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estate taxes in new york

Strategies to Minimize Estate Taxes in New York

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Navigating the complexities of estate planning can be overwhelming, especially when it comes to tax implications. In New York, estates valued above a certain threshold are subject to estate tax, which can significantly impact your loved ones’ inheritance. This article identifies strategies to help you maximize your estate while keeping it below the tax limit.

From leveraging lifetime gifting to utilizing trusts, there are various options available to minimize your tax burden and ensure the smooth transfer of your assets to your heirs.

Understanding estate taxes in New York

Estate taxes in New York can be complex and challenging to navigate, especially for those who are unfamiliar with the intricacies of estate planning. As a resident of the Empire State, it’s crucial to have a solid understanding of how estate taxes work and how they can impact your financial goals.
The estate tax is a tax levied on the transfer of your assets upon your death. In New York, the estate tax is administered at the state level, in addition to the federal estate tax. This means that your estate may be subject to both state and federal estate taxes, depending on the value of your assets.

The current estate tax limit in New York

As of 2024, the estate tax exemption in New York is $6.94 million. This means that if the total value of your estate is less than $6.94 million, your estate will not be subject to the New York estate tax. However, if the value of your estate exceeds this threshold, your estate will be subject to a tax rate that can range from 3.06% to 16%.

It’s important to note that the estate tax exemption in New York is different from the federal estate tax exemption. The federal estate tax exemption is currently set at $13.61 million for individuals and $27.22 million for married couples. This means that if your estate is valued below the federal exemption, it will not be subject to the federal estate tax.

Understanding the difference between the state and federal estate tax exemptions is crucial in estate planning. If your estate exceeds the New York exemption but falls below the federal exemption, you may still be subject to the state estate tax, even if you are not subject to the federal estate tax.

Gifting strategies to reduce your estate

Lifetime gifting is a powerful tool in estate planning, as it allows you to transfer wealth to your loved ones while you are still alive. By taking advantage of the annual gift tax exclusion, you can reduce the overall value of your estate and potentially avoid or minimize the estate tax. Under the current tax laws, you can gift up to $18,000 per person per year (or $36,000 for married couples) without incurring any gift tax.

In addition to the annual gift tax exclusion, you can also utilize the lifetime gift tax exemption, which is currently set at $13.61 million per individual. This means that you can gift up to $13.61 million during your lifetime without incurring any gift tax. However, it’s important to note that any gifts you make will reduce the amount of your estate tax exemption at the time of your death.

Another gifting strategy to consider is the use of a 529 college savings plan. By contributing to a 529 plan, you can effectively remove those assets from your estate, while also providing a tax-advantaged way to save for your loved ones’ education. Additionally, 529 plan contributions qualify for the annual gift tax exclusion, making them a particularly attractive option for estate planning.

Creating a trust to protect your assets

Trusts can be a powerful tool in estate planning, as they allow you to transfer assets to your beneficiaries in a controlled and tax-efficient manner. There are several types of trusts that you can consider, each with its own unique advantages and considerations.

One popular option is the revocable living trust. With a revocable living trust, you can transfer ownership of your assets to the trust while you are still alive, but maintain control and access to those assets. Upon your death, the assets in the trust are distributed to your designated beneficiaries, bypassing the probate process.

Another type of trust to consider is the irrevocable trust. Unlike a revocable living trust, an irrevocable trust cannot be modified or terminated once it has been established. However, this structure can provide significant tax benefits, as the assets in the trust are no longer considered part of your estate. Irrevocable trusts can be particularly useful for protecting assets from creditors or for minimizing estate taxes.

Utilizing life insurance to cover estate taxes

Life insurance can be a valuable tool in estate planning, particularly when it comes to addressing the potential estate tax liability. By purchasing a life insurance policy, you can ensure that your loved ones have the funds necessary to pay any estate taxes that may be owed upon your death.

There are several types of life insurance policies that can be used for this purpose, including term life insurance and permanent life insurance (such as whole life or universal life). The choice of policy will depend on your specific needs and financial goals, as well as the size of your estate and the anticipated estate tax liability.

In addition to providing a source of funds to pay estate taxes, life insurance can also be used to create liquidity within your estate. This can be particularly important if your estate is primarily composed of illiquid assets, such as real estate or a closely-held business. By using life insurance to generate cash, you can ensure that your heirs have the resources they need to pay any taxes or other expenses associated with your estate.

