A variety of personal financial obligations can influence an individual’s legacy. For example, a person administering someone else’s estate will usually need to provide notice to creditors and pay all of someone’s outstanding debts before handing out any resources to heirs and/or beneficiaries.
They also have a responsibility to file tax returns on behalf of the decedent and to potentially pay certain taxes. In addition to any outstanding final income taxes that someone owes and taxes generated by the sale of property, there could also be estate taxes that cut into how much someone’s family members inherit.
When does someone putting together or updating an estate plan need to worry about the possibility of estate taxes?
When they have millions of dollars in property
The typical estate in New York will not be sizable enough to trigger any taxes, but estate taxes are a possibility in some cases. Usually, the assets included in the estate, including real property and business ownership interest, will need to be worth millions of dollars for estate taxes to apply.
The threshold for New York state estate taxes is much lower than the current federal threshold. Any estate worth more than $6.58 million in 2023 may have to pay estate taxes. The more the estate is worth, the higher the tax rate will be. The lowest possible New York estate tax rate is 3.06%, but the highest is 16%. It is possible for someone’s estate to be subject to state estate taxes but not federal estate taxes.
The current threshold for estate taxes at the federal level is $12,920,000. The federal tax rate is also progressive, which means it increases depending on the taxable value of the estate. The federal estate tax rate could be anywhere from 18% to 40%. People could potentially lose more than half of an estate’s value to taxes.
How can people plan for estate taxes?
There are multiple ways for a testator to reduce their likely estate tax obligations through careful planning. The goal of such plans will be to reduce how much property someone holds solely in their own name. The right steps to reduce tax risk could include making strategic gifts, executing deeds, filing special paperwork with financial institutions and even funding a trust.
The exact steps that someone takes will depend on their family relationships and the resources that will contribute to the total value of their estate. Ultimately, seeking legal guidance to accurately identify possible tax risks could help someone maximize what they’re able to leave for their loved ones when they die.