Estate taxes and inheritance taxes can reduce the wealth left to loved ones.
The U.S. government is quite capable of spending money.
Even money it does not have.
And from where does that money originate?
Citizens are taxed.
A variety of taxes exist at the local, state, and federal levels.
People are taxed on making an income, selling goods or services, buying goods or services, and owning property.
The Beatles actually captured this unpleasant reality in song: The Taxman.
According to a recent The Motley Fool article titled “Millennials May Inherit $68 Trillion: Here’s What to Know About Estate and Inheritance Taxes,” some taxes are also levied at death.
The federal government has an estate tax on the assets owned by a person when he or she dies.
Even though it applies across all estates, only certain people will be subject to this tax.
The federal government has an exemption threshold.
At this time, only singles who have an estate valued at or above $12.92 million or couples who have an estate valued at or above $25.84 million will be subject to this tax.
Who is responsible for paying the tax?
The estate, rather than the heirs, must make these payments to the government.
In practice, the executor will be the individual who pays the taxes from the estate assets.
All cash, bonds, stocks, real estate, jewelry, and other valuables owned by the individual who died are included when calculating the value of an estate for the purpose of estate taxes.
If the wealth of a person exceeds the exemption threshold, only the amount above the threshold is subject to taxes.
How much are estate taxes?
The tax is levied based on percentages.
These range from 18 percent to 40 percent of the total value of the estate.
Consider this example.
An individual dies in 2023, leaving assets worth $15.5 million.
The costs of the funeral, medical bills, and other final expenses prior to death are $500,000.
To determine how much is taxable, one must subtract both $500,000 and $12.92 million from the $15.5 million.
The result of this equation is $2.08 million.
Because the amount exceeding the exemption is greater than $1 million, the estate is taxed at 40 percent.
$832,000 will be owed to the government.
After taxes, the heirs would inherit $14,168,000.
In addition to the federal estate tax, some states also levy their own estate tax.
These include the District of Columbia, Washington, Vermont, Rhode Island, Oregon, New York, Minnesota, Massachusetts, Maryland, Maine, Illinois, Hawaii, and Connecticut.
The exemption amounts and tax rates also vary by state.
Some states have both an inheritance tax and an estate tax.
There is no federal inheritance tax.
Is it possible to reduce tax liability for you and your heirs?
One option is to provide gifts to your heirs while you are alive.
This takes advantage of the annual gift tax exclusion of $17,000 per person without being subject to taxes.
Different rules apply if you are gifting to a non-citizen spouse.
Certain trusts can also help.
With a charitable trust, you can provide for a charity you value while also removing assets from your taxable estate.
You should work with an experienced estate planning attorney to create a trust to meet your goals and your needs.
Planning for estate taxes will be more urgent for many in the coming years.
After December 31, 2025, the exemption amounts outlined by President Trump’s Tax Cuts and Jobs Act of 2017 will expire.
When this happens, the individual federal estate tax exemption will be returned to the $5.29 million exemption level adjusted for inflation.
With the inflation adjustment, it will look more like $6.2 million in 2026.
If you will be impacted by this change, schedule an appointment with an experienced estate planning attorney to get out in from of the Taxman.
Reference: The Motley Fool (May 2, 2023) “Millennials May Inherit $68 Trillion: Here’s What to Know About Estate and Inheritance Taxes”