Attorney At Law: What you should know about estate taxes

By Nancy Burner, Esq.

There is a common misconception about estate taxes when a decedent dies. At the outset it is important to know that the New York State exemption in 2024 is $6,940,000. The federal exemption for 2024 is $13,610,000. Therefore, if your estate is under these amounts, then there is no tax due. Often clients are anxious to make annual gifts with the mistaken belief that their heirs will pay a tax at their death. First, any amounts to spouses are tax free. Any amount under the above thresholds is also tax free. Nevertheless, for estates over the exemption amounts, either the New York or federal, additional planning is necessary. The balance of this article is for estates that exceed these threshold amounts.

But before we consider those taxes, let’s be clear about what comprises your taxable estate. All assets that you own at your death are counted towards your taxable estate, including IRA’s, annuities, bank accounts, real estate, life insurance owned by you or for which you have the power to change the beneficiary.

In New York, estates valued below this threshold amount ($6.94 million) will not incur any tax. For any estate that is over the threshold by no more than 5%, the estate is only taxed on the overage. However, for any estate valued at more than 5% over the threshold amount, ($7.287 million) the entire estate is taxed and there is no exemption available.

To illustrate: For decedents dying in 2024, consider an estate valued at $6.0 million. This is under the threshold amount and no tax is due. For an estate valued at $7.1 million, which is $160,000 over the threshold amount, there will be a tax for the $160,000 overage, to wit: the taxable estate is $397,444. However, for an estate valued at $7.3 million ($13,000 over the 5%), the value of the estate is above the threshold by more than 5% and the estate tax rises sharply, to wit: the taxable estate is $678,000. This commonly known as the “cliff.”

Estate tax planning for NY residents is often focused on keeping assets under this

cliff. There are several techniques that can be used to avoid the cliff. For instance, each individual can make tax free annual gifts in the sum of $18,000 per person in 2024. Annual gifts can be utilized during lifetime to bring the value of an estate under the cliff, and maybe even under the threshold.

However, in an instance where the decedent dies and the estate is over the threshold, we often use a provision in the Will or Trust to reduce the taxable estate with gifts to charities. This is a savings provision that provides for a charity to receive any amounts disclaimed by the beneficiaries. By adding that type of clause, the beneficiaries have up to 9 months after the decedent’s death to file a qualified disclaimer, renouncing any such overage and having the disclaimed amount pass to the named charity. The beneficiaries can disclaim any amount necessary to bring the estate under the threshold and reduce the estate tax to zero.

Another technique is to make a large gift more than 3 years prior to death. Since New York State does not have a gift tax, only an estate tax, this works quite well. Take the example of an individual with $8.94 million in assets, which is $2.0 million over then threshold. If she transfers the $2.0 million to her heirs directly or to a properly drawn trust for heirs, and survives the gift by three years, then she still has a full New York State exemption. The lifetime gift is essentially transferred estate tax free. If she dies before the three years, the gift will come back into the estate for the purposes of calculating the estate tax.

This same technique would not work for federal estate tax purposes, because any lifetime gift over the annual gift amount does reduce the lifetime applicable credit. This year the applicable credit amount is $13.61 million. This amount is indexed for inflation and will increase again in 2025. However, in 2026 the credit amount will be reduced as the law that created it will “sunset”. Most experts believe the federal exemption will be approximately $6.5-$7.0 million as of January 1, 2026. For clients with estates over that amount, it is necessary to plan early and reduce their taxable estates before the federal applicable credit is reduced. This is usually done with sophisticated trust planning which moves assets “over the tax fence” and uses the credit before they lose it.

Nancy Burner, Esq. is the Founding Partner of Burner Prudenti Law, P.C. focusing her practice areas on Estate Planning and Trusts and Estates. Burner Prudenti Law, P.C. serves clients from New York City to the east end of Long Island with offices located in East Setauket, Westhampton Beach, Manhattan and East Hampton.