Many people may not be familiar with the concept of estate taxes. The IRS defines it as “a tax on your right to transfer property at your death.” To put into simpler terms, it’s a federal tax on the transfer of assets at death. But why are they important? And what kind of financial implications do they have on beneficiaries? If you want to learn more about estate taxes, you’re in the right place. Here’s everything you need to know.
So, let’s go back to the basics. To reiterate, an estate tax is levied on the transfer of assets from a deceased person’s estate. It’s based on the fair market value of the assets at the time of the person’s death. As of 2021, the lifetime gift tax exemption is $11.7 million per person or $23.4 million per couple. Assets that are subject to estate tax include:
When someone passes away, the heirs (or beneficiaries) receive the assets. The estate tax is calculated based on the value of the assets in the estate that exceed the threshold. The rate varies depending on the value of the estate. The current maximum estate tax rate is 40%. This means that a large portion of the estate could go to the government rather than the heirs or beneficiaries.
The implications of estate taxes on seniors and retirees vary depending on their individual circumstances. However, it’s important to know that not every state imposes them. In fact, most seniors and retirees won’t need to worry about it. As mentioned in a previous section, the threshold for estate tax is high—over $11 million for individuals and over $23 million for couples in 2021. For those with lower valued estates, estate tax won’t be a concern. However, those with significant assets may need to plan for estate tax to ensure that their beneficiaries receive the maximum inheritance possible.
Good news! There are several strategies that seniors and retirees can use to plan for estate taxes. One of the most common is gifting, which involves transferring assets to beneficiaries while still alive. By reducing the value of the person’s estate, one can lower or eliminate estate tax liabilities. Gifting can be done annually. The annual exclusion limit for gift tax is $15,000 per person. Another strategy is to create a trust, such as a revocable living trust or irrevocable trust. Once again, trusts can help to minimize estate tax.
Estate taxes can significantly reduce the amount of wealth that’s passed on to heirs and beneficiaries. If the estate value is above the threshold, the estate tax rate can take a significant bite out of the value of the estate, leaving less for the heirs and beneficiaries to inherit. In order for seniors to help their heirs get the most out of their inheritance, it’s important to start estate planning early. In fact, seniors should work with financial advisors and estate planners to develop a comprehensive estate plan that takes into account their unique financial circumstances and goals.
While estate taxes are a concern for many seniors and retirees, the majority of states don’t actually impose them. However, several states require estate taxes as part of their inheritance tax laws. To make matters more complicated, the exemption thresholds and tax rates may differ from those of federal estate tax. Remember to review your specific state’s laws regarding estate taxes!
Click HERE to view a full list of all the no estate tax states.
Estate planning can be a complex process. Fortunately, an estate planning attorney or financial advisor can make it a litlte more simple! From creating a will to opening a trust to drafting other legal documents, the professionals can help you figure out how to make sure your loved ones will be taken care of after you pass away. Of course, understanding how estate taxes work will help you develop a comprehensive estate plan, as well.
Originally published August 22, 2023