Considerations for business owners in estate planning

If you are a business owner, your estate planning strategy will require additional considerations and nuances. Your business assets, including real estate, equipment, and intellectual property, can significantly impact the value of your estate and the potential estate tax liability.

One key consideration for business owners is the use of succession planning. By developing a clear plan for the transfer of your business to your heirs or other designated successors, you can ensure a smooth transition and minimize the potential for disputes or tax complications. This may involve the use of buy-sell agreements, family limited partnerships, or other specialized business structures.

Working with a financial planner and estate planning attorney

Navigating the complexities of estate planning and minimizing your estate tax liability in New York can be a daunting task, especially if you are unfamiliar with the intricacies of the New York estate tax system. That’s why it’s crucial to work with a qualified financial advisor and estate planning attorney who can guide you through the process and help you develop a comprehensive strategy.

Remember, estate planning is an ongoing process, and it’s essential to review and update your plan as your circumstances and the tax landscape evolve. By staying informed, seeking professional guidance, and taking a proactive approach, you can ensure that your legacy is preserved and your loved ones are protected.

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COVID college costs

College Costs in the Era of COVID-19

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Paying for College in the Era of COVID-19

This semester, millions of students, teachers, and college administrators are having to deal with a radically changed landscape while still managing college costs. At many institutions, classes have been cancelled or moved online. Sports programs have been suspended and dormitories, libraries, and labs shuttered. In fact, traditional campus life has been turned upside down thanks to COVID-19, and it’s unclear how long it will last.

Meanwhile, the cost of a college education is higher than ever. According to the College Board, the average total charges at four-year public colleges (in state) for the 2019-2020 academic year were $21,950. Average costs at four-year private nonprofit colleges were more than double that ($49,870).1 And while increases in costs have moderated in recent years, they continue to outpace inflation and median household income, resulting in a growing dependence on student loans; the average student borrower graduating in 2018 owed about $29,000.2

For cash-strapped students and parents, the current crisis has tipped the scales. Many are rebelling at the high costs in the face of a severely diminished college experience. Others have decided to wait until the crisis has passed before enrolling. Still others are questioning the very value of a college degree under current circumstances.

But the issue of soaring college costs is hardly new, and there are two sides to consider.

Students and Parents: Give Us a Break!

“We are paying a lot of money for tuition, and our students are not getting what we paid for,” comments one California parent, incensed at paying in-person prices for education that has moved online. On-campus facilities and services like computer labs, libraries, and networking opportunities have also been severely diminished by closures.

Already suffering from a pandemic-induced recession, many families are feeling the pinch and want relief. Students in particular have been hard hit with furloughs and layoffs, as many rely on retail service jobs to help them get by — the same jobs that have suffered the most in the face of closures and lockdowns. Many students had also signed leases for off-campus housing and are now stuck with them even if classes are cancelled. In short, students and parents are demanding tuition rebates, increased financial aid, reduced fees, and leaves of absences to compensate for what they feel is a diminished college experience.

Colleges: How Can We Manage?

Meanwhile, colleges and universities are taking a major financial hit from the pandemic. Enrollment is down. International admissions and offshore semesters have been halted. Entire programs have had to be suspended for health reasons. What’s more, substantial resources are required to set up an online curriculum, administer the courses, and train educators. There are also major costs involved with constant COVID testing of students and disinfecting of classrooms, offices, and other facilities. And, colleges must continue to pay existing vendor contracts, maintain facilities, and compensate their own staff. The situation has created an existential crisis among smaller colleges, who lack the endowments and funding of larger institutions. For many, it’s a question of survival.

A Mixed Response to Managing College Costs

Given this predicament and the widely varying circumstances faced by different institutions, it’s no surprise that their responses vary widely. A handful of universities have announced substantial price cuts. Some have cut fees. But most have kept prices flat, and a few have even increased them. While many offer refunds of fees and room and board, the reimbursement policies vary from school to school — and nearly all have drawn the line at tuition. Here’s a sampling of actions taken — or not — by different schools:

  • Full or partial refunds for room and board costs
  • Reduced tuition and fees
  • Discounts in the form of scholarships or loans
  • Renegotiated financial aid packages
  • Frozen tuition at previous year’s level
  • Imposition of “COVID fees” to cover added costs
  • Increased tuition to cover added expenses

Which of these actions a given school takes depends largely on its financial health and reputation. Smaller, private colleges with more at stake are generally offering more in the form of relief. Larger, well-endowed institutions, such as the Ivy League colleges and large state schools, trend toward the status quo. But there are many exceptions, and each institution has its own approach.

