Last updated on September 20th, 2024

One of the primary considerations when developing an estate plan is the taxes that will be due upon a person’s passing. With this knowledge, an estate plan can – and should – proactively include actions to help ensure more of a decedent’s assets go to the people and causes they care about, rather than taxes. This is even more critical when a family business is involved.

Following a person’s passing where there is no surviving spouse but there is an estate, taxes may be due. The most common type of taxes due are on income earned up to the date of death. For example, if a person passes on June 15, 2026, a final tax filing must be made by the following April 15 for any earnings between January 1, 2026 and June 15, 2026.  The executor is responsible for making sure individual income tax returns are prepared and filed, and related taxes are paid.

Income taxes due come from assets remaining in an estate before any distributions are made. Any individual income tax refund owed to the decedent gets added to the estate and distributed with other assets.

Federal and state estate taxes may also be due. Federal estate taxes are due when an estate, including prior taxable gifts, is valued at more than $13,610,000 (this is scheduled to decrease to an estimated $7 million starting January 1, 2026). Estate values above this exemption amount are taxed at 40%.

New York estate taxes are due if an estate is valued at 100% or higher than the state’s exemption amount ($6,940,000 in 2024). For purposes of calculating the estate value, any gifts made within three years of death are clawed back and considered part of the estate. If an estate is valued at:

• More than 105% of the exemption amount (more than $7,287,000 in 2024), state taxes are due on the entire value of the estate – not just amounts above the exemption.
• 100% to 105% of the exemption amount, the exemption phases out and an additional portion of an estate is taxed based on a sliding scale, with the top rate being 16%.

An estate plan should address who bears the burden of estate taxes. If a person’s will or revocable trust is silent on this matter, the person who receives an asset is responsible for paying estate taxes on that asset. If a will states estate taxes are to be paid out of the residuary of the estate, then the estate pays the taxes and distributes any remaining assets.

It’s important to remember that certain assets pass onto a named beneficiary and bypass a will. Two examples are life insurance and individual retirement accounts. In this case, the will or revocable trust should specify how taxes will be paid for these assets.

A third type of tax to consider is the tax due on the income earned on estate assets, such as interest earned on an estate bank account; dividends and interest on an estate brokerage account; and a 401(k), 403(b), or traditional IRA distribution.

In addition, when an individual passes away, their assets are revalued, generally as of their date of death.  If an estate sells assets, the selling price reduced by the date-of-death value generates a gain or a loss. If there is a gain, taxes are due. The federal and state governments want their tax revenues. If no distributions are made, the income taxes become the responsibility of the estate. If distributions are made, the income tax burden may end up being passed to the beneficiary.

If the decedent owned a business, it gets more complicated (which is why every business owner should have an estate and succession plan) and is governed by varying rules depending on whether the decedent operated as a sole proprietor, a partnership, an S-Corporation, or a C-Corporation.

For example, if the decedent owned a sole proprietorship, it may stop operating on the date of death and its assets and debts become part of the estate. For a partnership, an agreement usually spells out whether other partners can buyout the decedent’s share or whether the decedent may leave their partnership interest to beneficiaries. In either case, the partnership is an asset of the estate and needs to be valued.

S-Corporations and C-Corporations are similar to partnerships in that they are considered estate assets that must be appraised. If there are other shareholders of the business, there should be an agreement that details how shares of stock may be handled – whether sold to other shareholders, sold to outsiders, or distributed to beneficiaries.

As mentioned above, a family business is also considered an asset that must be valued for estate tax purposes. If the value of the decedent’s estate exceeds Federal and state estate tax exemptions, taxes will be due. Careful planning is needed to determine how these taxes will be funded. Frequently life insurance, owned by an irrevocable life insurance trust, is used to fund the estate taxes.

I have only provided highlights in this article. There are numerous different scenarios that play out based on each individual situation. Two key thoughts I would like to leave you with:

• You need a will or, even better, an estate plan that clearly defines your wishes and beneficiaries; otherwise, what happens to your estate may be decided by state law.
• When creating or updating your estate plan, be sure to account for tax liabilities following your passing to ensure your legacy remains intact.

If you have any questions about estate taxes or you would like to get started creating or updating your estate plan, RBT CPA trust, estate and tax professionals are available to help. To get started, email mtorchia@rbtcpas.com or call 845-567-9000 and ask for Michael Torchia. We would consider it a privilege to show you how we can be Remarkably Better Together.