Our Knowledgeable NY Estate Planning Lawyers Can Help You Keep the IRS at Arm’s Length

The estate tax may not pose a risk to most New Yorkers; however, if you believe there’s a good chance your heirs’ inheritance could be jeopardized by the IRS, being proactive is key to avoiding high costs. Reducing your estate taxes in New York

The New York estate planning lawyers at Landskind & Ricaforte Law Group, P.C. will discuss your estate and ways to help you keep your tax burden to a minimum. Here, we explain critical estate planning tips and strategies for reducing taxes.

The 3 Best Strategies for Driving Down Your Estate’s Tax Burden

A sizeable estate could easily lay the foundation for a long-lasting legacy—a springboard to success for your children, a lifetime’s worth of support for a surviving spouse, or the makings of a dedicated philanthropic fund.

However, sizeable estates sometimes face substantial risks. If left unprotected, a large inheritance could be subject to heavy taxation. And, in New York, estate taxes aren’t just levied by the Internal Revenue Service (IRS)—they’re charged at the state level, too.

Taken together, the combined weight of federal and state taxes could reduce the value of a taxable estate by more than 40%.

You don’t have to wait for the government to take its cut. Here are three time-tested strategies that could help lower your estate’s anticipated tax burden, potentially shielding your assets from the IRS and ensuring that your heirs receive the inheritances they deserve:

1. Giving Lifetime Gifts

A fairly easy way to decrease the value of your taxable estate is through the strategic giving of lifetime gifts. Under federal law, individuals have a lifetime gift tax exemption of more than $12 million, subject to annual limits and other provisions. New York, in contrast, does not impose a gift tax, but it does enforce a strict “claw-back” rule for gifts bequeathed within three years of death. This rule permits the state to “claw back” the value of any gifts given within that timeframe to its assessment of your taxable estate.

Since New York’s gift-related rules negate the advantages of late-life giving, it’s typically best to consider the giving of lifetime gifts an effective tax mitigation strategy that is best employed sooner rather than later.

2. Establishing an Irrevocable Trust  

Almost everyone hoping to leave family or friends an inheritance could benefit from establishing a trust—a legal entity that can own, manage, and administer assets transferred to its care.

However, not every type of trust has the built-in protections necessary to mitigate the threat posed by the estate tax. In New York, most assets held by revocable living trusts are automatically exempted from probate but still considered part of the deceased person’s taxable estate. Irrevocable trusts, in contrast, provide enhanced protection from both probate and government-imposed estate taxes.

Although irrevocable trusts cannot typically be amended for the remainder of your lifetime, they provide ample opportunity to condition their terms in a way that makes sense for your circumstances (and for your heirs).

3. Setting Up a Life Insurance Trust

If you already have a trust, it might make sense to name it as a beneficiary to your life insurance policy or policies. However, this strategy poses the same tax-related risks as placing most of your assets in a revocable living trust, in that the proceeds could still be considered part of your taxable estate.

But, if you think that a life insurance payout is likely to make a big difference with respect to estate taxes, you still have the option of forming a separate “Life Insurance Trust,” or ILIT. Any payout made to your ILIT will be exempted from estate tax calculations and can be distributed in accordance with the terms of the trust’s charter.

Other Options for Overcoming Estate Taxes

Lifetime gifts, irrevocable trusts, and ILITs could all help reduce your estate’s tax burden, but they aren’t the most immediately practicable options for everyone. Other tax-mitigation strategies often involve some combination of the following: 

  • Pre-paying retirement taxes. If your estate includes retirement assets—like a traditional Individual Retirement Account—you may have the option of converting pre-tax assets to tax assets through a Roth conversion. This can relieve your estate’s anticipated tax burden and provide your heirs with a tax-free inheritance.
  • Spousal exemptions (but don’t forget to plan ahead). In New York, any property left to a surviving spouse is exempt from both federal and state estate taxes. However, spousal exemptions cannot be transferred or ported to the next generation of heirs. So, though these exemptions provide temporary relief, they should not be considered a long-term solution.
  • Writing a “Santa Clause” into your will or trust. If you’re on the edge of the state or federal tax cliff, an easy way to preserve your estate’s integrity is by writing a so-called “Santa Clause” into your will or trust. As the term suggests, this is a clause that directs any assets in excess of your exemption amount be distributed to a preferred charity.

Every estate is different, and what works best for others might not work for you. At Landskind & Ricaforte Group, P.C., we prioritize our client’s individual needs—needs that are sometimes more than complex, but give rise to legacies capable of withstanding the test of time.

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