For the most part, the news is surprisingly good when it comes to taxes on inheritances. Generally speaking, you do not have to claim a bequest as taxable income with the exception of distributions of the earnings that are generated by a trust.

Appreciated assets that you inherit get a step-up in basis, so you would not pay capital gains taxes on the appreciation.

This being stated, there is a federal estate tax, but most people don’t have to be concerned about it because there is a high credit or exclusion. The estate tax exclusion is the amount that can be transferred before the tax would be imposed.

At the time of this writing in 2021, the federal exclusion is $11.7 million. There are ongoing annual adjustments to account for inflation, so you will see a somewhat higher figure next year.

Here in the state of New York where we practice law, there is also a state level estate tax that you should be aware of when you are devising your estate plan. The state exclusion is significantly lower than the federal exclusion at $5.93 million during the current calendar year.

The Estate Tax Exclusion Cliff

Now that we have set the stage appropriately, we can get to the specific point of this blog post. The federal estate tax exclusion is available to you regardless of the total value of your estate, but the situation is different on the state level. This is what the “estate tax exclusion cliff” is all about.

In the state of New York, if the value of your estate is more than 5% over the exclusion amount, the exclusion will not be available when your assets are being transferred after you die. The entirety of your estate would be subject to taxation.

New York Estate Tax Clawback

There is a federal gift tax in place that is unified with the estate tax. The exclusion is a unified exclusion that applies to large gifts along with your estate. Because there is a gift tax, you cannot simply give gifts to avoid the federal estate tax.

We do not technically have a gift tax in New York, but at the present time, the estate tax parameters include a clawback provision. If you give gifts within three years of your death, the value of those gifts would be added to your estate for tax purposes.

Lack of Portability

Since 2011, the federal estate tax exclusion has been portable between people that are married to one another. In an estate planning context, the term “portability” refers to the ability of a surviving spouse to use the exclusion that was allotted to his or her deceased spouse. In essence, the survivor would have two exclusions to apply to their estate.

Most people would say that this is the fair approach because it typically takes the efforts of two individuals to accumulate the resources that are shared by a married couple.

Why should there be just one exclusion available when the assets that will be passed along were the product of the efforts of two different taxpayers?

Whether it is fair or not, here in in New York, the estate tax exclusion is not portable, so if you die without using any of your exclusion, it would not be available to your surviving spouse.

To account for this, you could work with our firm to implement the appropriate estate tax efficiency strategy. This could potentially be facilitated through the creation of a credit shelter trust.

In essence, you could arrange for an amount equal to the exclusion to be conveyed into one of these trusts at the time of your passing. The estate tax would not be applicable on the transfer, and it would not be a factor when assets from the trust are distributed to the beneficiaries.

Schedule a Consultation Right Now!

If you are ready to work with a Rochester, NY estate planning lawyer to put a plan in place, we are here to help, even if estate taxes are not a source of concern. Each case is different, and we can apply our expertise to create a plan that is ideal for you and your family.

You can set the wheels in motion if you call us at 585-374-5210, and you can use our contact form if you would prefer to send us a message.