What Are Estate Taxes?
Estate taxes represent a tax that is imposed on the value of a person’s estate following their death. The value of an estate includes property owned by the decedent at the time of their death, such as:
- Bank and brokerage accounts
- Real estate
- Personal property, including valuables such as art, jewelry, and antiques
- Proceeds of life insurance policies owned by the decedent’s estate
- The value of business ownership interests held by the decedent
Estates are taxed by both the federal government as well as by many states, including New York. Both federal estate tax law and New York estate tax law provide an exemption from taxation for estates under a certain value. The value of a taxable estate can sometimes be reduced by taking advantage of various deductions and exemptions offered by federal or state tax law.
New York Estate Tax Rates
Estate tax rates under New York law range from 3.06 percent to 16 percent, based on the value of the estate.
As of 2021, federal estate tax rates range from 18 percent to 40 percent based on the value of the taxable estate.
Estate Tax Laws in New York
New York’s estate tax laws differ from federal estate tax law and the estate tax laws of other states in several important ways. One of the most important differences of New York estate tax law involves the “estate tax cliff.”
The New York Estate Tax Cliff
Under federal estate tax law and the laws of states that impose taxes upon estates, only estates with a value over a certain amount are subject to taxation. However, under federal law and the laws of most states that impose estate taxes, only the amount of the estate value over the triggering value is taxed. For example, if a state only taxes estates valued at over $1.5 million, for an estate with a value of $2 million, the state will only tax $500,000, or the portion of the estate over the triggering limit.
However, in New York, estates valued at 105 percent above the exemption limit for estate taxes “fall off the cliff,” and the entire value of the estate is taxed, not just the portion of the estate over the exemption limit. In some cases, this may result in a tax bill that taxes over 100 percent of the estate’s value over the exemption limit. The amount of the exemption limit is $5.93 million in 2021 and is adjusted every year according to inflation.
Deadlines for Filing Estate Tax Returns in New York
In New York, an estate must file a tax return, if the estate value exceeds the exemption limit. A New York state estate tax return must be filed within nine months of the decedent’s death. However, an extension of up to six months can be obtained under certain circumstances, including payment of the estimated correct amount of tax (if any).
Federal estate tax returns also must be filed within nine months of a decedent’s death, with six-month extensions also available from the IRS.
New York Estate Tax Exemptions
Individuals have various estate planning mechanisms they can use to reduce the value of their estate for taxation purposes or to exempt some or all the value of their estate from taxation, including:
- Gifts – You can make certain gifts, with the value of those gifts exempted from taxation. For example, you can currently gift up to $15,000 per person, per year under federal law. You can make gifts during your lifetime tax-free under federal tax law by using a portion of your federal estate tax exemption limit. You can also make “gifts” by paying the medical or educational expenses of another individual, which do not count toward your annual gift limit.
- Charitable giving – Money donated to charity is usually excluded from a taxable estate. Money can be donated to charity during an individual’s life or can be donated at death through a provision of their will or by establishing a charitable trust.
- Trusts – Various types of trusts can be used to reduce the value of your estate. Depending on how the estate is structured, you may benefit by placing the property in the trust during your lifetime. In addition, various types of trusts can also help pass your property to your family without the need for that property to go through probate, a potentially costly and time-consuming process.
- Debts owed at death – Debts that are owed by a decedent at the time of their death are normally paid out by the estate, with those payments reducing the value of the estate.
- Estate administration expenses – Certain expenses incurred by the estate, such as funeral and burial costs or attorney and accountant fees, can also be deducted from the value of an estate.
Under the spousal exemption, any property that is left to a surviving qualified spouse is exempted from taxation at both the federal and state level, regardless of the value of the property.
Additionally, a spouse can pass on any unused portion of the estate tax exemption to the surviving spouse to use upon their death. While federal estate tax law places no requirements on porting the unused portion of the estate tax exemption between spouses, New York law does not permit porting any unused portion of the exemption between spouses.
Typically, any unused portion of the first spouse’s New York estate tax exemption can only be “passed” through a bypass trust or credit shelter trust, which places property equal in value to the unused portion of the New York exclusion in trust for the benefit of the surviving spouse or other beneficiaries. This can effectively exempt that property from New York estate taxation.
How an Experienced Estate Tax Attorney Can Help
At Chaves Perlowitz Luftig LLP, our estate tax attorneys can help you by:
- Calculating the value of your estate to determine whether it might be subject to federal or New York estate taxation
- Advising you of your options for reducing the value of your estate if it is valued over the exemption limit by taking advantage of exemptions under federal and state tax law
- Drafting estate planning documents as needed to reduce the value of your estate to bring it under the exemption limit so that you and your family might avoid estate taxes
- Amending your estate planning as the size and nature of your estate changes or changes in tax laws make other estate planning options more favorable for you
When you need help understanding how New York estate tax laws might affect you and your family and what legal options you may have for reducing your family’s estate tax liabilities, Chaves Perlowitz Luftig LLP can help. If you need help with estate or tax planning, our New York estate tax attorneys can explain your options during a free, confidential case evaluation. We can discuss your and your family’s finances and review how our firm can help you maximize the assets you pass on to your loved ones. Contact us today for your free case review.