What is the “Death Tax” and How Does It Work?

What is the “Death Tax”?

A “death tax” is another way to refer to estate taxes. Estate taxes occur from federal and sometimes states on the value of your assets upon your death. Death taxes generally only apply to estates or inheritances that surpass the threshold of millions of dollars. The threshold changes, however, from a federal standpoint, and states may also have an estate or “death tax” that they impose. New York, Hawaii, Minnesota, Vermont, Washington, and more are among fifteen states that impose an additional state estate tax.

According to the Internal Revenue Service, “estate tax is a tax on your right to transfer property at your death.” The fair market value of all your items is calculated as your gross estate. The articles typically included are real estate, insurance proceeds or policy values, trusts, annuities, cash, stocks, bonds, and more.

From your gross estate amount are deductions such as property that passes to surviving spouses or charities, any outstanding mortgages, and other debts. The net of these two numbers is your taxable estate. The federal estate tax threshold is approaching thirteen million dollars and will likely continue to rise. This typically means you are likely exempt from estate taxes if your estate doesn’t meet the federal threshold.

What About New York’s Estate Tax?

As with most estate taxes, if your taxable estate surpasses the set threshold, you must pay estate taxes. New York’s current threshold is above $6.5 million and will likely continue to increase with inflation. What this means for you or your loved ones who may be trying to reconcile your estate is that if the total amount of your estate is below that threshold, you will not be subjected to New York estate taxes.

From there, if the estate amount surpasses the threshold by less than 5%, only the amount that exceeds the threshold is taxable. The entire estate may be taxable if the estate is over the threshold by significantly more. If you have heard the New York estate tax referred to as a “cliff tax,” it is because of how the entire estate is taxed if it is valued at a certain level, and exemptions are no longer considered. Consult your estate planning attorney to learn the current amounts so you can plan accordingly for the future.

What if There is a Surviving Spouse?

If there is a surviving spouse, the money that goes to that spouse isn’t subject to estate taxes. When the second spouse passes away, it is common for their estate to be taxed if it is above the threshold.

With effective estate planning, some spouses set up a plan to help the surviving spouse avoid significant taxes by placing assets in a trust or other means. Your experienced estate planning attorney can walk you through the options so you can ensure that your spouse is cared for even after you are gone.

New York Gift Tax

One of the resources that couples will utilize is the absence of the gift tax in New York. Many states will impose a gift tax on asset transfers. This tax can discourage individuals from transferring assets to beneficiaries to avoid hitting the estate tax threshold.

In New York, there isn’t a state gift tax. The absence of this tax allows individuals to gift assets to beneficiaries throughout their lives to help minimize the taxable value of their estate.

It is important to note that though there may not be a state tax on gifts, they may be subject to federal taxes. Also of importance is that on transfers made less than three years before death, the asset may be retroactively added to the amount of the estate, affecting the taxable estate amount.

One of the most important aspects of estate planning is utilizing the timelines to the best of your ability. If you are close to the threshold and can transfer some assets more than three years from the end of your life, you can effectively avoid significant estate taxes charged to your loved ones after you are gone.

Other Resources

Exploring all options with your estate planning attorney is crucial to ensure taxes don’t diminish your legacy. One of the ways that many people choose to help ensure they avoid taxes is by creating a life insurance trust. An ILIT can house life insurance policy values so they aren’t calculated in countable assets upon death.

A less common option, but one that some may choose, is to leave the state of New York to avoid the taxes. As mentioned above, currently, only 15 states impose an extra tax on top of the federal estate tax. An estate planning attorney can review your current assets to ensure you don’t have any assets tied to New York that may result in tax implications in the future.

Charitable donations are another option some families choose rather than giving their money to New York through estate taxes. Sometimes called the “Santa Clause Provision,” stipulated in a will can mean that assets are donated to a specific charity, contingent on the fact that the estate surpasses the threshold at the time of death and the charitable donation will help heirs to avoid the tax.

Estate Planning Attorneys Provide Invaluable Resources

You have spent your whole life working towards your legacy and caring for the loved ones you will leave behind. Let us help to ensure that your hard work and planning help your legacy remain intact without unnecessary tax implications for your loved ones after you are gone.

Call us today at (917) 920-6437 to get started.