When it comes to estate planning, many people worry about the estate taxes that their loved ones will have to pay. The reality is, most people simply don’t have to worry about this due to the overall value of their estate. Regardless of how much you think your estate is worth, it is important to understand how both federal and state taxes may affect those who receive your inheritance.
Estate, Gift, and GST Taxes
You should also be aware of what the types of taxes are that may apply to your estate.
• Estate Tax – This is a tax that is applied to the net amount of your estate. It is determined by combining the values of any cash, real estate, trusts, securities, annuities, assets, and business interests that make up your estate. Most estates do not meet the required value, which for 2015 is $5,430,000, and as such would not be required to file a tax return on the estate.
• Gift Tax – This tax is applied to any transfers of property that are made from one person to another, without the giver receiving anything in return. This tax may also apply in situations where items are sold for considerably less value than their actual worth. There are two separate gift taxes:
• Lifetime – This is the amount of gifts that are untaxed throughout your life, which is currently at $5.43 million.
• Annual – The annual gift tax is applied to gifts that total for than $14,000 in 2015.
• GSTT – The generation-skipping transfer tax was put in place to prevent people from leaving large amounts to grandchildren and other subsequently removed generations to avoid paying taxes. If the amount meets the set limits, the heir will be required to pay the taxes.
Federal Estate Taxes
Few people are actually required to pay federal gift, estate, or generation-skipping taxes due to the high thresholds required for the value of the estate. For 2015, the exemption limit is $5.43 million. This means that the value of your estate or any gifts made during your lifetime combined cannot exceed this amount without requiring the taxes to be paid. However, gifts that are made to education or medical providers, as well as transfers from one spouse to another, are not taxed.
State Estate Taxes
Even if your estate does not meet the requirements for federal estate taxes, it may meet the limits set by individual states. There are currently 19 states along with the District of Columbia that have state death taxes. The amounts of these taxes, and their requirements, change frequently, so it is always a good idea to verify the taxation limit of your estate each year to ensure that you plan accordingly.
State and federal estate taxes can be difficult to figure, and for the federal lifetime gift tax, it can require close monitoring of your finances each year. If you are trying to plan your estate and you meet the federal or state limits, you should consider contacting an attorney to ensure you manage your inheritance and trust designations properly.