When you pass away, your assets will be distributed to your heirs as outlined in your will or estate plan, including your cash, possessions, property and more. But before any of that happens, the government may decide to take a chunk of your estate’s value in the form of estate taxes.
The average American has never considered or even heard of estate taxes. This is generally because estate taxes won’t affect everyone—there are exemptions for estates below a certain threshold. However, if you’re a high earner and have amassed a sizable estate, your family may be surprised to discover your inherited estate is minimized because of estate taxes.
So how do you know if your family will be affected by estate taxes, and is there anything you can do to prepare? Here’s what you should know.
What are estate taxes?
Estate taxes are one of the major forms of taxes the federal government collects on your assets. The tax is calculated and owed on the total value of the estate you are passing on to beneficiaries after your death.
After you pass, everything you own and plan to pass on, including bank accounts, retirement funds, real estate, cars and more, gets totaled. Then, the government deducts value from the estate for specific things, including mortgages and other debts, charitable donations and property that is being given to your surviving spouse. After this happens, the total will be your “taxable estate.”
If your taxable estate falls above the exemption threshold, the amount owed is collected from the estate. Federal estate tax is 40 percent, which can significantly diminish the value of assets remaining for your heirs.
Fortunately, estate tax doesn’t affect everyone. In 2019, the exemption threshold is $11.4 million. Thus, if your taxable estate is worth less than $11.4 million, you won’t owe any estate taxes! This threshold is adjusted every year to account for inflation, so it’s important to monitor the changes to be certain or whether you will owe or not.
Minimize estate taxes through a comprehensive estate plan
Because the federal estate tax exemption limit is so high, the average individual will not need to worry about estate taxes chipping away at their inheritances. However, people who own lots of property, businesses and/or investments may find that their assets add up quickly.
When your taxable estate is calculated, the value of each asset is the fair market value, or the value of the asset as it stands today, rather than what is was worth when you acquired it. This can make a big difference if assets have appreciated or depreciated over your lifetime.
If you’re concerned about owing estate taxes, a conversation with a Certified Financial Planner in Los Angeles can help you determine whether your estate will owe taxes and, if so, what you can do to minimize them.
There are many strategies available for minimizing estate taxes, including giving the maximum annual gift exclusion of $15,000 to members of your family before your passing and setting up trusts to give money to charity.
Estate tax planning is a critical component of overall estate planning. If you are concerned about the state of your affairs after you pass away, create or update your estate plan to ensure you’re able to give as much of your hard-earned wealth on to your heirs as possible.
Comments