As you might imagine, fully understanding estate taxes – or any taxes – can be challenging. Thankfully, however, for most people, estate taxes should not be a pressing concern. This is because federal estate taxes do not kick in unless an estate’s value exceeds $12.92 million ($24.12 for married couples). In addition, there are only 17 states that have estate or inheritance taxes.
This might seem like the end of the discussion, but unfortunately, there is more. There are still issues you need to be aware of when considering the tax ramifications of various Estate Plans and structures.
Tax Planning Should Also Consider Potential State Liability
As noted above, at the federal level, the amount of the estate tax deduction is very high. It is indexed yearly: in 2018, the exemption amount was $11.18 million, and it has gradually increased every year. If an estate exceeds the exclusion threshold, amounts in excess of the deduction are taxed at a graduated rate, from 18% up to 40% of the amount in excess of $12.92 million. You will owe estate taxes if your estate is larger than the deduction amount. Accordingly, you should work with your tax accountant, financial advisor, and estate planning attorney if you want to find ways of structuring your Estate Plan to minimize or eliminate estate tax liability.
Furthermore, if the person with the estate dies – or ever lived or owned property – in one of the 17 states with estate taxes, the estate may have a state tax liability. Estate tax deductions in these states are usually lower than the federal exclusion amount – sometimes much lower. For example, in Oregon and Massachusetts, the estate tax exemption amounts are only $1 million. All estates larger than the state exemption will owe taxes to these states.
Note, also, that some states have provisions that try to capture estate taxes even if you may not live there. For example, if an estate includes land in Oregon, there is a somewhat complicated formula for calculating the amount of Oregon state taxes that may be owed to Oregon by the estate, even if both the decedent and his or her heirs have never set foot inside Oregon. Consequently, when crafting your Estate Plan, you must look at potential federal and state tax liability.
Other Tax Considerations Related to Estates
In addition to estate taxes, several states have inheritance taxes. While the individual planning or administering an estate does not need to worry about paying these taxes, the people inheriting do.
As noted above, a few states have estate taxes, and others have inheritance taxes. Maryland is the only state that has both. While the estate tax will affect all heirs equally in that it reduces the overall value of the estate, inheritance taxes only affect those who live in states with the inheritance tax. This means that when an estate is distributed to the heirs, those who live in these “inheritance tax” states will receive a lower net amount of the inheritance. For some people, this may not matter. But if any of your heirs are in this situation, this may be something you want to consider when deciding how to distribute your estate.
Another issue to take into account when planning your estate is that if you have a Trust, it is a separate legal entity – including for tax purposes. So if a Trust is part of your Estate Plan, make sure that your Trust complies with all tax laws. This can be more difficult than it sounds because the IRS treats different types of Trusts differently regarding taxation. You should obtain professional tax advice and assistance to comply with all tax laws.
In addition, there may be other minor wrinkles in tax law that can affect an estate. For example, for estates that involve Trusts, a Trust may have tax liability for capital gains when liquidating assets for distribution to heirs. Per the IRS, the Estate can pay those taxes up front before distribution or distributing the assets pre-tax and placing the capital gains tax burden on the heirs. The Trustee(s) will be responsible for making the best decision and ensuring the beneficiaries know their tax responsibilities and obtain the necessary tax documents if required.
Finally, Executors and Trustees are responsible for ensuring that all taxes are paid for the deceased, including personal taxes, property taxes, Trust taxes, estate taxes, and so on. In other words, even if an estate owes no estate taxes, it does not mean there are no tax concerns or liabilities that must be addressed.
Get Professional Advice For Estate Tax Insights
At eLegacy, we know that needing to put together an Estate Plan can be a daunting prospect. But with the right professionals to advise you, you can craft a plan that takes into account all your concerns, from managing your wealth to protecting your assets to minimizing your tax exposure. There is a way forward, and you can rely on us to provide the information and advice you need to create a plan that gives you peace of mind that you have taken care of those you love. For information and assistance on estate planning, contact eLegacy today.