New York residents live in a minority state in at least one senese: the probate process levies an estate tax on inheritances. This is in addition to federal taxes of the same type.
An estate represents the efforts of at least one lifetime. Some of the assets in estates — business earnings, wages and stock dividends, for example — were typically previously reduced by taxes. It is often possible to avoid further taxation, but it often requires significant planning. It also requires a thorough understanding of the way the tax works.
The federal and state inheritance taxes work similarly, at least on the surface; both allow for a lifetime deduction before considering the estate for taxation. However, that is where the similarity ends, for the most part.
An article in Forbes about the new federal tax regulations touches on some common estate-reduction strategies while focusing on the recently increased exemption limit . Essentially, the significant increase gives more freedom to those who intend to allow their assets to go through probate. However, it might not be wise to take full advantage of this in New York.
Relatively few states impose an estate tax, but New York is one of them. The Department of Taxation and Finance offers details of the inheritance regulations on its official website. Here are the important points:
- The state tax rate is much lower than the federal rate
- New York taxes the entirety of any non-exempt estate
- The state exemption is lower than the federal exemption
All of these regulations add up to an environment in which leaving a sizeable estate is not necessarily the best way to bestow wealth. As a result, wealthy people use various techniques to reduce the value of their estates to a level below the allowed federal and New York exemptions.