Avoiding tax complications is an incredibly important aspect of estate planning. Between state and federal taxes, the overall value of a person’s estate can be greatly impacted. Consequently, while creating an estate plan, many people wonder “will my beneficiaries’ inheritance be taxed?” As a foremost estate planning law firm in Long Island with a certified financial planner on our team, we often address tax issues and ensure that our estate plans are structured with inheritance and estate taxes in mind. The following are two of the most frequently asked questions that we answer.
Will My Beneficiaries’ Inheritance Be Taxed?
An inheritance tax is imposed on the beneficiaries of inherited assets. Unlike an estate tax, which is levied on the estate and paid using the estate, an inheritance tax is levied on the beneficiaries of the estate and it is those beneficiaries who must pay it. There is no federal inheritance tax, but some states impose such a tax, including New Jersey and Pennsylvania. New York does not use inheritance taxes.
New York State does impose estate taxes, however. State taxes are levied in addition to federal estate taxes, which is set at a rate of 40% for estates valued above $12.06 million for individuals in 2022. The New York State estate tax exemption adjusts every year for inflation. As of 2022, estates valued at under $6.11 million are not subject to New York State estate taxes. If the gross amount of the estate and any eligible gifts is greater than this amount at the time of death, an estate tax return must be filed.
Non-residents of New York State should also be cognizant of the estate tax system. All real estate and tangible personal property that is located in New York is subject to state estate taxes. This is true even in situations where the non-resident’s other assets have not been taxed.
There is a marital exemption for these estate taxes. Property left to a person’s spouse is exempt from federal and state taxes. If the federal exemption amount is not met by one spouse, however, the amount leftover can be transferred to the spouse. This is not true in New York State, which can result in beneficiaries facing unexpected tax consequences. An experienced attorney and certified financial planning can help you navigate these taxes and ensure that you and your family do not face undue tax burdens.
Are IRAs Exempt from Estate Tax?
Any form of IRA, including traditional and Roth IRAs as well as SEP IRAs and SIMPLE IRAs, can be passed down to heirs following a person’s death. When you inherit an IRA account, there are several options for how you can manage the account. Making one single misstep in managing the account can have major financial consequences. To avoid undue tax issues, it is important to follow state and federal law precisely.
If the owner’s estate is large enough, IRA accounts may be subject to estate tax. More commonly, most beneficiaries are required to pay income taxes on the money they withdraw from the IRA account. If this amount is enough to lift their income into the higher tax bracket, their entire income will be taxed at the higher level. This is a key consideration when inheriting an IRA account, as failing to pay income taxes on the withdrawn amount can have serious consequences.
If a person inherits an IRA from someone other than their spouse, they have ten years to withdraw the full amount from the account and pay taxes. If a person inherits the IRA from their spouse, however, it is possible to wait and take required minimum distributions (RMDs) at the age of 72. If they fail to take the required minimum distributions, they may face steep penalties. It is important to note that Roth IRAs do not require required minimum distributions.
The tax obligations associated with inheriting an IRA account are complicated. Fortunately there are different options available to beneficiaries to help reduce these tax burdens, including qualified charitable distributions. An experienced estate planning attorney can help you navigate the taxes associated with inherited IRA accounts and ensure that no unexpected issues arise.
Consider Contacting Davidov Law Group Today
With a team of knowledgeable attorneys and certified financial planners, Davidov Law Group is well-positioned to provide professional legal and financial guidance regarding estate and inheritance tax obligations. Through our strategic and creative estate planning strategies, we are able to safeguard our clients’ estates from taxes and ensure their inheritance is distributed swiftly and efficiently. To create an estate plan with complex tax considerations in mind, contact our office today at 516-908-8689.