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Home » Estate Tax » What Is Involved in Inheritance Tax Planning?

What Is Involved in Inheritance Tax Planning?

October 19, 2016 by Anthony Moccia

Inheritance tax planningWhen you think of inheritance planning you likely think first about creating a Last Will and Testament to distribute your estate assets when you are gone. Although your Will may serve as the foundation for your inheritance plan, a well-rounded estate plan should include a number of additional tools and strategies aimed at accomplishing a wide range of additional inheritance planning goals. For example, your plan should also take into account the impact that taxes will have on your estate after you are gone. What exactly is involved in inheritance tax planning though? Because inheritance tax planning is a highly personal endeavor, it is always best to consult with your New York estate planning attorney about your specific plan; however, it is also a good idea to learn some of the basics about inheritance tax planning.

Federal Gift and Estate Taxes

The first consideration when discussing inheritance tax planning is whether or not your estate will be subject to federal gift and estate taxes. The federal estate and gift tax is a tax imposed by the U.S. federal government on the transfer of wealth, whether that transfer is accomplished during a taxpayer’s lifetime or at the time of death. The tax must be paid within 9 months of your death. Gift and estate taxes are computed by first adding the value of all qualifying gifts made during your lifetime to the value of the estate you left behind at the time of your death. That total is then potentially subject to the federal estate and gift tax at the rate of 40 percent. For example, if you made a gift during your lifetime valued at $4 million and left behind an estate valued at $6 million at the time of your death, you would have $10 million that would potentially be subject to federal gift and estate taxes.

Each taxpayer, however, is entitled to make use of the lifetime exemption. The American Taxpayer Relief Act of 2012 (ATRA) permanently fixed the lifetime exemption amount at $5 million, to be adjusted annually for inflation. For 2016, the lifetime exemption amount is $5.45 million. Therefore, only assets valued above the current lifetime exemption limit will be taxed. As a result, you would be entitled to deduct $5.45 million from your $10 million estate before the tax would be imposed, leaving a taxable estate of $4.55 million.

State Gift and Estate Taxes

In addition to the federal gift and estate tax, you will also need to consider the impact of state estate taxes if you live in a handful of states, including the State of New York. Like the federal estate tax, New York allows taxpayers an exemption. As of 2016, the New York exemption is $4,187,500. Unlike the federal exemption, however, New York taxes the entire estate if your estate is valued at over the exemption amount. For example, if your estate was valued at $5,187,500, you would be over the exemption limit and the entire $5,187,500 would be taxed instead of just the $1 million that is over the exemption limit. The tax rate in New York fluctuates from five percent to 16 percent, depending on the value of your estate.

Inheritance Tax Planning

Understanding the various taxes your estate might be subject to is the starting point for inheritance tax planning. You need to start including tools and strategies in your estate plan to try and limit the impact of those taxes on your estate. For example, you might make use of the yearly exemption that allows every taxpayer to make gifts valued at up to $14,000 to an unlimited number of beneficiaries each year tax-free. Even better, the value of the gifts is not counted against your lifetime exemption limit. You might also decide to create one of several different trusts that are specifically designed to limit the impact of taxes on your estate.

Contact Us

For more information, please download our FREE estate planning worksheet. If you have questions or concerns relating to inheritance tax planning, please contact the experienced estate planning attorneys at the Law Offices of Kobrick & Moccia by calling 800-295-1917 to schedule your appointment.

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Anthony Moccia
Anthony Moccia
Anthony Moccia is an attorney and partner at The Law Offices of Kobrick & Moccia.His practice focuses on estate planning and elder law.He is a member of the New York State and Nassau County Bar Associations.He frequently presents free seminars on wills & living trusts to area residents and his seminars are said to be “informative, entertaining & easy to understand.”
Anthony Moccia
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