What Can You Do?

If you are a student or parent seeking compensation or relief, your options are limited, especially for the current semester. At nearly all institutions, tuition reimbursement is almost nonexistent after several weeks, no matter what the circumstances. Some schools are now offering tuition insurance, but coverage typically applies only when a student withdraws for medical reasons. To find out what relief may be available at your school, contact the registrar.

Alternatively, you can join the thousands of students and parents who have signed petitions or filed lawsuits demanding tuition cuts, housing reimbursements, and more. Check online to see if any such actions may be already in the works at your school.

In the end, like so many other issues arising from the pandemic, the current predicament facing students and schools is likely to be with us until a COVID-19 vaccine is in place. Even then, skyrocketing costs and mounting student debt pose longer-term issues. Any resolution will take time and likely have far-reaching implications for the costs and nature of a college education.

Notes:

1The College Board, Trends in College Pricing 2019.

2The College Board, Trends in Student Aid 2019.

                                                                                                                                                                            

This material was prepared by LPL Financial. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that they views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. All performance referenced is historical and is no guarantee of future results.

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Should I use a 529 plan to save for college?

Facts about 529 Plans

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Getting the Facts Straight about 529 Plans

As many of us are sending our children back to school this month, I thought it would be a good time to clear up some misconceptions about 529 savings plans. A 529 savings plan is an investment program offered by each state. It offers tax-free growth on money invested to pay for education expenses. Here are some common questions that arise regarding these savings plans:

Do I lose the money if my child doesn’t go to college? You will always have access access to the money in your 529 account. If withdrawn for anything other than qualified expenses, you will be subject to income taxes and a 10% penalty on the earnings. The account is funded with after-tax money, so the principal isn’t subject to taxes or the penalty. For example, let’s say you withdraw $10,000 from your plan and $8,000 is principal and $2,000 is earnings. If the money is used for anything other than an educational expense, $2000 is subject to taxes and penalty. If your child doesn’t need the money for education, you can also change the beneficiary to another family member or fund your own continuing education. There are no tax consequences or penalty to change the beneficiary.

What qualifies for an educational expense? A qualifying expense doesn’t have to be tuition or fees to a 4-year college. It could also be used for community college, graduate school, eligible vocational or trade schools, or adult continuing education classes. Funds can also be used for off campus housing, books and supplies, and computers. This year’s Tax Cuts and Jobs Act has expanded qualified expenses to distribute up to $10,000 per student to cover elementary or secondary schools.

What if my child gets a scholarship? You will be exempt from the 10% penalty on withdrawals up to the amount of the scholarship. You will still be subject to income taxes on the earnings. An exemption of the penalty is also applied if the beneficiary dies or becomes disabled, or decides to attend a U.S. Military Academy.

Do I have to use my home state’s plan or choose a school in my home state? You are not limited to using your home state’s plan, but there may be tax advantages. Some states offer a state tax deductions for 529 contributions if you make them to a plan in your home state. Your child can attend any eligible school regardless of where the plan is set up.

Will a 529 plan affect my child’s chances of receiving financial aid? Financial aid eligibility can vary depending on the institution, but it will have some impact. Since the account will be considered assets of the owner of the account and not the child, the impact will be small. An asset of a parent will reduce your eligibility by up to 5.64% of the value of the account. If the account were in the child’s name, it would be reduced by 20% of the value of the account. Also, the distributions will not be counted as income to your child for financial aid purposes.

With education expenses continuing to outpace inflation, a 529 plan can be a valuable tool to help cover the costs. A great resource for researching the different plans available is www.savingforcollege.com. If you are still unsure, reach out and I can help you determine the best way to save for your family’s education expenses.

 

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual, nor intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

 Securities offered through LPL Financial, Member of FINRA/SIPC and investment advice offered through Stratos Wealth Partners Ltd., a Registered Investment Advisor. Stratos Wealth Partners, Ltd. and Lob Planning Group are separate entities from LPL Financial.

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