(Updated on Jan. 1, 2019)
One of the primary reasons for most of us to work hard all of our lives and accumulate assets is so that we can pass those assets down to our children and grandchildren when we die. Knowing we have helped to provide for future generations is a wonderful feeling. If you are fortunate enough to have parents who think that way, and are planning to leave you their house when they are gone, you may be wondering about the practical implications of that gift. Specifically, if you live in the State of New York you may be wondering if you will have to pay New York inheritance tax if your parents leave you their house when the die. Only an experienced New York estate planning attorney can review your specific facts and circumstances and tell you, with certainty, what the tax implications of the gift from your parents will be; however, it may still be beneficial for you to gain a basic understanding of the state and federal taxes that might be levied on the gift.
Federal Gift and Estate Taxes
In the United States, the value of the estate of a decedent, including the value of any gifts made during the decedent’s lifetime, is potentially subject to federal gift and estate tax. This tax, if applicable, must be paid during the probate of the estate and before any assets are transferred to the intended beneficiaries or legal heirs of the estate. Each taxpayer, however, is entitled to exempt up to the lifetime exemption limit which is $11.4 million in 2019. The lifetime exemption is also adjusted annually for inflation. The value of assets that exceed the lifetime exemption limit are then taxed at the rate of 40 percent. By way of example, let’s assume that your father died in 2018, leaving behind an estate valued at $10 million. Assume further that he made gifts during his lifetime valued at $2 million. He would then have $12 million in assets subject to federal gift and estate tax. After his $11.4 million exemption his estate is left with $600,000 subject to the tax. Your father’s estate would owe $240,00 in federal gift and estate tax; however, the tax liability would have to be paid out of estate assets prior to any assets being transferred out of the estate. Therefore, by the time you received the house he gifted you, all federal gift and estate tax will already have been paid.
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State Inheritance and Estate Taxes
Although people use the terms “inheritance tax,” “death tax,” and “estate tax” interchangeably, they do not actually all have the same meaning. An “estate tax” or “death tax” refers to a tax on the value of assets you gifted during your lifetime or at the time of your death. Your estate is responsible for paying the tax. An “inheritance tax” is a tax on the value of a gift you inherited and is paid by the beneficiary of the gift. Not all states impose inheritance and/or estate taxes.
States with some type of estate tax include:
- New York
- Rhode Island
- New Jersey
- District of Columbia
States that impose some type of inheritance tax include:
- New Jersey
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State Inheritance and Estate Taxes
How Does New York’s Estate Tax Work?
For deaths in 2019, New York taxes estates valued at more than $5.49 million. This means that even if your father’s estate doesn’t owe federal gift and estate taxes because it is not valued above the lifetime exemption amount of $11.4 million, it could owe New York estate taxes if it is valued above the $5,490,00 threshold. Although the tax rate is less than the 40 percent federal rate (New York estate tax rates range from 3.06% percent to 16 percent), the estate could still owe more in state taxes than federal taxes because New York taxes the entire estate if the estate qualifies to pay estate taxes. At the federal level, only the amount of the estate that exceeds the lifetime limit is taxed.
Will You Owe Any Taxes?
Although your father’s (or mother’s) estate could be subject to both federal and New York State estate taxes, both would have to be paid before the house is transferred to you. New York is not one of the few states with a true inheritance tax, meaning that whatever gifts you receive from your parents’ estates will be tax-free gifts to you.
If you have additional questions or concerns regarding federal or state estate or inheritance taxes please join us for one of our free estate planning seminars, or contact the experienced New York estate planning attorneys at The Law Offices of Kobrick & Moccia by calling 800-295-1917 to schedule your appointment.
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