Estate Tax Simplified: Preparing Your Will with Clarity

When preparing your will, it is crucial to have a basic understanding of many different and essential topics. One of them is the estate tax. For many people planning their estates, taxes are a significant factor in the structures and provisions they include when drafting their will and other documents. If your estate is not planned in a way that will decrease the amount of estate tax owed upon your death, less of your money may go where you want it to go. Hiring an estate planning attorney is the best way to ensure your estate is executed correctly after your passing.  

What is Estate Tax?

Estate taxes are imposed at death on the total value of a decedent’s estate.  An estate tax can be levied at both the federal and state levels. The federal government enacted this tax permanently over a century ago.  

For 2021, the federal exemption is $11.7 million per person, assuming that no tax changes being contemplated will be retroactively applied to 2021. This exemption can be combined with a spouse in certain situations for a total of $23.4 million. Notably, this exemption amount could be changed for future years. Regardless, currently, this means that if the total value of all your assets upon your death (if you die in 2021) is not greater than $11.7 million, your estate will not owe any taxes. However, suppose your estate is worth more than that figure. In that case, your estate will be liable to pay taxes on any value above $11.7 million.   

In 2005, Colorado eliminated its estate tax. As a result, Coloradans who die in the future will not owe any estate taxes at the state level. Most states that do impost estate taxes levy between 12 to 19 percent over the exemption amount. Since Colorado has no estate tax, it also does not have any exemptions. 

The following will be excluded from the value of your estate for tax purposes: 

• Assets you leave to a surviving spouse (unlimited marital deduction)
• Money or property you leave to a charity without any limits
• Gifts you have given that are less than the annual exclusion of $15,000 for the year in which they were given
• Assets held in certain kinds of trusts, such as life insurance proceeds in an irrevocable trust

Calculating Estate Tax

After you die, your estate must be handled by a personal representative and in general, a probate court. You can choose your personal representative while you are still alive and put their name in your will, or the court will select one for you after your death.  

The personal representative will need to calculate the gross estate or the total sum of all your assets and property. This can include bank accounts, stocks and bonds, real estate property, motor vehicles, art pieces, collectibles, antiques, and anything else of value. They will also need to determine the sum of all of your liabilities, including taxes, court and administrative fees, and any debts. To determine your net estate value, they will subtract your liabilities from your gross estate value. Once your liabilities are settled, the executor can then pass on your remaining assets to your chosen heirs listed in your will. 

Estate Tax Exemptions and Exclusions

Taxable estates can be taxed by law between 18 and 40 percent of the estate’s net value over the exemption amount. The amount of taxes paid depends on the amount of the estate over the $11.7 million exemption. For example, if the net value of an estate is $12.7 million, the estate will only be taxed on $1 million. However, the tax rate for that amount is a combined 34.58 percent. Everything over $1 million will be at 40 percent. While the exemption has gone up and down in recent history, it has significantly increased since 1977 when it was $30,000. 

Another type of estate tax exclusion is the annual gift tax exclusion. During life, transfers of up to $15,000 per recipient per year are excluded from tax. There is no limit on the number of gifts that can be given up to this amount to an unlimited number of individuals each year. Second, a married couple is allowed by law to combine their individual gift exemptions to make gifts as much as $30,000 per recipient per year without liability for any gift tax. There is also the ability to use the lifetime gift tax exclusion for larger gifts given before death, but this involves reducing the estate tax exclusion amount that will be applicable at death and has other consequences that need to be addressed with your estate plannign and tax advisors. 

You Can Rely on Hackstaff, Snow, Atkinson & Griess, LLC for Effective Estate and Tax Planning

At Hackstaff, Snow, Atkinson & Griess, LLC, we take pride in giving our clients the knowledge they need to make informed decisions that are best for their circumstances and wishes. We provide information on the many facets of will and estate planning to empower our clients to do what is best for them and their families. When you hire one of our experienced estate planning attorneys, you can be assured that you have a skilled advocate on your side, helping you make the best decisions. Give our office a call today to find out more about our estate planning services and protecting your assets.