Just about everyone that passes on will leave assets behind, and they must determine where those assets will go while they’re still alive. Even if you are in great health and expect to have decades of good living ahead of you, planning your estate is a must. It is incredibly complicated and can take a lot of time, but with the right help, you can ensure your wishes are fully honored.
There are a lot of considerations that go into estate planning. The larger your estate, the more considerations there tend to be. One thing that can’t be forgotten is the different taxes that impact estate planning. There are limitations to what can be given in an estate without taxation, and it is important to know which taxes are likely to impact your estate planning process.
Let’s look at some of the important taxes to know when estate planning.
Federal Estate Tax
The federal estate tax is a tax put on the total taxable value of your estate. This is what many people are concerned about when estate planning, but the truth is that for the overwhelming majority, the federal estate tax will not be a concern. That is because there is an exemption amount, which is a certain amount that each citizen can transfer at the time of their death exempt from federal estate taxation.
The exemption amount is $12.06 million per decedent as of 2022. That means you can transfer massive estate sums without worrying about taxation. Only a small percentage of US households are going to have to worry about the federal estate tax, and there are deductions and workarounds. There is also no federal estate tax for transferring money to a surviving spouse.
State Estate Tax and Inheritance Tax
While most people don’t have to worry about the federal estate tax, some will have to worry about state estate and inheritance tax. Fifteen states have a state estate tax, and six have an inheritance tax. Maryland is the only state with both. For estate taxes on the state level, the rates range from 0% to 20%, depending on the state and the size of the estate. These taxes are levied before the money is granted to the receivers of the estate.
With inheritance taxes, the rates are from 1% to 18%. The rates for inheritance taxes are similarly location and inheritance size-dependent. They also depend on the relationship the beneficiary has to the person whose estate it is. Direct descendants will often pay less than non-relations.
Generation-Skipping Transfer Tax
This tax is important to consider for those passing on money to younger generations. This is a tax imposed on transfers of either gifts or estates to those 37.5 or more years younger than the person giving the gift. This tax was created to close a loophole that allowed wealthy individuals to leave their fortunes to grandchildren without paying estate taxes.
The Generation-Skipping Transfer Tax is imposed at a flat rate of 40%, but it is only applied with the same threshold of the federal estate tax. That means the threshold is $12.06 million, so most will not have to worry about this tax.
Federal Gift Tax
If you want to give some of your money away before you pass, the federal gift tax may apply. The federal gift tax is imposed when you make gifts while you are alive that are above the exemption amount. The exemption amount is up to $16,000 for an individual or $32,000 for a married couple. There are exceptions to these gifts, like charitable organizations or medical and tuition expenses, where there is no limit to the gift amount, as long as they are paid directly to the relevant organization.
This is something to keep in mind if you plan on gifting money while you are alive. The exemption amount is significantly lower here, so gift tax is something more people are likely to run into.
Because estate planning is such an important but complicated process, finding the right assistance can make all the difference in the world. Luckily, some experts can make estate planning painless and effective. Hiring a tax attorney that specializes in estate planning will help you navigate the estate planning process with ease. These professionals understand all the important laws and regulations that govern estate planning and can partner with you to ensure your wishes are fully honored.