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Planning for the potential of estate taxes

Past posts on this blog touched upon the fact that New York residents fact the potential of both state and federal estate taxes. Knowing this might dishearten those engaged in the estate planning process, with them assuming that there is nothing they can do to avoid this liability against their estates.

However, that may not be the case. With careful planning, one might be able to take advantage of estate tax exemptions to limit their potential tax liability (or avoid it altogether).

Local and federal estate tax exemptions

While both the New York state and federal governments assess estate taxes, both also allow for estate tax exemptions. Per the New York Department of Taxation and Finance, the local estate tax exemption threshold for 2021 is $5.93 million; according to the website, the federal threshold for the current year is $11.7 million. This means that those estates whose total taxable value comes in below those amounts will not be subject to tax.

Estate tax portability

Married couples can also take advantage of another tax benefit known as portability. Tax portability allows certain parties to share their benefits. In the case of estate tax portability, one can claim their deceased spouse’s unused tax exemption amount. The federal government allows for estate tax portability; the state of New York does not.

To take full advantage of portability, one can plan to leave their entire estate to their spouse (allowing those assets to pass tax-free due to the unlimited marital deduction). This allows one to preserve their entire estate tax exemption. Information shared by the Internal Revenue Service shows that their spouse must then file an estate tax return within nine months of their death electing portability. This allows them to extend their estate tax exemption out to $23.4 million.