When creating your estate plan, it’s critical to take taxes into consideration because they have a significant impact on what you actually pass to your heirs. Let’s dive into a few factors that you need to plan for.
Federal Transfer Tax
Estate tax, gift tax, and generation-skipping transfer tax are all examples of federal transfer taxes that are applied to the value of your taxable assets during the transfer of your estate to your beneficiaries.
A decedent can transfer $11.7 million dollars to their heirs, exempt of federal estate tax. Any amount of assets over this threshold are subject to estate tax. However, there is an exemption referred to as the unlimited marital deduction, which allows unlimited assets to be transferred to a surviving spouse free of estate tax.
This type of tax is imposed when someone gifts something to someone that is valued over the exemption amount of $15,000 a year (double that for married couples). You are able to gift an unlimited number of people an amount up to the exemption amount without being subject to a gift tax. You may also give unlimited gifts to your spouse, pay medical bills and tuition up to any amount as long as they are paid directly to the provider/institution, contribute to a 529 college savings plan, or donate to a charity – all without facing a gift tax.
Generation-skipping transfer tax
This type of federal transfer tax is pretty self explanatory from the name. Your estate may be subject to GST if you leave your assets to someone that is two or more generations apart from you or if the beneficiary is not related to you and the individual is 37.5 years younger than you. This tax may be due in conjunction with the other two mentioned above and comes in at the highest federal estate tax rate, which is up to 40% in 2021.
State Transfer Tax
Depending on where you live when you pass away, your beneficiaries may be subject to state transfer taxes on top of federal transfer taxes. States may enforce one or all of the estate transfer taxes mentioned above.
The Importance of Reducing Your Tax Liability for Your Estate Plan
The goal of estate planning is to leave your beneficiaries with as much of your hard-earned assets as possible, and this means reducing your tax liabilities.
While Loughlin Law is not a CPA or tax planning specialist, we do help individual create comprehensive estate plans that protects both you and your loved ones. We’d be honored to help you as well!
This information is written for general information only. It presents some considerations that might be helpful in reducing your estate tax liabilities. It is not intended as legal advice or opinion.