Your legacy is something that your loved ones could potentially draw from after you pass away if you have been very successful from a financial standpoint. There are some families that have made very important contributions to society because they had opportunities that that were provided by their ancestors.
If you have been able to build wealth, your family members could be the beneficiaries at some point in time. However, you have to be aware of the fact that estate taxes can severely damage your legacy.
Federal Death Tax
There are actually a few different death taxes that can come into play depending on the state of your residence. However, everybody across the country has to be concerned about the possible imposition of the federal death tax. The estate tax on the federal level packs a heavy punch with a 40 percent maximum rate.
Though this can sound rather alarming, a significant amount of property can be transferred tax-free before the estate tax would become a factor. First off, we should mention the fact that there are no taxes on asset transfers between citizen spouses because there is an unlimited marital deduction.
However, simply leaving everything to your spouse tax-free is not an estate tax savings solution because you would just be postponing the problem. Your spouse’s estate could then be subject to taxation so you should discuss the matter with an estate planning attorney before you go this route.
There is a certain amount that you could transfer to people other than your spouse before the estate tax would become applicable. This figure is called the exemption, the credit, or the exclusion. The base exclusion was set at $5 million in 2011, but there are inflation-adjustments each year. In 2016, the exclusion is $5.45 million.
This can sound like a lot of money, and it is, but many people who do not necessarily consider themselves to be very wealthy do have property that is valued in excess of this amount. Real estate and business holdings are part of your estate, and many people own large tracts of land that may have been in their families for generations. Life insurance policies are also counted as part of your estate for tax purposes.
State-Level Estate Taxes
Even if the value of your estate does not exceed the amount of this exclusion, that does not necessarily mean that estate taxes are not a factor for you. There are a number of states that impose state-level estate taxes, and in these states, the exclusions are often lower than the federal exclusion. As a result, there can be state-level exposure for residents of these states, even those who are exempt on the federal level.
We have offices in North Carolina and Kentucky. Fortunately for us, there are no state-level estate taxes in these states, but you could still face state-level estate tax exposure if you own property in a state with an estate tax. There are 14 of thse states, and the District of Columbia also has its own estate tax.
There is a good article on Forbes.com that you can check out if you would like to learn more about how death taxes work in these 14 states.
Inheritance Tax
An inheritance tax and an estate tax are two different types of taxes. The entirety of the taxable portion of an estate would be shaved down before it was distributed to the heirs when an estate tax is being applied.
On the other hand, an inheritance tax is levied on transfers to each individual nonexempt inheritor. We do not have an inheritance tax on the federal level, but there are a handful of states that have state-level inheritance taxes. North Carolina is not one of them, but there is a state-level inheritance tax in the state of Kentucky.
We should point out the fact that very close relatives like spouses, children, parents, grandchildren and siblings are exempt from the Kentucky state inheritance tax.
Schedule a Consultation
Though most people are not going to be exposed to estate taxes, if your estate is in taxable territory, death taxes are definitely a huge threat to your legacy. The good news is that there are legal steps that you can take to position your assets in a tax efficient manner.
If you do the right things at the right time, you can enjoy your wealth while you are living, and you can also make sure that your loved ones have opportunities after you pass away. To explore your options, call us at (704) 944-3245 (Charlotte, NC) or (606) 324-5516 (Ashland, KY) or send us a message through our contact page to set up a consultation.
John’s practice focuses on the use of Wills and Living Trusts in Estate Planning to help individuals protect their families and preserve their legacies after their deaths, but his practice also focuses on the critical issues of protecting individuals with dementia or other diminished capacity, assisting individuals in qualifying for Medicaid and other government benefits to offset the costs of long-term care, and providing special needs planning.
John is admitted to practice law in North Carolina, South Carolina, Kentucky, and Ohio, and he is accredited by the Department of Veterans Affairs.
- What You Need to Know about the Medicaid Look-Back Rule - January 3, 2023
- How to Pass Down Your Legacy in Your Estate Plan - October 3, 2022
- Practical Steps to Take after Receiving a Terminal Diagnosis - September 30, 2022
