The potential of having to pay estate taxes may hang over your estate plans in New York. Yet should they? While most assume that everyone must pay estate taxes, that is not the case. Both the state of New York and the federal government offer opportunities to limit your potential tax liability.
An important point to remember on this point is the difference between tax evasion and tax avoidance. Not accounting for estate taxes at all in your estate plan could place your beneficiaries in the position of facing accusations of tax avoidance. Yet planning to possibly avoid estate taxes fall under tax avoidance (which the law allows for).
Reviewing the federal estate tax exemption
The federal estate tax exemption allows you to potentially avoid any estate tax liability provided the total taxable value of your estate comes in under the exemption threshold. Per the Internal Revenue Service, the threshold for 2021 is $11.7 million.
Estate tax portability also allows you to coordinate your plans with your spouse to maximize your estate tax exemption. Through portability, either you or your spouse may claim the other’s unused exemption amount. To take full advantage of this benefit, you would need to plan to leave your estate to your spouse. This allows that amount to pass on tax-free thanks to the unlimited marital deduction (while also preserving your entire estate tax exemption). Your spouse can then claim your exemption and combine it with their own to protect up to $23.4 million.
Understanding New York’s estate tax exclusion
The state of New York does not offer you the benefit of portability. It does, however, offer an estate tax exemption. According to the New York Department of Taxation and Finance, the exclusion amount for the exemption is $5.93 million.