Estate tax is an issue that is frequently debated. It’s also a topic that is often misunderstood. There are several types of taxes that are associated with decedent estates. In addition to taxes against estate assets, there are also gift, inheritance, income, and generation skipping taxes.
Federal estate tax is imposed when the estate value exceeds $5,000,000, but this amount will decrease to $1,000,000 onJanuary 1, 2013. Currently, 18 states also impose a separate state estate tax. Seven states impose inheritance tax on certain beneficiaries that receive decedent assets. Surviving spouses are exempt from state inheritance tax, as are charitable organizations.
Estate tax is calculated based on the net value of estate assets owned at the date of death. In the states where state estate tax is collected beneficiaries are allowed to claim an exemption for part of the value. These exemptions range from $338,333 to $5,000,000.
Inheritance tax is calculated based on the taxable rate of the person receiving the decedent’s property. Each state that collects inheritance tax exempts spouses from paying the tax. Four states do not impose inheritance tax against property that is gifted to children and grandchildren. The remaining three states assess tax at rates between 1 and 20 percent of the net value of assets received.
The primary difference between estate and inheritance tax is estate tax is imposed on the right to transfer property to heirs after death, while inheritance tax is imposed on the privilege to receive inheritance gifts.
There is several estate planning strategies that can be implemented to lessen estate taxes. A few of the more common include: removing assets from the estate; providing tax-free gifts to charities and relatives; setting up an irrevocable life insurance trust; arranging a family limited partnership; and establishing a qualified personal residence trust.
Beneficiaries can be designated to receive funds held in bank accounts, retirement accounts, and financial investments. The process for designating beneficiaries is simple and only involves filling out a form provided by the financial institution where funds are held. Assigning beneficiaries is a popular strategy for keeping assets out of probate.
Beneficiaries can also be designated to receive life insurance proceeds. People that anticipate high estate taxes often purchase life insurance policies and designate the same beneficiaries that will receive inheritance cash and property. Life insurance proceeds can be used to pay estate taxes so that beneficiaries don’t have to pay out of their own pocket.
Titled property can be gifted to heirs by acquiring joint titles or by placing the property into a trust. In most situations, inheritance property that has been placed into a trust is exempt from estate tax. However, it is best to hire an estate attorney to figure out which kind of trust is most appropriate and offers the highest level of protection and tax savings.
The Internal Revenue Services lets people give tax-free gifts which also reduces the estate value and lowers estate tax. Presently, the limit for tax-free gifts is $13,000 per person per year, or $26,000 per married couple.
Cash gifts encompass money, investments, or property. TheIRSconsiders the value of the gift based on the current market value at the time of transfer. Furthermore, cash gifts can include medical expenses or college tuition as long as funds are paid directly to the institution. These types of expenses are normally categorized as a qualified transfer and do not have a maximum limit.
Working with estate planning providers is the best method for reducing or eliminating estate tax and protecting inheritance gifts for future generations. There are multiple methods that can be used to reduce taxes while still alive and after death.
At Craton, Switzer and Tokar, we are always happy to answer questions or arrange consultations to discuss your estate planning needs. We also provide informative articles on ways to lessen estate tax and learn about available estate planning strategies at our estate planning blog.