Estate tax is an excise tax imposed upon the net value of the assets and property of a decedent at the time of their death. After someone dies, their estate generally goes through probate court, except for assets in a trust. Estate taxes must then be calculated to be paid from the estate as a part of assets being distributed to the heirs. However, exclusions or credits may reduce the taxable value. Only the estate tax laws in place at the time of the death will apply.
While the federal estate tax exemption for 2021 is $11.7 million per person, and can be combined with a spouse’s exemption in certain situations, the current administration has proposed reducing this amount significantly. For those with estates valued near this figure or above, estate tax planning should be a priority. It’s worth nothing that some states also have an estate tax and some, like Colorado, do not.
The “gross estate” refers to the entire dollar value of someone’s assets and property when they pass away. A gross estate does not include any debts or other taxable circumstances initiated by a person’s death. When these things are subtracted from the gross estate, you can ascertain the value of the net estate.
An executor who is either picked by the deceased before their death or by the court after their death is responsible for calculating these amounts. It is the executor’s responsibility to determine the sum of the value of the gross estate, including:
This figure is typically necessary for federal income tax purposes.
The executor must then calculate all liabilities, including outstanding debts, taxes, funeral and burial expenses, and other applicable administrative costs. The sum of the liabilities will be subtracted from the gross value to determine the net value of an estate.
Fortunately, you can use many viable strategies to reduce your expected estate tax liability when you die. It is best to speak with a qualified estate tax attorney to determine which ones might work best for your situation. Here are three of the most common methods.
You can achieve substantial tax savings by decreasing your estate’s value while you are still alive. People who want to use this method typically give money away to the beneficiaries of their estate. Federal law allows each individual to remove assets from their estate and each annual gift up to $15,000 to one or more people tax-free. Couples who share an estate can each take this step and together give $30,000 to each person. You may also take advantage of the lifetime gift tax exclusion applicable today to give larger gifts and remove those funds and their growth from your estate. Keep in mind that gifts given to pay for medical expenses or tuition and contributions to political organizations do not count towards the gift tax exemption limit.
If you have a life insurance policy where you or your estate is the policy beneficiary, the death benefit proceeds will not be taxable income when paid, but will increase your taxable estate at your death. To avoid this, you can establish an irrevocable trust that will hold the life insurance policy outside of your estate for the benefit of the trust beneficiaries.
You can donate money and lower the amount of taxes your estate must pay at the same time. You can give money to charity while you are still alive, directly or through various trust structures. This step will reduce your estate’s tax liability upon your death and count towards charitable income tax deductions. You can also leave money to charities in your estate plan. Your estate’s tax liability will be reduced by the amount you give to charity when you die.
Estate plans, estate taxes, and exemptions can all become confusing and overwhelming fast. It is no wonder many people avoid estate planning. However, it is crucial that all adults have an estate plan.
Instead of trying to figure it all out on your own, it is to your beneficiaries’ benefit to work with an estate planning attorney. Your attorney can provide reliable information on all your options. Then they can help you draft an estate plan that is customized to your wealth, needs, and desires. Having legal help is the smart way to ensure your bases are covered and that current tax laws are accounted for to decrease the burden on your loved ones. At Hackstaff, Snow, Atkinson & Griess, LLC, we know that you have worked hard to build your estate. You want to have a plan for it so that you can avoid as much estate tax liability as you can. We are honored to partner with you to protect as much of it as possible after your death. Reach out to us today for estate planning assistance.
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