A client from Brooklyn called me last week. Her aunt had passed away, naming her as the sole beneficiary of a sizable estate. After the initial grief, her first question was a practical one I hear almost every day: “How much of this am I going to lose to taxes?”
It’s the first thing on most people’s minds. The answer is often less alarming than they expect. In New York, there is no inheritance tax. A beneficiary does not write a check to Albany for the assets they receive from an estate. The tax obligation, if one exists, belongs to the estate itself—before a single dollar is ever distributed to an heir.
This is a critical distinction. Understanding it is the first step in responsible stewardship of a family legacy.
The Difference Between an Estate Tax and an Inheritance Tax
Language matters in the law. While people use “inheritance tax” and “estate tax” interchangeably, they are two very different things.
- An inheritance tax is paid by the person receiving the assets. The tax rate often depends on the beneficiary’s relationship to the decedent. Only a handful of states still have this tax; New York is not one of them.
- An estate tax is paid by the decedent’s estate before the assets are distributed. It’s a tax on the total value of the assets the person left behind. Both the federal government and New York State levy an estate tax, but only on estates that exceed a certain value.
So, when my client asked what she would have to pay, the direct answer was nothing. Her aunt’s estate, however, might have an obligation. That’s where the analysis begins.
New York’s Estate Tax Threshold—and Its Cliff
For an estate to owe state taxes in New York, it must be worth more than the current exemption amount. As of 2024, that amount is $6.94 million. If the total value of the decedent’s taxable estate is below this threshold, no New York estate tax is due.
But New York has a unique—and unforgiving—feature known as the “estate tax cliff.” If the value of the estate is more than 105% of the exemption amount, the exemption is eliminated. The tax is not calculated on the amount *over* the exemption; it’s calculated on the *entire* value of the estate. This is a planning pitfall that can cost families hundreds of thousands of dollars if not addressed through prudent trust and gift planning years in advance.
The tax rates themselves are progressive, rising with the value of the estate, as outlined in New York Tax Law § 952. The federal estate tax operates similarly, but its exemption is much higher—$13.61 million per individual in 2024. As a result, far fewer estates are subject to federal tax than to New York State tax.
When an Inheritance Can Create Future Taxes
While you don’t pay an inheritance tax upon receiving assets, certain assets can create a tax event for you later. This isn’t a tax on receiving the inheritance, but a tax on what you do with it afterward.
The two most common situations we see involve retirement accounts and capital gains.
Inherited Retirement Accounts
If you inherit a traditional IRA or 401(k), the money was contributed on a pre-tax basis. The IRS will get its due when the money is withdrawn. As a beneficiary, when you take distributions from that inherited account, you will pay ordinary income tax on the amounts you withdraw, just as the original owner would have.
Capital Gains on Inherited Property
For assets like stocks or real estate, beneficiaries receive a powerful benefit called a “step-up in basis.” The asset’s cost basis is “stepped up” to its fair market value on the date of the original owner’s death.
For example, imagine your father bought a stock for $10,000. Years later, on the day he passes away, it’s worth $100,000. If you inherit that stock, your basis isn’t $10,000—it’s $100,000. If you immediately sell it for $100,000, you have zero capital gains and owe no tax. If you hold it and later sell for $110,000, you only owe capital gains tax on the $10,000 of growth that occurred after you inherited it. This provision allows generational wealth to be transferred without being diminished by capital gains tax.
Understanding which tax applies, to whom, and when is not an academic exercise. It is the core of intentional legacy planning—ensuring that what was carefully built over a lifetime reaches the next generation as the giver intended.
If you are serving as the executor of an estate or are a beneficiary with questions about potential tax liabilities, a prudent first step is to get a clear picture of the assets and obligations. We regularly schedule confidential reviews with families to outline an estate’s tax profile and the fiduciary duties involved.
