Estate Taxes in the State of New York: What You Need to Know

Estate planning is a critical aspect of managing one's financial affairs, especially for those residing in New York. Understanding the nuances of estate taxes in New York can significantly impact how you plan for the future. Here, we break down the essential elements of New York's estate tax system, offering insight into what you need to know to navigate this complex area effectively.

Understanding Estate Taxes

An estate tax is a levy on the estate of a deceased person before distribution to the heirs. Unlike inheritance tax, which is paid by the beneficiaries receiving the inheritance, estate tax is paid out of the estate's funds.

New York's Estate Tax Threshold

As of 2024, New York imposes an estate tax on estates valued over $6.58 million. This threshold, also known as the estate tax exemption, is subject to annual adjustments for inflation. Estates valued below this exemption are not subject to New York estate taxes.

However, New York has a "cliff" tax system. If the estate's value exceeds the exemption amount by more than 5%, the entire estate becomes taxable, not just the amount over the threshold. This can significantly increase the estate tax liability, making careful planning essential to avoid inadvertently crossing this threshold.

Estate Tax Rates

New York's estate tax rates are progressive, ranging from 3.06% to 16%. The rate applies to the portion of the estate value that exceeds the exemption amount. Here's a brief overview of how these rates apply:

3.06%: On estates over the exemption amount but under $500,000.
5.0%: On estates between $500,000 and $1 million.
9.6%: On estates between $1 million and $5 million.
16%: On estates over $10.1 million.

The marginal tax rate increases as the estate value increases, making larger estates subject to higher tax rates.

Deductions and Credits

New York allows several deductions that can reduce the taxable estate value. These include:

Debts and Liabilities: Outstanding debts and liabilities at the time of death can be deducted.
Funeral Expenses: Reasonable funeral expenses are deductible.
Charitable Contributions: Bequests to qualifying charitable organizations can be deducted.
Marital Deduction: Transfers to a surviving spouse are generally exempt from estate tax due to the unlimited marital deduction.

In addition to deductions, New York provides a state estate tax credit, often referred to as the "basic exclusion amount," which effectively reduces the taxable estate by the exemption threshold amount.

Portability of Exemptions

Unlike the federal estate tax, New York does not allow portability of the estate tax exemption between spouses. This means that each spouse's estate must individually qualify for the exemption, and any unused exemption cannot be transferred to the surviving spouse. Therefore, proper estate planning, such as the use of trusts, is crucial to maximize both spouses' exemptions.

The Importance of Timely Filing

An estate tax return (Form ET-706) must be filed with the New York State Department of Taxation and Finance within nine months of the decedent's date of death if the estate exceeds the exemption amount. Extensions for filing can be requested, but interest will accrue on any unpaid tax from the original due date.

Planning Strategies

Effective estate planning can help minimize or eliminate New York estate taxes. Some common strategies include:

Lifetime Gifting: Reducing the estate's value through lifetime gifts can help stay below the exemption threshold.
Irrevocable Life Insurance Trusts (ILITs): Placing life insurance policies in an ILIT can remove the death benefit from the taxable estate.
Credit Shelter Trusts: These trusts allow the use of both spouses' estate tax exemptions.
Charitable Trusts: Establishing charitable trusts can provide both estate tax benefits and philanthropic fulfillment.

In Conclusion

Navigating New York's estate tax system requires careful consideration and strategic planning. Given the complexities and potential financial impact, consulting with an experienced estate planning attorney is advisable. Fortunately, Adler Law is here to help you understand the rules and utilize effective planning techniques. Reach out today for estate tax assistance and ensure that more of your estate is preserved for your beneficiaries and less is lost to taxes.

Call Adler Law now at (516) 740-1184 or contact us online.