” If the value of an estate is just over the exemption threshold, even by a small amount, the entire estate may be subject to taxes, not just the portion that exceeds the limit. This can create a significant financial impact if you are not careful with planning. For example, an estate that is only a few dollars above the exemption amount could be taxed on its entire value, leading to a large tax bill. This makes careful estate planning essential if you want to avoid losing a substantial portion of your estate to taxes.

There are ways to minimize the risk of falling off the estate tax cliff, including gifting portions of your estate while you are still alive or using trusts to reduce the value of your estate. Understanding how the cliff works and working with professionals to plan accordingly can help protect your estate from unnecessary taxation.

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New York’s Estate Tax Rates

New York’s estate tax rates vary based on the total value of the estate. For estates that exceed the exemption threshold, the tax rates range from 3.06 percent to 16 percent. These rates apply to the value of the estate that is over the exemption limit. For example, if an estate is valued at $7 million, only the amount over $6.58 million would be taxed, and the applicable rate would depend on the size of the excess.

New York’s estate tax system is designed to ensure that smaller estates are taxed at lower rates, while larger estates face higher taxes. This progressive tax structure can lead to significant estate tax bills for those with very large estates, so it is important to plan ahead if you anticipate that your estate will exceed the exemption amount.

Federal Estate Taxes and New York

In addition to New York State estate taxes, some estates may also be subject to federal estate taxes. The federal estate tax exemption is much higher than New York’s, currently set at $12.92 million as of 2024. This means that if the value of your estate is below this amount, you will not owe any federal estate taxes. However, for estates valued above this threshold, a federal estate tax of up to 40 percent could apply.

It is important to keep in mind that New York estate taxes and federal estate taxes are separate. This means that even if your estate does not owe federal taxes, it could still owe New York estate taxes. Similarly, an estate that exceeds both the state and federal exemption limits could be required to pay both state and federal taxes. Planning for both types of taxes is essential if you want to reduce the total tax burden on your estate.

Strategies to Reduce Estate Taxes in New York

Estate taxes can be a significant burden on larger estates, but there are strategies you can use to reduce the amount of tax owed. One common method is gifting. You can give away portions of your estate to family members or other beneficiaries while you are still alive. These gifts reduce the total value of your estate, potentially lowering it below the tax exemption threshold. Under federal law, individuals can give up to a certain amount each year without triggering gift taxes, making this a useful way to transfer wealth while minimizing estate taxes.

Another option is creating trusts. Trusts can be used to remove certain assets from your estate, thereby reducing its overall value. There are several types of trusts available, including revocable and irrevocable trusts, each with its own benefits and rules. Working with a legal professional to establish trusts can help you protect your estate and ensure that more of your wealth is passed on to your beneficiaries.

Charitable giving is also a popular strategy for reducing estate taxes. By leaving part of your estate to a charitable organization, you can reduce the value of your taxable estate. In some cases, charitable donations can completely eliminate estate taxes, depending on the size of the gift and the value of the estate.

Planning for the Future

Estate planning is about more than just deciding who will inherit your property. It also involves taking steps to protect your estate from unnecessary taxes. For people with larger estates, careful planning is essential to ensure that as much of their wealth as possible is passed on to their heirs. Without a plan in place, your estate could be subject to high taxes, leaving your beneficiaries with less than you intended.

One important step in the estate planning process is having a will. A will allows you to specify how your assets should be distributed after your death, which can help reduce confusion and prevent disputes among family members. Without a will, the state will decide how your property is divided, which may not align with your wishes.

In addition to a will, other estate planning tools such as trusts and gifting can help you minimize taxes and protect your estate. It is also important to keep your estate plan up to date, especially if there are changes in tax laws or your financial situation. Regularly reviewing and updating your plan can ensure that your estate remains protected over time.

How a Lawyer Can Help with Estate Taxes

Understanding estate taxes in New York State can be challenging, but you do not have to navigate the process alone. A legal professional can help you develop an estate plan that minimizes taxes and ensures that your assets are passed on according to your wishes. Lawyers who focus on estate planning can provide valuable guidance on the best strategies for reducing estate taxes, including gifting, trusts, and charitable donations. They can also help you prepare the necessary legal documents to ensure that your estate is managed properly after your death.

Working with a lawyer can give you peace of mind, knowing that your estate plan is in place and that your loved ones will be taken care of. Whether you have a large estate or just want to make sure that your assets are distributed fairly, a legal professional can help you understand your options and create a plan that meets your needs.

If you are concerned about estate taxes in New York and want to make sure that your estate is protected, Cole, Sorrentino, Hurley, Hewner & Gambino, P.C. can assist you. Our team is ready to help you navigate the complexities of estate taxes and create a plan that preserves your wealth for future generations. Contact us today to discuss your estate planning needs and learn how we can help you protect your legacy.