There are many things to consider as a part of estate planning and one of them is taxes. Estate taxes can have a significant effect on your estate plan so it’s important to understand what they are. An estate planning attorney can help you better understand the details but here is a general idea of what you should know about estate taxes.
What are Estate Taxes?
Estate taxes are the taxes your estate may have to pay after your passing. There are both federal estate taxes and individual state estate taxes. These taxes only apply to estates valued over a set threshold.
Any estate valued at less than $1 million will not be subject to estate taxes in any state, for example, so that can be a relief for many people. And any state estate taxes that are due will only tax the value over that state’s minimum threshold.
As for federal taxes, currently, only estates valued at over $11 million for singles and about $23 million for married couples are subject to federal estate taxes. In other words, only the very wealthy have to worry about federal estate taxes at this point.
If your estate is subject to estate taxes, either at the federal or state level, the amount due will be based on the value of your estate. So, if you don’t already know what your estate is worth, it can be useful to estimate the value of your gross estate using fair market value.
Who’s Responsible for Estate Taxes?
Estate taxes are paid for by the estate. You can specify in your Last Will and Testament which assets you would like to use to pay for the estate taxes. If you don’t put a Last Will and Testament in place at the time of your passing, the state laws of your home state will determine how the estate tax bill is paid.
What Are Inheritance Taxes?
Though they may sound similar, estate and inheritance taxes are not the same. Estate taxes, as the name suggests, are paid through the estate and are governed by the state where the decedent lived.
Inheritance taxes, on the other hand, are paid to the state where the beneficiary of the inheritance lives and are paid by that beneficiary. The good news is that only six states (in 2020) have inheritance taxes. Those states are Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. If your beneficiaries do not live in any of those states, they will not be subject to inheritance tax.
How Can You Reduce Estate Taxes?
There are a variety of strategies for reducing (or eliminating entirely) the amount of money that will be due in estate taxes. An estate planning attorney can help you with personalized strategies but here are some general tips.
Give Gifts- While there is also a gift tax to consider, giving portions of your estate away as gifts can help reduce the overall tax burden of your estate. You can give up to $15,000 yearly to each person you choose without incurring any taxes. That money will reduce the value of your estate and thus the estate taxes due.
Contribute to Charity- Similar to giving gifts, contributing to charity will reduce the estate taxes owed by your estate. Thus, choosing a worthy cause to contribute to can be beneficial in multiple ways- for your estate and the recipients of the charitable giving.
Spend Your Assets- This may be an obvious option to bring down the value of your estate and thus the estate taxes due but it is effective. By spending your assets during your life, the estate taxes will be lower or even nonexistent (provided your estate falls below the relevant minimum thresholds).
Consider Marriage- If the intended beneficiary of your estate is a romantic partner (and US citizen), consider marriage. The federal estate tax does not apply to a transfer of your estate to a spouse so getting married could be a helpful strategy.
Consult an Expert
In the complicated and oftentimes frustrating process of estate planning, sometimes your best option is to consult a professional. Estate planning attorneys have been through this process many times before and can help you determine the best course of action for your estate when it comes to estate taxes. With this basic understanding of estate taxes and the help of a qualified team of estate planning attorneys like Meurer & Potter Law Office, your estate will be in great shape.