Estate Tax Planning Attorney in New York

What is New York Estate Tax, and How Does it Affect Your Estate Plan?

Estate tax planning is a crucial part of managing your wealth, ensuring your assets are preserved, and minimizing taxes on your estate. For residents of New York, understanding state and federal tax laws and regulations is essential, as they can significantly affect your estate plan.

At the Law Offices of Glenn Busch, P.C., we specialize in helping clients navigate the complexities of New York state estate tax laws and develop favorable tax strategies to protect their legacies. This guide covers the basics of estate tax planning, including how to minimize estate tax liability and comply with state-level estate tax requirements.

Understanding the Basics of Estate Tax Planning

Estate tax is a tax on the transfer of a person’s estate after death. In New York, the tax applies to the value of assets in a decedent’s estate, including real estate, financial accounts, and personal property. This tax, sometimes referred to as a death tax, can significantly reduce the taxable value of your estate, leaving less for your heirs.

New York state estate tax laws differ from federal tax laws, and planning involves understanding how each impacts your wealth. With guidance from an estate planning lawyer, you can craft a strategy to address these tax implications.

Key Differences Between Federal and State Estate Taxes

While federal and New York estate taxes share similarities, the federal estate tax exemption amount and rates are significantly different. The federal estate tax exemption amount is $12.92 million per individual (2023), with a top federal estate tax rate of 40%. In contrast, New York state estate tax begins at $6.11 million and applies a progressive rate structure up to 16%.

New York’s estate tax cliff adds complexity. If your estate exceeds the state exemption limit by more than 5%, the entire estate becomes subject to NY estate tax.

For example, even if your estate exceeds the exemption by $1, your beneficiaries could lose the entire exemption and pay estate tax on the full value of your estate. Careful planning can help avoid this significant tax burden.

Tax Consequences of the Exemption on Your Estate

The taxable value of your estate plays a critical role in determining whether it is subject to estate tax. If the size of your estate exceeds the New York exemption threshold, it may trigger both federal estate and gift tax and state-level estate taxes.

By reducing the value of assets included in your taxable estate, you can ensure your heirs receive the maximum inheritance without incurring estate tax penalties.

What Are the Current New York Estate Tax Exemption Limits?

The 2023 Exemption and Adjustments

New York’s estate tax exemption amount is $6.11 million as of 2023. Estates valued below this threshold are excluded from the estate tax, while larger estates are subject to estate tax. This amount is adjusted annually for inflation, but it remains far below the federal exemption for federal estate tax.

Federal and State Estate Tax Differences

Federal estate tax purposes prioritize a higher exemption, but this favorable tax treatment does not apply in New York. For estates between $6.11 million and $12.92 million, state tax laws create a gap, making state-level estate tax planning vital for New York residents.

Legislative Changes and Tax Cuts and Jobs Act Impact

The Tax Cuts and Jobs Act (TCJA) temporarily raised the federal exemption for estate and gift tax to $12.92 million, but it did not affect New York state estate tax rates. These disparities highlight why planning involves strategies tailored to both federal and state laws.

Strategies to Minimize New York Estate Taxes

1. Strategic Gifting

Gifting can reduce the taxable value of your estate over time. The gift tax exemption allows individuals to give up to $17,000 per recipient annually without incurring gift and estate tax penalties. These gifts are excluded from the estate for tax purposes, helping reduce estate tax liability.

Larger gifts can utilize the lifetime gift tax exemption, which is unified with the federal estate tax exemption amount. Paying medical or educational expenses directly is another way to gift assets tax-free.

👉 Learn more about strategic gifting and tax benefits.

2. Using Trusts to Protect Estate Assets

Trusts are essential estate planning strategies for reducing taxes on your estate. Common options include:

• Irrevocable Life Insurance Trusts (ILITs): Exclude life insurance proceeds from the taxable value of your estate.
• Qualified Personal Residence Trusts (QPRTs): Transfer your home at a lower gift tax valuation.
• Credit Shelter Trusts: Maximize spousal exemptions for federal and state estate tax purposes.

Trusts can help ensure your estate includes only assets that minimize tax exposure while maximizing benefits to heirs.

3. Life Insurance as an Estate Planning Tool

Life insurance provides liquidity to pay estate tax liabilities, ensuring your heirs aren’t forced to sell estate assets like businesses or real estate. When held in an ILIT, the policy’s value is excluded from the estate, reducing taxes.

How Does New York’s Estate Tax Rate Structure Work?

Progressive Rates and the Cliff Effect

New York employs a progressive estate tax rate, ranging from 3.06% to 16%, depending on the taxable value of your estate. However, the cliff effect creates a sudden increase in tax liability if the estate exceeds the exemption by just 5%.

Calculating Estate Tax Liability

Calculating your estate tax liability involves summing the value of assets in the estate, subtracting deductions, and applying the tax rates. Accurate calculations require understanding how deductions like charitable contributions and debts affect your estate plan.

When Should You Start Estate Tax Planning?

Early Planning is Key

Starting early helps avoid unfavorable tax outcomes. For example, gifting assets over several years reduces the size of your estate without incurring estate taxes. Early planning also accounts for changes in tax laws and regulations.

Life Events That Trigger Updates

Major life events—such as marriage, divorce, the death of a spouse, or changes in financial circumstances—should prompt you to update your estate plan. Moving to New York also requires adjustments to address state-specific laws.

Regular Plan Reviews

Review your estate plan every three to five years to ensure it aligns with current laws and financial goals. Regular reviews help you minimize taxes on your estate and adjust strategies to meet your changing needs.

Common Mistakes to Avoid

1. Overlooking State-Level Estate Tax Rules: Focusing solely on federal tax laws can leave your estate exposed to New York estate tax consequences.
2. Neglecting Regular Updates: Outdated plans may fail to account for changes in tax laws or financial circumstances.
3. Mismanaging the Cliff Effect: Estates slightly above the exemption limit risk significant tax penalties. Careful planning can help mitigate this issue.

At the Law Offices of Glenn Busch, P.C., we offer personalized estate planning strategies to help you protect your wealth, minimize tax burdens, and secure your legacy. Contact us today to schedule a consultation.