The top concern for most clients in estate planning is the issue of estate taxes. In fact, for most people, the primary goal of estate planning is to reduce or eliminate estate taxes if at all possible. The federal estate tax rate is 40%, but there is an estate tax exemption available. While there is no longer a California estate tax, the federal estate tax remains. Here is some basic information you need to know about this issue.
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California Estate Tax has been eliminated
California no longer imposes a separate estate tax at the state level. Therefore, the only estate tax liability California residents need to be concerned with is on the federal level. Currently, there are 17 states who still impose an estate tax on the state level: Connecticut, Delaware, District of Columbia, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Rhode Island, and Vermont. North Carolina and Ohio appealed their estate tax law as of January 1, 2013. Tennessee phased out is estate tax as of January 1, 2016.
The federal estate tax exemption
The federal estate tax exemption allows an estate with a value below the exemption amount to be passed on tax-free. As of 2019, the exemption amount is $11.4 million. The tax exemption is “portable,” meaning that the surviving spouse of a decedent can take advantage of any unused portion of their deceased spouse’s exemption. The unused portion of the exemption is then added to the surviving spouse’s own exemption. For example, if only $7,000,000 of the wife’s $11,400,000 exemption is used, then the surviving husband can elect to add the husband’s remaining $4,400,000 exemption to his exemption. This will allow him to pass on up to $11,800,000, tax-free.
What happens if you exceed the annual exclusion?
Although most estates don’t exceed the $11.4 million exclusion amount, your estate may be one of the few. If your estate exceeds that amount, an estate tax of 40 percent of the excess amount. If you are married, though, you can take advantage of the unlimited marital deduction that is also available, which will help defer taxes until the second spouse dies. There are also various ways that you can avoid estate taxes, through the use of estate planning tools.
To learn how to reduce estate taxes and the ins and outs of trusts and wills, join us for a FREE seminar by clicking this link. Space is limited.
Using the marital deduction
Married couples can give a gift of an unlimited amount to their spouse. The value of the property gifted to the surviving spouse is deducted from the deceased spouse’s estate. If all assets go to the surviving spouse, then no estate taxes are imposed based on the “marital deduction.” A married couple can essentially protect $22.8 million from federal estate and gift taxes. This is commonly referred to as the lifetime credit.
What is the “generation skipping” tax?
Another type of estate tax is referred to as the “generation-skipping” tax. This is a tax assessed on any property passed on to a generation that is two or more levels below the decedent. In other words, when you pass property on to your grandchildren, as opposed to your children, the IRS will assess a tax. Additionally, the tax applies to a transfer to someone who is unrelated to you and who is 37 ½ years or more younger than you.
Generation-skipping trusts can be very helpful
The purpose of a General Skipping Trust, or Dynasty Trusts, is to minimize or avoid estate taxes on transfers made to subsequent generations. This is accomplished by holding the assets in trust and distributing the funds in a pre-defined way, to each successive generation. In this way, the entire amount of the trust is protected from estate taxes with each passing generation. A common misconception is that Generation Skipping Trusts are only for wealthy families, but most families can benefit from this type of estate planning.
The benefit of making gifts instead of inheritances
Another way to avoid California estate taxes is by transferring property to your grandchildren or other heirs as gifts instead of inheritances. This can not only reduce the size of your estate, but also decrease the amount of taxes imposed on your estate upon your death. For instance, grandparents can give their grandchildren up to $15,000 each year (or $30,000 if the spouses combine their gifts) to each grandchild, without incurring a gift tax. There are several options, actually. You can make an outright gift, pay health care or education expenses, put the money in a custodial account, or transfer the money into a trust.
To learn how to reduce estate taxes and the ins and outs of trusts and wills, join us for a FREE seminar by clicking this link. Space is limited. If you have questions regarding California estate tax or any other estate planning needs, please contact the Schomer Law Group either online or by calling us at (301) 337-7696 or (562) 3460-3209.
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