Financial success is a beautiful thing, and it is a good feeling to be able to leave behind a legacy for your loved ones to draw from after you are gone. This being stated, there are looming threats in the form of death taxes.
Generally speaking, inheritances are not subject to regular income taxes, but there is a federal estate tax that can have a significant negative impact. This levy carries a 40% maximum rate, so we are not talking about a barely noticeable nibble. The high rate is the bad news, but there is also some good news to soften the blow.
There is a federal estate tax credit or exclusion that allows you to transfer a certain amount of property free of taxation. At the time of this writing in 2019, it stands at $11.4 million per person. So if you are married, you and your spouse would have a combined exclusion of $22.8 million.
It should be noted that the estate tax exclusion is portable between spouses. This means that if you predecease your spouse, they would still have two exclusions to use.
Another important piece of information for married couples is the fact that there is an unlimited marital deduction. You can transfer unlimited assets to your spouse free of taxation, as long as your spouse is an American citizen.
The logical step to take when you hear about the existence of the death tax would be to give gifts to your loved ones that could be viewed as inheritances received in advance. Unfortunately, this window was closed by the powers that be in 1932 when the gift tax was put into place.
Since the gift tax and the estate tax are unified, the $11.4 million exclusion that we have this year applies to large lifetime gifts along with the estate that will be transferred to your heirs.
There is an additional $15,000 per recipient annual gift tax exclusion that you can use aside from the unified exclusion. So the first $15,000 that you give to anyone within a calendar year could pass tax-free without using any of your unified lifetime gift and estate tax exclusion.
Real Property
When you are inventorying your assets to evaluate your potential exposure to the estate tax, all real property must be counted. This would include farmland and ranches, and some people are in possession of large tracts of land that have been in their families for generations.
Decades ago, it was relatively inexpensive, but now, it may be extremely valuable. This is something to keep in mind when you are analyzing the value of your property.
State-Level Estate Tax
There are a number of states in the union that have their own state-level estate taxes. In these states, the exclusions are typically lower than the federal exclusion. As a result, you could be exposed to a state estate tax even if you are exempt on the federal level.
Here in California, we do not have a state estate tax. However, if you own property in a state that does have such a tax, it could be applicable. For example, many wealthy Californians own property in Hawaii. There is an estate tax there, with an exclusion of $5.4 million in 2019.
Attend a Free Seminar
Our attorneys are holding a number of free seminars over the coming weeks. You can learn more about taxation and other important estate planning matters if you attend one of these sessions. Admission is free, but we do ask that you register in advance so that we can reserve your seat.
To get all the details, visit our seminar schedule page. When you click on the date that works for you, follow the simple registration instructions.
Schedule a Consultation!
Our doors are open if you are ready to cut to the chase and put a custom crafted estate plan in place. You can send us a message to request a consultation appointment, and we can be reached by phone at 310-337-7696.
- How Can an Incentive Trust Help Me Achieve My Estate Planning Goals? - September 4, 2023
- How Do I Prove Undue Influence in a California Will Contest? - September 2, 2023
- National Make-a-Will Month - September 1, 2023