Feb 4, 2022 Inheritance Tax In New York?
Is there a difference between inheritance tax and estate tax? Yes.
Confusion about these two terms is understandable because some people mistakenly use the terms interchangeably. At Ely J. Rosenzveig and Associates, we believe that words matter, and we want our clients to have a solid understanding of their financial options when planning for a safe, secure, and tax efficient future.
The Difference Between Inheritance Tax and Estate Tax
New York does not have an “inheritance tax.” Inheritance taxes are assessed on the property and money an heir receives from a decedent’s estate. The tax is paid by the heir. Although New York does not impose an inheritance tax, a New York resident with property located in another state may open their heirs up to paying that state’s inheritance tax unless steps are taken to avoid it.
New York does have an “estate tax.” Estate taxes are assessed on the value of the property and money owned by the decedent at the time of their death. The NYS estate tax rates are progressive, starting at 3% and capping at 16%. There is also a portion of a NYS estate that enjoys an exclusion threshold (Basic Exclusion Amount (“BEA”), such that estates valued at that BEA threshold or less have no NYS estate tax. Estate tax is paid by the estate from the estate’s assets before any heirs or creditors receive anything.
The U.S. federal government imposes an “estate tax” but not an “inheritance tax.” The federal estate tax rate can reach 40%.
Six States That Do Impose Inheritance Taxes
While many states impose estate taxes on the assets of a decedent whose property passes through probate, only six impose an inheritance tax on the beneficiaries who receive the inheritance: New Jersey, Pennsylvania, Maryland, Kentucky, Iowa, and Nebraska. Only Maryland has both a state estate tax and an inheritance tax. Iowa is scheduled to eliminate its inheritance tax by 2025.
What If a New York Resident Inherits Property Located In an Inheritance Tax State?
Even though New York has no inheritance tax, several nearby states do impose inheritance taxes on New York residents who inherit property or assets located in that state. The ease with which most people travel in contemporary society means that many people own property in more than one state. In most cases, a New York resident’s property will be found within the state, but it is not uncommon for New Yorkers to own vacation property or investment property in New Jersey or Pennsylvania where inheritance taxes are imposed.
To illustrate the dangers of failing to create a sound estate plan, this brief review of just two states’ inheritance tax systems reveals an unnecessarily expensive process for the heirs of New York decedents who own property in those jurisdictions.
Pennsylvania Property and Assets
A New York resident inheriting Pennsylvania property would find the applicable inheritance tax rate depends on the relationship of the heir to the decedent. Here is the breakdown of who pays what rate in Pennsylvania:
- 0% — surviving spouse is exempt from inheritance taxes, as is a parent inheriting from a child under age 21,
- 4.5% — linear descendants (children, grandchildren, or parents of decedent),
- 12% — siblings,
- 15% — others
- exempt — charitable organizations, tax exempt institutions, and government entities pay no inheritance tax on bequests or transfers of assets in anticipation of death.
New Jersey Property and Assets
If a New York resident inherits New Jersey property, the inheritance tax rate applied to assets received by a decedent’s beneficiaries depends on the heir’s relationship to the decedent and on the value of the asset. New Jersey probate beneficiaries are divided into the following classes:
- Class A — surviving spouses and linear descendants
- Class C — close relatives (primarily siblings, sons-in-law, daughters-in-law, civil union partners, etc.)
- Class D — all other beneficiaries (other than Class E)
- Class E — charitable organizations and government entities
The New Jersey inheritance tax rates follow this schedule:
- Class A beneficiaries pay 0%
- Class C beneficiaries pay
- 11% on the first $1,075,000 inherited above the $25,000 exemption amount,
- 13% on the next $300,000,
- 14% on the next $300,000, and
- 16% on the amount above $1,700,000
- Class D beneficiaries pay
- 15% of the first $700,000 inherited above a $500 exemption, and
- 16% on the amount over $700,000
- Class E beneficiaries pay no inheritance tax
Complicating matters further in New Jersey is the process of calculating inheritance taxes when someone inherits earnings from an ongoing trust paying the heir periodically over the course of years. It is impossible to determine the amount of the gift because the amount of earnings is unknown. And what if the earnings are to be shared equally by two beneficiaries occupying different classes? New Jersey implemented a process by which it attempts to compromise inheritance tax debts too speculative to quantify with certainty.
How to Avoid the Inheritance Tax Altogether
Taking steps to avoid the uncertainty and expense of the New Jersey and Pennsylvania inheritance taxes is wise estate planning. While other states’ inheritance taxes apply different rates, subjecting your heirs to unnecessary taxes merely diverts assets from your intended beneficiaries.
There are several strategies an experienced estates and trusts lawyer can follow to prevent your heirs from paying inheritance taxes.
Transfer Property and Assets to a Trust —Inheritance taxes and estate taxes are assessed on property and assets that a decedent holds in their name at the time of their death. As the owner of an asset, you and your estate planning attorney can create a trust requiring a trustee to hold and manage the trust assetaccording to the directions dictated by the trust document. If you wish, you may act as the trustee and the powers that are reserved to you will be spelled out.
At the time of your death, the trust assets will be managed or disposed of as per your instructions, but since the trust is the legal owner of the assets, nothing needs to pass through probate courts and no estate or inheritance taxes are generally owed.
Retitle Property and Assets — In addition to or as an alternative to creating a trust, adding another person’s name, as a joint owner with rights of survivorship, will give the joint owner full title to the asset by operation of law, without probate, and generally without owing taxes. Some limitations apply that an experienced tax and estates lawyer can explain in detail. For example, some inheritance tax states will assess the tax on the deceased joint owner’s half interest in the asset if the two joint owners are not married.
If you live in New York and you own property or assets in another state, contact Ely J. Rosenzveig and Associates today for help with tax planning to protect your property and preserve its full value for the benefit of your loved ones.
Contact Ely J. Rosenzveig and Associates for Inheritance Tax Help