When someone passes away, their family often has to go through a legal process known as probate. In Buffalo and across New York, probate involves the transfer of the deceased person’s property to their heirs or beneficiaries. However, the probate process isn’t just about paperwork and distributing assets. One of the major factors that families often face during probate is taxes. The types of taxes, how much is owed, and who is responsible can make a big difference for the heirs and beneficiaries. Understanding the probate tax implications in Buffalo can help families better prepare for this process. At, Friedman & Ranzenhofer, PC , we are here to guide you through the legal process and help you navigate the complexities of your case.
Understanding Probate and Why It Matters
Probate is the legal process of proving a will in court. If there is no will, the process still occurs, but New York State laws decide who inherits the estate. During probate, the court ensures that the deceased’s property is properly distributed and that all debts and taxes are paid. Probate is required for assets that the person held in their name alone, not jointly or with a named beneficiary. These assets can include real estate, bank accounts, vehicles, and personal belongings. The main purpose of probate is to ensure that the deceased’s wishes are honored, while making sure the rightful heirs and beneficiaries receive what they are entitled to.
One of the most important parts of probate is managing the taxes that come with an estate. In New York, probate taxes may include estate taxes, income taxes, and even capital gains taxes. This means that probate is not only about settling who gets what, but it is also about making sure the government receives the taxes it requires from the estate.
Estate Taxes and How They Apply in New York
Estate taxes are taxes on the value of the deceased’s estate before it is distributed to heirs. In New York, an estate tax applies if the total value of the estate is over a certain amount. This amount, known as the “exemption amount,” changes over time based on inflation adjustments. Currently, the New York estate tax exemption amount is several million dollars. If the estate’s value is below this amount, there may be no estate tax due. However, if it’s over the exemption, the tax can be substantial. The estate tax rate in New York ranges from a lower percentage to a much higher one, depending on the value of the estate above the exemption limit.
The executor of the estate is responsible for filing an estate tax return and paying any taxes owed. An executor is the person appointed to manage the deceased’s estate. The estate tax must be paid before the assets can be distributed to the heirs. If the estate owes taxes, the executor may need to sell some of the estate’s assets to pay the tax. This is one reason why families may need to plan carefully if they know they will be going through probate in New York.
The New York Estate Tax Cliff
One unique part of New York’s estate tax system is something called the “estate tax cliff.” The cliff means that if the estate’s value goes over the exemption amount by even a small amount, the entire estate could be taxed, not just the portion over the exemption. This could result in a significant tax bill for estates that are only slightly over the exemption limit. For example, if an estate is just a little bit over the exemption amount, it may be taxed as if it were worth a lot more. This can have a big impact on the final amount that beneficiaries receive from the estate.
To avoid the estate tax cliff, some families in Buffalo consider planning strategies, such as gifts or trusts. These strategies can help reduce the value of an estate and potentially avoid the New York estate tax. However, it’s important to understand that any plan needs to be carefully considered to make sure it is right for the family’s goals and situation.
Federal Estate Taxes and How They Differ from New York
In addition to New York estate taxes, there may also be federal estate taxes to consider. The federal estate tax applies only to very large estates, with a much higher exemption limit than New York. While most families do not have to worry about the federal estate tax, it’s still important to be aware of this potential tax for those who have larger estates. The federal estate tax rates are also high, so any estate that exceeds the federal exemption can face significant taxes.
Federal estate taxes and New York estate taxes are calculated separately. This means an estate could potentially owe taxes to both the state and the federal government, depending on its size. The executor of the estate is responsible for understanding these tax requirements and making sure both state and federal taxes are paid if they are owed.
Income Taxes on Estate Assets
In some cases, income taxes may also apply during probate. This can happen if the estate earns income during the probate process. For example, if the deceased person owned rental property, the estate might continue to earn rental income while probate is underway. Similarly, if the estate holds stocks or other investments, these could earn dividends or interest.
The estate may need to file an income tax return to report this income. Any income tax owed would come out of the estate before assets are distributed to heirs. This is another task that falls to the executor, who must keep track of any income the estate earns and file the necessary tax returns.
Capital Gains Tax and Property Sold During Probate
Capital gains tax is another type of tax that could come up during probate. Capital gains tax applies if property is sold for more than its value at the time of the deceased person’s death. For example, if the deceased person’s home is worth more now than it was when they purchased it, there may be a capital gain when it is sold. However, there is a benefit called the “step-up in basis,” which can help reduce capital gains tax for estates. The step-up in basis means that the value of the property is adjusted to its fair market value at the time of death, rather than the original purchase price. This can lower or even eliminate capital gains tax on the sale of inherited property.
The step-up in basis is important for families going through probate in Buffalo because it can help reduce the overall tax burden. However, if the property continues to increase in value during probate and is then sold for a higher amount, there may still be a capital gain that the estate or the beneficiaries need to consider.
Trusts as a Way to Avoid Probate and Reduce Taxes
For some families, creating a trust can be a way to avoid probate and potentially reduce the taxes owed on an estate. A trust is a legal arrangement where one person, known as the trustee, holds and manages property for the benefit of another person, known as the beneficiary. When property is placed in a trust, it does not go through probate. This means that the family may avoid some of the probate tax implications altogether.
In New York, there are different types of trusts, including revocable and irrevocable trusts. A revocable trust can be changed or canceled during the person’s lifetime, while an irrevocable trust cannot. Each type of trust has its own benefits and tax implications. For families in Buffalo, setting up a trust can be a way to keep property out of probate, potentially reduce estate taxes, and ensure that assets go directly to beneficiaries. However, trusts need to be set up carefully to make sure they work as intended.
The Role of the Executor in Managing Taxes
The executor plays a key role in managing taxes during probate. In Buffalo, the executor is responsible for making sure all required tax returns are filed and that any taxes owed are paid. This includes estate taxes, income taxes, and possibly capital gains taxes. The executor also has to keep detailed records of the estate’s assets, debts, and any income the estate earns during probate. Being an executor can be a complex job, and it often requires knowledge of the probate process and the various tax laws that apply.
In some cases, families may choose to seek help to ensure that the executor has the guidance needed to handle these responsibilities. This can be particularly important for larger estates or estates with complicated assets, like businesses or investment portfolios. Working with someone familiar with probate in Buffalo can help ensure that all tax requirements are met and that the estate is handled properly.
Probate can be a challenging and emotional time for families. On top of grieving the loss of a loved one, family members must handle legal and financial responsibilities that can be difficult and confusing. Taxes, in particular, can add extra stress to the process. Understanding the tax implications of probate in Buffalo is important, but having guidance from those who are knowledgeable can make the process smoother. Whether it’s navigating estate taxes, understanding income tax requirements, or avoiding the estate tax cliff, families often benefit from assistance to manage the probate process.
If you need help understanding probate tax implications in Buffalo, or if you are concerned about how taxes may impact your family’s inheritance, Friedman & Ranzenhofer, PC can provide guidance. We understand that probate can be overwhelming, and our firm is here to help you manage the process with clarity and care. Contact us today to learn more about how we can support you through probate and make sure that you and your family are prepared for the road ahead.
Robert Friedman
Michael Ranzenhofer
Sam Alba
Justin Friedman
John Dracup