When a Brooklyn family inherits a parent’s paid-off brownstone, a retirement account, and a stock portfolio, the first question they ask at our Madison Avenue office is usually the same: “How much of this do we lose to taxes?”
They often assume the government treats an inheritance like a lottery winning or a massive year-end bonus. They expect to pay income tax on the cash and capital gains on the inherited real estate. They brace themselves for a painful tax bill that will force them to liquidate assets just to satisfy the government.
The reality is entirely different. In New York, the primary tax burden rarely falls on the heir receiving the assets. Instead, it falls on the estate itself before a single dollar is ever distributed. Whether your inheritance arrives intact or severely depleted depends not on your personal income tax bracket, but on deliberate decisions your parents made—or failed to make—while they were alive.
The Difference Between Income Taxes and Estate Taxes
There is no federal inheritance tax, and New York does not levy one either. If your parent leaves you $2 million in a standard brokerage account, you do not report that $2 million as taxable income on your personal tax return.
Capital assets like real estate and non-retirement investment accounts receive a “step-up” in basis upon the owner’s death under federal tax law. If your mother bought a house in 1985 for $150,000 and it is worth $2.5 million when she passes, you inherit the property with a $2.5 million cost basis. If you sell it the next day for that exact appraised value, you owe zero capital gains tax.
Traditional retirement accounts are the major exception. Assets inside a traditional IRA or 401(k) were funded with pre-tax dollars. When you inherit these accounts, you will pay ordinary income tax on the distributions. Under current federal rules, most non-spouse beneficiaries must empty the entire account within ten years of the original owner’s death. This forced withdrawal schedule can push an heir into a significantly higher tax bracket during their peak earning years.
However, the tax that poses the greatest threat to generational wealth is the estate tax. This is a tax on the right to transfer property at death. The IRS calculates this based on the total value of everything your parent owned, including real estate, business interests, life insurance payouts, and bank accounts.
The Federal Exemption: A Temporary Shield
The federal government currently provides a massive shield against estate taxes. For deaths occurring in 2024, the federal estate tax exemption is $13.61 million per individual, rising to $13.99 million in 2025. A married couple can effectively shield nearly $28 million from federal taxation with basic planning. For the vast majority of families, the federal estate tax is simply not a factor.
But the law is not static. Under current statutes, these historically high exemption amounts will sunset at the end of 2025, reverting to roughly half their current value. Families who believe they are perfectly insulated from federal estate taxes today may find themselves highly exposed tomorrow. Prudent stewardship requires contingency planning for this exact scenario.
The Danger of the New York Estate Tax Cliff
While the federal exemption is generous, the state level is where we see poorly planned estates hemorrhage wealth. New York is one of a handful of states that imposes its own estate tax, and its rules are notoriously unforgiving.
The New York estate tax exemption is currently set at $6.94 million for 2024. If your parent’s estate is worth $6 million, no state estate tax is owed. However, New York Tax Law § 952 contains a punishing provision known as the estate tax “cliff.” If the value of the taxable estate exceeds the state exemption amount by more than 5%, New York completely wipes out the exemption. The estate is taxed from the very first dollar.
Consider the math: an estate valued exactly at the exemption limit pays nothing to the state. An estate valued just 6% over the limit suddenly owes hundreds of thousands of dollars in taxes. One unexpectedly high appraisal on a commercial property or a sudden surge in a stock portfolio right before death can push an estate over the cliff.
This is why we do not view estate planning as a mere drafting exercise. It is the active, ongoing preservation of your family’s legacy. By utilizing credit shelter trusts, irrevocable life insurance trusts, and intentional lifetime gifting, we can keep the taxable estate safely below the cliff threshold.
The Fiduciary Burden on the Executor
When the time comes to settle the estate, the responsibility of filing these tax returns and paying the exact amounts owed falls to the executor or trustee.
Stewardship.
That is the defining characteristic of a successful estate administration. Under SCPA Article 14 and EPTL § 11-1.1, the executor appointed by the Surrogate’s Court assumes a strict fiduciary duty to protect and manage the estate’s assets. Failing to file an estate tax return on time, missing a crucial valuation discount, or improperly distributing funds before tax liabilities are settled invites severe financial penalties. The executor can even be held personally liable if they distribute assets to heirs and leave the estate unable to pay its tax bill.
The custodian of the estate must work methodically with legal and tax professionals to ensure that the maximum legally permissible amount is transferred to the next generation, rather than absorbed by the state. We regularly advise executors on how to properly value assets, claim appropriate deductions, and file the necessary New York and federal returns to close out the estate cleanly.
Tax laws are temporary. Your family’s legacy should not be. If you expect to inherit a significant estate, or if you are currently serving as executor for a parent whose assets approach the state exemption limit, early intervention is critical. We invite you to schedule a 30-minute beneficiary audit with Morgan Legal Group to review the estate’s tax exposure and map out the necessary filings.
