Members of Gen Z will likely be responsible for paying estate taxes after the death of their parents.
Gen Z is considered by many to be a savvy generation, with an entrepreneurial bent and a focus on the future.
While future planning involves saving for retirement, it also involves preparing for the eventual death of parents.
According to a recent Forbes article titled “What Gen Z Needs To Know About Estate Taxes,” members of Gen Z will likely serve as executors for the estates of their parents or grandparents.
As executors and trustees, they will be responsible for settling the estate.
Depending on the wealth of the parent, the state of residence, the current federal estate tax exemption threshold, and the specific estate planning done by their parents or grandparents; Gen Z may find the estate is left with a significant tax bill.
This tax bill is known as the estate tax or the death tax.
What is the estate tax?
It functions differently than the annual income tax.
Instead of being owed each year on income earned, the tax is levied once on the estate of the deceased individual.
The Gen Z executor and trustee will need to pay the tax within nine months of the death of the decedent if the estate is large enough to trigger an estate tax.
Estate taxes may be levied at the federal or state level, or both.
If the individual who died was married and left everything to the surviving spouse, this wealth transfer usually does not trigger an estate tax.
Even so, an executor/trustee is required to file an estate tax return to preserve the estate tax exemption of that first decedent spouse.
The estate will be subject to estate taxes after the death of the surviving spouse, again depending on the estate value.
This is where the people in Gen Z enter the picture.
When the inheritance passes to non-spousal heirs like children or grandchildren, the estate tax for both spouses will be due prior to distribution.
Certain estate planning tools and strategies can reduce the tax liability of the estate.
One method is gifting.
Each individual can presently give up to $15,000 dollars to a person each year without triggering tax consequences.
Consider a family with two children.
The parents could each gift $15,000 to each of the two children each year.
This means the parents could remove $60,000 each year from their taxable estate with no tax consequences to themselves.
Even better, the recipients do not report the gifts as income.
Why is planning for estate taxes important?
Although the federal estate tax exemption threshold is currently $11,700,000 per individual, it is scheduled to drop to 5 million adjusted annually for inflation starting in 2026.
Any amount of income over this threshold would be taxed at 40 percent.
As mentioned previously, some states also have an estate tax.
These states do not have identical thresholds.
Whether you are a member of Gen Z or not, it is important to work with an experienced estate planning attorney to minimize estate tax liability.
Reference: Forbes (Aug. 10, 2021) “What Gen Z Needs To Know About Estate Taxes”