Since the tax man seems to be involved in every financial transfer imaginable, you may assume that your family will be forced to pay some type of estate taxes. We are glad to be able to tell clients that in fact, most people do not have to worry about this form of taxation. However, those who do are facing a maximum rate of 40% that can have a very serious impact.
In this post, we will provide five key pieces of information about death taxes that will give you a basic but broad understanding of the relevant facts.
Estate Tax Exclusion
The reason why the majority of Americans do not have to be concerned about the federal estate tax is because there is an exclusion that is larger than most estates. At the time of this writing in 2019, the exclusion is $11.4 million.
If your estate is valued at less than this amount, you are in the clear. Any portion of an estate that exceeds this exclusion would potentially be subject to the estate tax before transfers are distributed.
This figure in the vicinity of $11 million was put into place as a result of a tax overhaul that went into effect in 2018. Previously, the exclusion was about half of that so the exclusion amount can be changed via legislative mandate.
As estate planning attorneys, we have to stay up to date on these issues, and this is one of the reasons why you should schedule estate plan reviews periodically. A significant change in the exclusion amount can be a cause for revisions in some instances.
Provisions for Married Couples
Ever since 2011, the estate tax has been portable between spouses. This means that if you predecease your spouse, the survivor could use your exclusion along with their own. Using the figures in place right now, this would equate to a total exclusion of $22.8 million for the couple.
The estate tax is potentially applicable on transfers to anyone, regardless of the relationship with the exception of your spouse. As long as you and your spouse are American citizens, you can transfer unlimited assets to one another free of taxation.
Federal Gift Tax
You cannot simply give gifts to your loved ones while you are living to get around the federal estate tax. There is a gift tax in place as well, and it is unified with the estate tax so the $11.4 million exclusion that we have this year applies to your estate along with large lifetime gifts.
This gift tax does not come into play on every gift-giving holiday or special event because there is an additional $15,000 per person annual exclusion. You can give this amount to an unlimited number of people during a calendar year before you would start using any of your unified federal/estate tax exclusion.
State-Level Estate Taxes
There are quite a few states in the union that levy estate taxes on the state level. We have offices in North Carolina and Kentucky, and we are fortunate, because there are no estate taxes that are specific to these states. However, if you own property in a state with an estate tax, you should look into their laws because you could face exposure.
It is important to note that the state level exclusions are typically much lower than the federal exclusion.
An estate tax is applied to the taxable portion of an estate before the assets are transferred to the heirs. Inheritance taxes are a different form of taxation. This tax applies to transfers to each nonexempt beneficiary so, technically, an estate could be exposed to an estate tax and an inheritance tax.
There is no federal inheritance tax, and there are only a handful of states with state-level inheritance taxes. Kentucky is one of them, but transfers to your closest relatives (surviving spouses, parents, children, grandchildren and siblings) are completely exempt.
Schedule a Consultation!
We are here to help if you would like us to review your existing documents or help you put an initial estate plan in place. You can send us a message to request a consultation appointment, and we can be reached by phone at 704-944-3245 in North Carolina (Charlotte, NC or Huntersville, NC) and 606-324-5516 in Ashland, Kentucky, or 859-372-6655 in Florence, Kentucky.
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