Taxes and Estate Planning

Estate planning is the process of dispersing your assets (your possessions and property) after you pass away. It is important for everyone, not just the wealthy, to have an estate plan in place. There are many advantages to estate planning including tax benefits. In fact, one of the primary benefits of estate planning is its ability to reduce or eliminate estate taxes.

What is an estate tax?

Estate taxes are imposed upon the transfer of an individual’s assets after their death. In other words, before your beneficiaries can receive their inheritance, they may have to pay taxes on it. These taxes can be hefty and the rates vary depending on the state where you reside and the value of your assets. It is important to understand that not only are there both state and federal estate taxes, but the exemption thresholds change every year, adjusting for inflation.

Here are a few quick facts:

 The 2023 New York state tax exemption is $6.58 million for an individual.

 The 2023 federal estate tax is $12.92 million for an individual.

The 2023 federal estate tax is $25.84 million for a married couple.

 The New York state estate tax rate ranges from 3.06% to 16%.

So, if your estate is currently valued above the $6.58 million threshold in New York, your estate will be subject to an estate tax. (Remember your estate includes your property, your business, savings accounts, and any other assets of value.)  The good news is that by utilizing various estate planning tools, such as trusts and lifetime gifting, you can reduce or eliminate estate taxes.

Consider this common scenario:

Mr. and Mrs. Johnson own a successful family restaurant in New York city currently worth

around $3.5 million. They also have a home and a vacation property worth $3.5 million and two life insurance policies worth $1 million totaling their estate at $8 million- which is above the New York estate tax exemption. They want to leave the restaurant business and other assets to their two adult children when they pass away. However, they are aware of the estate taxes that will have to be paid by their children on the estate. How do they reduce or avoid the estate taxes?

To minimize estate taxes and protect their restaurant business, the Johnsons need to work with an experienced estate planning attorney to create a comprehensive estate plan, including a trust that holds the business and their other assets. This will ensure the business remains in the Johnson’s control. They also gift a portion of the business’s shares to their children every year, taking advantage of the annual gift tax exclusion limits. Mr. and Mrs. Johnson can now pass down the business and other assets with a minimal financial burden to their children and continue their legacy.

Gift-giving and Estate Taxes

Gift-giving is a great way to reduce the size of an estate or avoid estate taxes altogether. The IRS allows individuals to gift up to a certain amount each year without gift taxes. As of 2023, this amount is $17,000, per person, per year. For example, let's say you want to help your granddaughter pay for college. Instead of giving her a big check all at once, you could give her $17,000 every year for a few years. That way, you won't have to pay gift taxes, you may decrease or avoid estate taxes, and your granddaughter will get the help she needs. Gift-giving can help reduce estate taxes by effectively removing assets from an individual’s estate. In other words, when a person gives a monetary gift to another person, the value of that gift is no longer considered part of the giver’s estate.

Combining Trusts and Gift-Giving

The most effective strategy to lower or possibly avoid estate taxes is combining trusts and gift-giving. For example, an individual could set up a trust and gift assets to the trust each year, using their annual gift tax exemption. By doing so, they would be able to transfer assets out of their estate, while also avoiding gift and estate taxes.

Creating an estate plan will ensure that your assets are distributed according to your wishes and that your loved ones are taken care of after you pass away. Furthermore, estate planning can help reduce or even eliminate estate taxes, which can be a significant burden on your beneficiaries. Talk to a lawyer or financial advisor to help you create an estate plan that works for you.

About The Author

Leslie has been practicing law since 2009 and is the host of the estate planning podcast 'Legacy Purse'. She has a long history of representing family members struggling to inherit property and/or wealth from deceased family members through the Probate Courts. Knowing how time-consuming and expensive the probate process is, Leslie takes great pride in helping her clients learn how to plan and protect their families during their lives so they can avoid the probate court process and save their loved ones that additional grief (and expense).