The ability to direct the distribution of your estate assets after you are gone may be the primary impetus for the creation of your estate plan, that plan can accomplish much more than just acting as a roadmap during probate. For example, your estate plan can help protect your assets while you are alive as well as prevent the loss of assets to state and/or federal taxes after your death. Toward that end, the Long Island attorneys at Eghrari Law Firm discuss estate planning and taxes for New York residents.
Federal Gift and Estate Taxes
Every taxpayer faces the potential liability of federal gift and estate taxes, which are applicable to qualifying gifts made during your lifetime coupled with the total value of assets owned at the time of death, collectively referred to as your “estate.” The federal gift and estate tax rate has remained at 40 percent for some time now, meaning you risk losing 40 percent of the value of your estate to federal taxes after your death. Fortunately, taxpayers are entitled to make use of the lifetime exemption which functions like a deduction that reduces your taxable estate.
As of 2023, the lifetime exemption stands at $12.92 million and is scheduled to increase to $13.61 million in 2024; however, in 2026 the lifetime exemption is slated to revert to $5 million, adjusted for inflation, unless Congress opts to extend the existing temporary increase. For 2024, that means that the initial $13.61 million worth of gifts, whether made during your lifetime or as part of your estate distributed upon your death, remain exempt from taxation. Gifts exceeding the lifetime limit are subject to a 40 percent federal tax.
By way of illustration, imagine that you made gifts valued at $5 over your lifetime and owned an estate valued at $13 million at the time of your death for a total estate value of $18 million. If you passed away in 2024, your taxable estate would be valued at $4.39 million after applying the lifetime exemption. Your estate would owe Uncle Sam $1,756,000 in federal gift and estate taxes.
New York State Estate Taxes
Every taxpayer’s estate is subject to federal gift and estate taxes; however, some taxpayers may also face state estate taxes. As of 2023, 12 states and the District of Columbia also collect a state level estate tax. New York is one of those states. If you are a New York resident (or you own property in New York), this means that your estate could owe taxes to both the United States and to the State of New York after you pass away.
New York estate taxation is calculated differently than its federal counterpart. New York does have its version of the lifetime exemption which, for 2023, is $6.58 million. If the value of assets passing to beneficiaries (other than a spouse or charity) is below the applicable exemption, your estate is fully exempt from New York estate taxes. Unlike federal estate taxes, however, the New York estate tax completely phases out if your estate is valued just five percent ($6,909,000 in 2023) over the threshold. At that point, the value of your entire estate is subject to New York estate taxation up to a maximum rate of 16 percent. Your $18 million estate would owe the State of New York $2.88 million in estate taxes if you were taxed at the 16 percent rate.
Can My Estate Avoid Federal and State Estate Taxes?
It should be clear how much value your estate could lose to federal and/or state estate taxes if you fail to proactively work to avoid taxation. The good news is that your estate planning attorney can help you incorporate tax avoidance tools and strategies into your estate plan that can reduce, if not completely eliminate, your estate’s exposure to federal and/or state gift and estate taxes.
Do You Need Help Avoiding New York Taxes?
For more information, please join us for a FREE estate planning seminar. If you have additional questions about how to avoid paying gift and estate taxes as a New York resident, contact the Long Island estate planning attorneys at Eghrari Law Firm by calling us at 631-265-0599 to schedule your appointment.
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