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Planning for estate taxes in New York

New York residents have more reason to worry about estate taxes than those who live in many other parts of the country. The state taxes estates at rates ranging from 5 percent to 16 percent, and the exemption for 2015 is $3,125,000. The exemption will increase each year, and it is expected to match the federal exemption in 2019. The federal estate tax is 40 percent, and the exemption for 2015 is $5.43 million. The federal estate tax exemption is adjusted every year according to the rate of inflation.

Many people look at these exemptions and quickly conclude that they need not concern themselves with estate taxes, but this can be a costly mistake. New Yorkers who own real estate and have life insurance policies and retirement accounts can quickly surpass the state exemption, and many will find themselves on the wrong side of the federal exemption without careful tax planning.

A sizable inheritance or the proceeds of a life insurance policy are two common reasons that an estate exceeds estate tax exemptions. Assets such as real estate, investments, business interests, cars, furniture and jewelry all eat into estate tax exemptions, and life insurance policies may sometimes be counted against the exemptions even if the proceeds pass to a third party.

An experienced estate planning attorney could explain how an irrevocable trust could be set up to prevent the proceeds of a life insurance policy being counted against estate tax exemptions. An attorney with experience in this area could also point out that life insurance benefits paid to a spouse who is a U.S. citizen will not be subject to estate taxes because of the unlimited marital deduction.

Source: New York State Department of Taxation and Finance, "Estate Tax", accessed on July 26, 2015

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