The intricate web of estate taxes can be daunting for those leaving behind significant assets to their loved ones. In addition to the complex federal estate and gift tax framework, New York State also has a complex estate taxation system that warrants careful consideration and planning.
New York State Estate Tax
New York State imposes an estate tax on the transfer of property at death having a total value exceeding a certain threshold. This tax is levied on the estate itself rather than on individual beneficiaries. However, not all estates are subject to taxation in New York, as there are exemptions and thresholds to protect smaller estates.
As of 2024, the New York State estate tax threshold is $6.94 million. This means estates valued below this threshold are not subject to estate tax. However, estates exceeding this threshold are taxed on a graduated scale, with rates ranging from 3.06% to 16% for the portion of the estate exceeding the threshold.
It’s important to note that the design of New York’s estate tax features what has been called a “cliff” provision, which means that if an estate’s value exceeds the threshold (e.g. $6.94 million) by more than 5% (e.g. $7,287,000), the entire estate is subject to taxation, not just the portion exceeding the threshold. This provision underscores the importance of precise estate planning to minimize tax liabilities.
While New York does not, generally, impose a “gift” tax on gifts given during a person’s lifetime, the estate tax regulations do claw back into the calculation of the total estate value, lifetime gifts made within three years of death.
Federal Estate Tax
In addition to state estate taxes, individuals must contend with the federal estate and gift tax, which applies to transferring wealth during life (gift tax) or upon death (estate tax). The federal gift and estate tax threshold is currently significantly higher than that of New York State, but it still impacts high-net-worth individuals and families. This exclusion is termed a “unified credit” because it applies both to lifetime gifts and/or transfers at death.
As of 2024, the federal estate tax unified credit is $13.61 million per individual. Married couples can effectively double this exemption through proper estate planning and/or electing portability at the first spouse’s death by filing a federal estate tax return, potentially shielding up to $27.22 million from federal estate taxes. Estates exceeding this threshold are subject to a 40% tax rate, but only on the amount that exceeds the unified credit exclusion.
Nevertheless, it is important to note that if Congress does not act in 2025, on January 1, 2026, the federal estate tax threshold will again be $5.49 million (adjusted for inflation from 2017), for a predicted threshold of around $7 million. This is a significant reduction in the threshold amount, so planning accordingly with your financial advisor and estate planning attorney is recommended.
Like New York State, the federal estate tax allows certain deductions and exemptions, such as those for charitable contributions and spousal transfers. Strategic estate planning can leverage these deductions to minimize tax liabilities and maximize the transfer of wealth to intended beneficiaries.
Navigating the Intersection
Navigating the intersection of New York State and federal estate taxes requires careful planning and a comprehensive understanding of the tax laws and regulations governing both jurisdictions. Individuals and families with significant assets should work closely with estate planning professionals, including attorneys and financial advisors, to develop tailored strategies that mitigate tax exposure and preserve wealth for future generations.
Some estate planning techniques that can be utilized to minimize estate tax liabilities include:
- Lifetime gifting: Transferring assets during one’s lifetime can reduce the size of the taxable estate, potentially lowering both state and federal estate tax obligations. If the annual federal gift tax exclusion is utilized ($18,000 per person, per recipient, per year in 2024), this lifetime gifting does not use up any of the unified credit.
- Irrevocable trusts: Establishing certain types of irrevocable trusts can remove assets from your estate, thus ensuring that the future growth of those assets do not increase your estate value beyond the state or federal exclusion amounts. Certain types of trusts, such as charitable remainder trusts and qualified personal residence trusts, offer additional tax benefits.
- Testamentary trusts: Within a good estate plan, you can establish various types of “credit shelter” trusts, or disclaimer trusts, which enable a married couple to effectively double their New York State estate tax exclusion.
- Estate tax portability: Married couples can take advantage of estate tax portability with regard to the federal estate tax, which allows the unused portion of one spouse’s federal estate tax exemption to be transferred to the surviving spouse, by merely checking a box on the deceased spouse’s estate tax return.
- Life insurance: Proceeds from life insurance policies are generally exempt from income tax and can provide liquidity to cover estate tax liabilities when the life insurance is properly held within an Irrevocable Life Insurance Trust (ILIT).
Conclusion
Navigating the complexities of New York State and federal estate taxes requires foresight, diligence, and expert guidance. By developing comprehensive estate plans that leverage available exemptions, deductions, and planning strategies, individuals can minimize tax liabilities and ensure the orderly transfer of wealth to future generations. As the tax landscape evolves, staying informed and proactive is essential to preserving and protecting one’s legacy in the Empire State and beyond.
The estate planning attorneys at Lacy Katzen LLP have decades of experience helping clients plan for the transfer of wealth in a way that will protect their legacy. Contact us today to see how we can help you.
