New York residents who plan to leave a multi-million dollar estate to their heirs might be worried about taxes because the federal government takes 40 percent, which can account for a large chunk of the assets. However, there are steps that they could follow to limit how much their heirs pay in estate taxes.
One law that they can take advantage of is the annual gift exclusion, which is up to $14,000 per person as of 2015. The federal estate tax applies to the amount of an estate that exceeds the lifetime basic exclusion, which currently stands at $5.43 million. By taking advantage of the annual gift exclusion, individuals can give some assets to their heirs while they are still alive without being taxed on those gifts and without exceeding the lifetime basic exclusion limit.
Using a Qualified Personal Residence Trust is another method for reducing how much money heirs pay in estate taxes on homes, which are often the biggest asset that people own. With this highly specialized strategy, the individuals transfer their homes into trusts that allow them to choose the length and who receives their homes after that period. They can continue living in their homes through the trust period. If they continue living there after the trusts end, they must pay rent to the heirs at a fair market price, but they lose some of the gift tax discount if they die before the trusts end.
Another tip is to consider the states in which they retire because 15 states and the District of Columbia impose estate taxes, and each state has different minimum and maximum tax restrictions that could reduce the values of the estates. Estate planning attorneys can provide more insight to clients who are interested in these and other strategies.