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Basics of Estate Taxes

Published: April 6, 2023

A deceased individual’s estate is taxed when assets are transferred to their heirs or beneficiaries. An estate tax is not the same as an inheritance tax. It’s a tax on the total value of a person’s assets at the date of death. The estate pays the tax before any assets are distributed to beneficiaries or heirs.

In contrast, inheritance tax is based on the value of assets that an individual beneficiary receives. The tax responsibility is on the beneficiary, not the estate, and tax rates can depend on the relationship between the decedent and the beneficiary.

US Estate Taxes Overview

US estate taxes apply only to high-value estates. The amount adjusts annually for inflation, and for 2023 is $12.92 million per individual—higher estate tax exemptions will sunset on December 31, 2025. Projections vary slightly but align with a 2026 estate tax exemption cut in half to about $6.8 million per individual. Any value exceeding the current year’s exclusion limit is subject to tax.

The Internal Revenue Service requires any estate with prior taxable gifts and combined gross assets exceeding the threshold to file a federal estate tax return and pay estate tax. Therefore, any estate valuation in 2023 over $12.92 million per individual will pay tax on the overage amount. Executors, or personal representatives, are responsible for filing the estate’s return and paying any taxes owed by the estate, from the estate, over that year’s exclusion amount.

Unlimited Marital Deduction

A provision in the US Federal Estate and Gift Tax Law allows an individual to transfer an unrestricted amount of assets at any time to their spouse free from tax. This transfer includes the date of death of the transferor.

However, this unlimited deduction from estate and gift tax only postpones the taxes on the property inherited from each other until the second spouse dies. After the surviving spouse’s death, all estate assets over the exclusion amount are subject to the survivor’s taxable estate.

Assets Subject to Estate Tax

The estate tax applies to the fair market value of assets such as cash, real estate, stocks, bonds, and personal property, including art, jewelry, and other collections. Life insurance proceeds paid to a beneficiary are generally not subject to estate tax but may be included in the estate if the deceased owns the policy.

Exemptions and Deductions

Certain deductions and exemptions can help reduce the amount of estate taxes owed. For example, a married couple can pass on their estate to their spouse without incurring estate tax at that time. Additionally, charitable donations made from the estate can qualify as a deduction from the taxable amount.

Reducing Estate Taxes

Estate tax law can be complex, and an estate planning attorney can provide valuable guidance and assistance when minimizing the impact of estate taxes. Here are some ways an estate planning lawyer can help:

  • Creating an estate plan minimizes the impact of estate taxes. An estate planning attorney can help you explore various strategies, such as gifting, trusts, and other tax-efficient structures, to reduce the size of your taxable estate.
  • Reviewing and updating your estate plan and making revisions every year or so ensures it’s optimized to minimize estate taxes.
  • Estate planning strategies can reduce the impact of estate taxes, such as gifting, trusts, and life insurance. These strategies are complex and are customized to each individual’s unique circumstances.
  • Ensuring compliance with tax laws and regulations that govern estate taxes ensures you are taking advantage of all available deductions and exemptions.
  • Helping to file estate tax returns to ensure all necessary information is included and the return is filed accurately and on time.
  • Providing guidance to executors and trustees with a fiduciary responsibility to manage the estate in a way that minimizes taxes and maximizes the value of the assets for heirs and beneficiaries.

An estate planning attorney is a valuable resource for individuals concerned about estate taxes and minimizing their impact.

Estate Taxes by State

In addition to federal estate taxes, some states have their own estate or inheritance taxes. Currently, twelve states levy an estate tax upon your death. Like federal estate tax law, state-level estate taxes can change. There may be additional requirements for exemptions that apply depending on the year. If you are concerned about estate taxes in your state, it’s a good idea to consult with an estate planning attorney for guidance and advice specific to your situation.

Spending Down Your Estate

Reducing the size of your estate can minimize or avoid federal estate tax. Enjoy your wealth if you aren’t afraid of running out of money before you die. Travel, live lavishly, and give your assets to loved ones that may improve their lives while you can enjoy the experience. You can give away your assets to a qualifying charity and deduct them from your estate. You can use an irrevocable trust to shield assets that legally shelter them from federal or state estate taxes. You can even relocate to a more favorable tax environment if you live in a state that levies estate taxes.

Creating a Plan

Your estate planning goals define the steps you take. Establish a clear idea of what you want to happen, to whom you want to give, who will handle your estate, and how estate taxes can be avoided to protect the legacy you leave to your loved ones.

