As you go through life, you pay taxes at every turn. There are income taxes on the federal level, and if you live in California where we practice law, you have to contend with a state-level income tax. Property taxes, capital gains taxes, and sales tax will enter the picture as well, and there are other taxes that fly under the radar, like gasoline and hotel taxes.
Since you are required to hand over all these different slices of your personal pie, it would seem as though your death should not be viewed as yet another taxable event. Whether it makes sense or not, the powers that be see it a different way if you have experienced a particular degree of financial success.
Federal Estate Tax
There is a federal estate tax in the United States that packs a powerful punch with a 40 percent top rate. This figure is eye-catching to say the least, but you probably don’t have to worry about it, because there is a significant credit or exclusion.
At the time of this writing in 2020, it is $11.58 million. The tax would only be applied on the portion of an estate that exceeds this amount when it is being transferred to the heirs. It should be noted that the structure is subject to change via legislative mandate, so these figures are not permanently etched in stone.
This tax is not applicable on transfers between spouses who are American citizens, because there is an unlimited marital deduction. However, this is the only exception to the rule; transfers to all other relatives are potentially taxable.
Unfortunately, you cannot simply give gifts to your loved ones to avoid the estate tax if you are exposed, because we also have a federal gift tax. The two taxes have been unified since the 1970s, so the exclusion applies to gifts that you give while you are living along with the estate that you will leave behind to your loved ones.
That sounds like some pretty bad news, but the good news is that there is another gift tax exemption that sits apart from the unified lifetime exclusion. You can give as much is $15,000 to any number of people in a calendar year free of federal transfer taxes.
Plus, you can pay medical bills and school tuition for others without incurring any transfer tax liability. When it comes to the educational exemption, it does not cover books, fees, and living expenses, but you could use your $15,000 per year exemption to provide additional support.
Attend a Free Webinar!
If you would like to learn more about many different important estate planning topics, there are some great learning opportunities coming up in the near future. Our firm is offering a series of webinars, and the sessions are chock-full of useful information.
Though there is no charge to attend, we ask that you register in advance so that we can reserve your seat. To get all the details, visit our webinar schedule page and follow the simple registration instructions.
We Are Still Here to Help!
When you digest enough information, you will invariably come to the conclusion that it is time to discuss your situation with a licensed attorney. If that time is now, we are ready to help.
We know that it can be a bit disconcerting to discuss personal matters with a lawyer that you have just met. You can rest assured that we will make you feel comfortable from the first moment you connect with us, and we will carefully listen as you share your objectives.
Once we understand the situation, we will explain your options to you. If you decide to go forward, we will create a custom crafted estate plan that is perfect for you and your family.
You can give us a call at 310-337-7696 to schedule a remote consultation, and there is a contact form on this website that you can use if you would prefer to send us a message.