When planning an estate, all individuals are subject to a federal tax. However, it is important to consider the state tax laws that affect individuals in different ways depending on where they live. For example, citizens in Florida will be subject to different regulations from those living in New York.
What is the NY Tax Law?
Many bills affect estate and financial planning because they can put tax burdens on both the owner and heir of the assets. Many of the current tax laws that affect estate planning stem from provisions in Donald Trump’s “Tax Cuts and Jobs Act” passed in 2017. It is important to note that these rules are set to expire in 2025, at which point Congress will vote to extend this act or pursue new legislation. In addition, New York State has separate estate tax laws that affect estate planning just as much as those on a federal level.
An estate tax exemption eliminates any federal estate taxes on assets amounting to a number under specific limits given to successors during one’s lifetime or post-mortem. As it stands in 2023, the estate tax exemption for an individual is $12.92 million and $22.36 million for couples. In addition to estate tax, there is the generation–skipping transfer tax. This tax prevents individuals from skipping children and passing their assets directly down to their grandchildren. Currently, the generation-skipping tax threshold is the same as the estate tax exemption.
New York State separately assesses estate taxes, and individuals are still required to pay those taxes when passing down their assets. The current threshold for New York estate tax is $6.58 million, and individuals are taxed on a sliding scale format from that threshold. This way, the tax is calculated with consideration to your annual income. In addition, New York state has a unique policy called the “estate tax clawback”. This provision potentially subjects gifts made within three years of death to estate tax, even if those gifts were within federal tax exemption at the time that they were made. Accordingly, if you make large gifts within your lifetime, they can still be subjected to estate taxes if you pass within three years of bestowing them. While these laws are always changing, it is important to bear in mind these factors, while also keeping an eye on future legislation, as you create and update your estate plan.
What is estate planning?
Estate planning refers to the process of arranging and managing one’s assets to ensure proper distribution after one’s death or incapacitation. A solid estate plan includes legal, financial, and healthcare directives. The primary objective of this process is to provide for loved ones while minimizing potential conflict and maximizing the value of the estate. In addition, estate planning gives you the power to make decisions about your end-of-life treatment, if it is needed, while you are in good health and sound of mind.
Estate planning typically involves several key elements and procedures, including, but not always limited to:
- Drafting a will – A will is a legal document that outlines the distribution of assets and appoints an executor to manage the estate. A will allows individuals to specify their wishes regarding anything from property, to guardianship of minor children, to funeral arrangements.
- Establishing trusts – A trust provides greater control over the distribution of assets and minimizes tax implications. Trusts can be tailored to meet specific needs and intentions, such as providing education for children or providing care to loved ones with special needs. Having a trust allows for smooth asset transition and avoids the costly and lengthy probate process.
- Designating beneficiaries – Specifying beneficiaries for retirement accounts, life insurance policies, and other assets helps to ensure that those assets are passed down to the intended individuals. Again, naming beneficiaries avoids probate court, which risks the possibility that your loved ones may not receive the share of assets you believe they deserve.
- Stipulation of advance healthcare directives – Advance healthcare directives, such as a durable power of attorney for healthcare and a living will allow individuals to designate someone they trust to make medical decisions on their behalf if they become incapacitated. These directives provide guidance regarding end-of-life treatment preferences and allow an incapacitated individual to be in control of their experience until the end.
Estate planning allows individuals to have peace of mind that their loved ones will be taken care of after their passing. As significant life events such as marriage, the birth of children, change in assets, and legislative updates occur, it is important to regularly review and update your estate plan and adjust accordingly.
How Does NY Tax Law Affect Estate Planning?
When you are in the process of estate planning, it is important to take into consideration current and future tax laws that may affect you and your heirs. In order to maximize the value of your assets, it is important to be smart and strategic about when, how, and to whom you transfer your estate. Given the complexities of navigating this process, it is important to have an experienced and trustworthy attorney by your side. If you have any further questions or are ready to begin your estate planning journey, please contact the Law Office of Inna Fershteyn at 718-333-2394.