Man Looking at Estate Planning Tax PaperworkWhen it comes to estate planning, you might be focused on the big topics like setting up a will and deciding who will inherit your assets. While these are important considerations, many people overlook the tax implications of their choices. Without understanding how taxation affects your estate plan, your heirs could lose a significant amount of money. Our New York estate planning law firm explains a few basic tenets to help you and your beneficiaries avoid unwanted surprises.

5 Tax Mistakes to Avoid When Making Your Estate Plan

An estate plan is essential to ensuring that your assets and property are distributed according to your wishes after you pass away. However, even small mistakes can have far-reaching consequences when going through the probate process.

Before you celebrate finishing your estate plan, you should ask yourself:

How Much Will Estate Taxes Be?

The estate tax, sometimes called death tax, is imposed on a deceased person’s estate before assets are dispersed to their beneficiaries. Both federal and state governments levy estate taxes, with the taxable amount depending on where you live and the value of your estate. In New York, the estate tax rate ranges from 3.06% to 16% on estates valued at over $6.58 million in 2023 (the amount increases with inflation each year). The federal tax applies to estates worth $12.92 million or more in 2023. Even if your estate falls below the taxable threshold now, you should consider how much your wealth will grow over time and plan ahead. In many cases, the estate tax could be avoided entirely by incorporating tax planning provisions into a revocable trust.

Who Will Pay Estate Taxes?

If you cannot avoid taxes through your trust, you should consider how they will be paid and how it will affect your heirs. Fortunately, federal estate tax exemption is portable between spouses, allowing married couples to protect up to $25 million of their estate when their surviving spouse dies. However, many trusts contain boilerplate language directing the trustee to pay all taxes from “the residuary estate” or the remainder of the estate once specific distributions are made. This can result in some beneficiaries paying no tax and the rest paying all of it, losing a significant amount of their inheritances. For example, if you leave one child the family home, another a plot of land, and the rest to your youngest child, the youngest child may be solely responsible for paying taxes on the entire estate.

Will My Heirs Pay Income Tax on Their Inheritance?

Inheritances are exempt from income tax at both the New York State and federal levels, but some heirs may owe taxes in special cases. For example, any profits made on earnings from an inheritance—such as interest on funds, rental income, or growth on investments—are subject to income tax. In addition, many tax exemptions only exist as long as the asset is held. Once it’s sold, it’s subject to taxation. Finally, if you own property in another state, that state’s inheritance tax rules may differ.

Who Pays Taxes on Cash Gifts?

One way to avoid high estate taxes is to give large sums of money as gifts to relatives and charities during your lifetime. However, certain limits exist on when and how much you can give away. The federal government places a yearly limit on tax-free gifts and a lifetime gift tax exemption. In 2023, the annual limit is $17,000 per recipient per year, with any amount over $17,000 counting against your lifetime exemption of $12.92 million. In addition, to prevent benefactors from evading taxes by gifting large sums on their deathbeds, gifts made within three years of the date of death will be counted toward the total value of your estate.

A Good Estate Plan Can Minimize Taxes and Give You Peace of Mind

The complexity and variations in tax laws are difficult for people to understand fully, so it’s well worth your time and expense to hire an attorney who knows the law inside and out. Let Landskind and Ricaforte Law Group, P.C. explain your options and create a comprehensive estate plan that preserves your wealth for future generations. Contact us today through our online form to get started or read our free book, Estate and Medicaid Planning in New York: What Everyone Needs to Know.

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