For most of us, the word ‘estate taxes’ conjures up images of the ultra-rich. However, even with provisions that permanently set the level at which estate taxes kick in at a fairly high amount, you should still know how the tax can affect you.
The estate tax in 2014 won’t affect as many people as it once did, but it’s still complicated enough to pay close attention to. Being smart about your potential estate tax liability could help you find ways to make sure it never affects you and your family.
Know your limits & exemptions – A $5.34 million exemption shelters most estates from federal gift and estate taxes. Under the current law, individuals can shelter $5.34 million of gifts they make during their lifetime or after death from federal gift & estate taxes. This allows married couples to combine their exemptions & shelter up to $10.68 million that can be left behind or given away without triggering estate taxes. This amount is indexed for inflation every year. Congress though has the ability to pass new legislation overriding these limits.
Just because we die, it doesn’t mean we avoid the tax man. When an individual taxpayer dies, a new taxpayer, the estate, is born. Federal income tax is assessed on the deceased’s final return, the return of a beneficiary of the income, or, if the estate receives more than a certain amount of income, on the estate’s income tax return. State taxes are specific to each state and may or may not have the same exemptions as the federal level. As mentioned above, inheritance may or may not be taxable to the beneficiary, based on the type of account and the amount. Surviving spouses often receive the assets of the deceased with minimal income tax implications.
One thing to keep in mind is that large gifts distributed over your lifetime can reduce the amount of estate tax exemption when you die. While the amounts vary for married couples and individuals, there are annual limits of gift giving that will not reduce the amount of your estate tax exemptions.
One of the greatest gifts you can leave to your loved ones is the gift of preparation. In the age of the internet, it is too easy to fall into a false sense of security that we can determine all of the ins and outs of estate planning and keep up with the almost annual tax code changes.
Lawyers, accountants and financial planners exist for a reason, and are there to understand your family’s unique circumstances, be it supporting a loved one’s healthcare, providing for a family member’s education, or ensuring the continued well-being of a spouse. GKM’s team can also help you create any documents that will assist in avoiding probate and quickly settling the estate with minimal tax implications for your heirs.
