Estate taxes in the United States, especially within the state of New York, pose significant considerations for those aiming to preserve their wealth for the next generation. This guide sheds light on the intricacies of estate taxes and outlines planning approaches tailored to the specific rules in the U.S. and New York.
1. Understanding U.S. Estate Taxes
Estate taxes, also known as death taxes, are imposed on the transfer of an individual's wealth upon their demise. Calculated based on the estate's total value, including real estate, investments, and other assets, it's vital to be familiar with the distinct rules and exemptions applicable at both federal and state levels. US citizens are taxed on their world-wide assets. Non-resident aliens are generally taxed only on assets located in the US.
2. Federal and New York Exemption Thresholds
Both the federal government and the state of New York provide exemption thresholds, allowing a certain portion of the estate's value to pass tax-free. Staying current with these limits is crucial, as they do undergo periodic adjustments. Strategic planning should capitalize on these exemptions to minimize the taxable portion of the estate. For 2026 the federal exemption for US citizens and domiciliaries is $15,000,000 per person, indexed for inflation, with no scheduled sunset. For NY, the 2026 exemption is $7,350,000, and New York's credit disappears entirely once the taxable estate exceeds $7,717,500 (105% of the exemption).
3. Lifetime Gifting Strategies
Strategic lifetime gifting is a valuable tool. By transferring assets before death, individuals can reduce the taxable estate. New York has no gift tax, but taxable gifts made within three years of death are added back to the New York gross estate (Tax Law 954, for deaths before January 1, 2032), and federal gift tax reporting still applies, so gifts need to be planned, not improvised.
4. Irrevocable Trusts in New York
Establishing irrevocable trusts is a robust strategy within the New York context. Assets held in such trusts can be excluded from the taxable estate, but only if the grantor gives up ownership and control over them; retaining control or the benefit of the assets pulls them back into the estate.
5. New York Family Limited Partnerships (FLPs) and Limited Liability Companies (LLCs)
Utilizing FLPs or LLCs in New York provides a structured method for transferring assets within a family. Beyond streamlining management, these entities can facilitate gifting strategies and potentially reduce the taxable value of the estate.
6. Life Insurance Planning
Life insurance plays a pivotal role in U.S. estate planning. Proceeds from life insurance are generally free of income tax and can provide liquidity to pay estate taxes, but a policy the insured owns is generally itself part of the taxable estate; holding the policy in an irrevocable life insurance trust can keep the proceeds outside it (an existing policy must have been transferred more than three years before death).
7. Stay Informed and Consult Professionals
U.S. and New York estate tax laws are intricate and subject to change. Staying informed about current regulations and seeking advice from an estate planning attorney and your tax advisors is important. Together they can craft a strategy aligned with your circumstances and goals.
Contact Schwartsman Law Group to review how the federal and New York exemptions apply to your estate.