An estate planning attorney can help you gather and organize your financial data to determine your net worth and establish estate tax avoidance strategies, review all existing beneficiary selections, and make updates where appropriate. They help you understand the importance of how you hold title to your property.

Create your estate plan today, knowing you can modify much of it as your family situation changes. Estate taxes may be an important consideration if you have a large estate. By understanding the basics of estate taxes and working with an estate planning attorney, you can ensure your assets transfer to your loved ones in the most tax-efficient manner possible.

If you have questions or would like to discuss your legal matters, please do not hesitate to contact our office at 215-364-1111 to schedule a consultation.

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It is important to plan your estate to ensure that your assets, interests, and those you love will be protected after your death. However, without proper guidance and advice from a qualified estate planning attorney, many individuals make costly mistakes. Beyond undermining your intent and diminishing your financial legacy, poor planning can create additional stress to your heirs in their time of grief.

Six common errors frequently happen during the estate planning process. These mistakes often occur because the complete financial picture was not fully considered. It is easiest to avoid estate planning mishaps by knowing what they are before you begin or looking for these errors when reviewing and updating your plan.

Financial procrastination causes problems. While examining your mortality and making end-of-life preparations is not a particularly fun activity, try viewing it as helping and enhancing your loved ones' future lives while creating a sense of peace during your own. 

The need to protect your finances using wills, trusts, and power of attorney (POA) documents is not solely the domain of the elderly. Putting off the drafting of legal documents necessary to protect yourself and your inheritors can lead to disastrous outcomes.

By far, failing to create an estate plan is the most common mistake. Even if you do not have a lot of money, you need a will to protect any minor children you have by naming their guardians. Your will also ensures your asset distribution to heirs is carried out according to your intentions when you die and names a representative to handle debt obligations, final taxes, and other estate administrative duties. Dying without a will or "intestate" can lead to dire consequences.

Outdated wills, forms, and POAs create problems. If you made a will twenty years ago and have not reviewed and updated its contents, chances are many of the details no longer reflect current assets or beneficiaries. Estate planning is not a "set it and forget it" proposition. Reviewing estate planning documents and beneficiary forms every two years is generally adequate, barring a major life change such as divorce, birth, death, remarriage, or relocation to another state.

Beneficiaries without coordination can create expensive oversight. Beneficiary forms for retirement accounts like 401(k)s and IRAs, annuities, and life insurance policies may constitute a significant portion of your estate's assets. These beneficiary forms are legally binding and will supersede the contents of your will. Failure to update beneficiary forms can lead to an ex-spouse receiving assets that preferably would go to your heirs. Routine checks of all beneficiary designations are best practices for estate planning.

Failing to title trust assets properly can lead to probate. While not everyone requires a trust, those who do must carefully retitle their assets into the name of the trust. Forgetting to add more recently purchased property or opening a new account requires you to title them into the trust to receive trust benefits. Whether real estate, cash, mutual funds, or stocks, if you fail to move the asset into the trust, they become subject to the probate court, possible tax consequences (depending on the trust type), and a public record of these assets.

Life insurance can trigger estate tax. Life insurance can provide heirs with liquidity without the sale of assets and tax consequences when handled correctly. However, if a wealthy individual dies while maintaining ownership of their life insurance policy, they may inadvertently create a tax event for their heirs. Although life insurance death benefits are not subject to state or federal income taxes, any "incident" of ownership by the decedent can create an inheritance tax.

An estate planning attorney can help shelter life insurance proceeds from high-value estates by gifting the policy to an Irrevocable Life Insurance Trust (ILIT) or draft a new trust to purchase a new policy where the trust is the owner and beneficiary. A policy owned by the trust does not create a taxable situation to death benefits. Your attorney's careful structuring of this trust type is complex but can provide proper protection.

Joint ownership of assets with your children can lead to disastrous consequences. Naming your children as co-owners of assets, even digital, permits their creditors to access your money. The better way to address the situation is to give your adult child power of attorney and assign them as a beneficiary to a payable on death bank or brokerage account. This tactic permits them to access your funds if required during your lifetime. However, it keeps your assets from your child's estate and away from their potential creditors.

Ultimately the biggest error you can make is not finding the right estate planning attorney to guide you. This specialized attorney receives training on avoiding probate, tax implications, and asset protection if you require long-term care. Proper planning with the right guidance will help you avoid costly estate planning mistakes and protect your family's future financial well-being.

If you have questions or would like to discuss your legal matters, please do not hesitate to contact our office at 215-364-1111 to schedule a consultation.

- Estate Planning Mistakes to Avoid

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Together, Melanie and Scott will meet all you needs to perfection! Great Law office!
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