Estate planning is an essential process to transfer the property you have accumulated in your lifetime efficiently. Unfortunately, most people avoid estate planning to minimize or avoid their tax responsibilities. More often than not, the taxes charged on your estate if you die intestate are higher than those that would be charged if you leave a will.
A will attorney in Salt Lake City can recommend various legal solutions for the reduction of your estate’s tax burden as much as possible. When preparing your will, it is prudent to have some idea of the taxes that may affect your estate so that you can make the right decisions.
Here are the estate planning taxes you should watch out for:
Gift Tax
There is a federal tax exemption for gift taxes if the gifts to a beneficiary are less than $14000 annually. If you surpass this limit, the gift to the recipient will incur a tax. Rather than paying the tax at a go, however, the federal tax code offers a lifetime tax exemption for gifts of $5,340,000, which you can use to offset the taxable gifts.
The $5340000 tax exemption is like a coupon from which you will deduct the excess gifts you give your beneficiaries over your lifetime. A few states have an additional gift tax on top of the $5,340,000 federal tax exemption.
State Inheritance Tax
Some states impose a state inheritance tax on certain recipients of a deceased’s estate. Assets passed on to charities, the deceased’s descendants, and surviving spouses are, however, exempted from this tax. A state inheritance tax will also be imposed if you own a property in a state with this tax even if this is not your home state.
Generation-Skipping Transfer Tax
This applies to an inheritance of more than $5,340,000, which skip one or several generations. The ‘skip’ refers to estate transfer to a relative that is at least two generations below the testator’s/testatrix’s or a non-family member who is not less than 37 ½ years than the testator/testatrix. Some states impose a different generation-skipping tax in addition to the federal tax.
Income Tax
Almost all estates will be affected in some way by income taxes. This is because when settling your trust or estate after your death, the estate will continue earning some interest before it is transferred in the beneficiaries’ name. There might also be a sale of some of the estate’s assets and this will attract a capital gain while some estate accounts come with built-in tax implications. These include the non-Roth IRA, annuities, and 401Ks. Estate income taxes can be calculated on a step-up in basis or modified carryover basis regime.
Estate planning taxes might be the one issue that mars your estate planning and leaves your beneficiaries with far less than what you leave them. Without legal aid in drafting your will, this will be an unfortunate event for your heirs. An attorney will help you understand the estate planning taxes that apply in your state and the best ways to handle them.
