If you were recently notified that you are the beneficiary or heir of an estate, you are likely processing some mixed emotions. Clearly, the news that an inheritance is coming your way is good news from a financial perspective; however, the odds are good that someone close to you died in order for that inheritance to be headed your way. Along with the emotional impact of an inheritance, there are also typically legal and financial consequences of which you need to be aware. Failing to understand those consequences could cause you problems down the road. The old saying “Don’t count your chickens before they hatch” definitely applies to an inheritance because that inheritance could be subject to taxes that will diminish its value. All estates are potentially subject to federal gift and estate taxes; however, does the State of New York impose estate taxes or inheritance taxes?
Will the Federal Gift and Estate Tax Impact Your Inheritance?
When you die, you will leave behind an estate that is made up of everything you owned at the time of your death or in which you had an ownership interest. The same applies to anyone who dies. That estate must then go through the legal process known as probate. One of the purposes of the probate process is to ensure that any federal gift and estate taxes the estate owes are paid before the estate assets are transferred to the intended beneficiaries and/or heirs of the estate. Although federal gift and estate taxes can be complicated, in general the tax is imposed on the value of all lifetime gifts coupled with the value of the estate assets owned at the time of death that exceeds the lifetime exemption limit. The lifetime exemption limit was permanently set at $5 million back in 2012 but is adjusted annually for inflation. For 2016, the limit is $5.45 million. Therefore, gift and estate taxes would be imposed on the amount that exceeds $5.45 million. Because federal gift and estate taxes are paid by the estate, however, a beneficiary or heir of the estate does not have to worry about them as any tax due will have been paid before they receive their inheritance.
What about State Estate Taxes and Inheritance Taxes?
As far as federal gift and estate taxes are concerned, your inheritance will not be affected as long as the decedent’s estate (added to the value of lifetime gifts) was not valued at more than $5.45 million; however, what about state estate taxes? The State of New York is one of 15 states (and the District of Columbia) that does impose an estate tax. As of 2016, the New York exemption limit is $4,187,500, meaning that estates valued at over that amount are subject to New York State estate taxes. The tax rate varies in New York from 3.06 percent to 16 percent. Therefore, an estate could be completely exempt from federal gift and estate taxes but still owe New York estate taxes. For example, imagine that the decedent’s taxable estate is valued at $5,187,500. The entire estate would fall just below the federal lifetime exemption limit and, therefore, not incur a federal gift and estate tax obligation. In the State of New York, however, the estate surpasses the exemption limit by $1 million, meaning that $1 million would be subject to estate taxes payable to the State of New York. That tax obligation will have to be paid before any assets can be distributed to the intended beneficiaries and/or heirs of the estate.
Unlike estate taxes (federal or state) which must be paid by the estate during the probate of the estate, inheritance taxes are imposed after the gift has been received by the beneficiary or heir. In other words, the recipient is responsible for paying an inheritance tax. As of 2016, only six states (Iowa, Kentucky, Pennsylvania, Maryland, Nebraska, and New Jersey) impose an inheritance tax. As you can see, the State of New York is not on that list, meaning you will not have to worry about paying any inheritance taxes on your inheritance.
For more information, please join us for an upcoming free seminar. If you have additional questions or concerns regarding how to include your pets in your estate plan, contact the experienced Long Island, New York estate planning attorneys at the Law Offices of Kobrick & Moccia by calling 800-295-1917 to schedule your appointment.