Handling the affairs of a loved one’s estate can be stressful and difficult. However, to receive the full benefit of the gift a loved one leaves you, it’s critical to be prepared for the taxes that bequestswill incur. This is the advice in Investopedia’s article, “Estate Taxes: How to Calculate Them.” The article explains the potential tax liability, upon transfer of an estate after death.
The high rate of the federal estate tax (40%) motivates most people to calculate their potential estate tax beforehand. It’s a good idea to figure the amount you might owe in estate tax before something happens, instead of dealing with the consequences afterwards.
Estate tax is calculated on the federal and state level. There are now still several states that have their own estate tax: Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington, as well as the District of Columbia. Thankfully California has no estate tax. However, if you are a California resident and own assets in a state with estate taxes, you could be subject to estate tax on those assets.
The federal estate tax starts when the fair market value of your assets hits $11.18 million per individual. Each state has its own minimum on when the estate tax kicks in, ranging from $675,000 to $1 million. As a result, you can be eligible to pay the state estate tax, the federal, or both. Because the estate tax is determined based on the current market value of your assets instead of what you paid for them, calculating that number is more complex.
Initially, you’ll need to calculate the value of the gross estate. Debt, administrative fees, and assets that will be left to charities or a surviving spouse will be deducted from the total market value of those assets.
Next, add any gifts, including gifts that fall above the gift tax exemption. The $11.18 million exemption includes gifts made during life (it’s a way of keeping people from giving away their fortune before their death to avoid estate taxes).
If the loss of a loved one is imminent, preparing for the tax burden of estate transference ahead of time, can make the grieving process a little easier and can be a comforting distraction. Talk to an estate planning attorney and tax professional as there may be planning techniques to reduce income, capital gains, and estate tax available to you.
You can also prepare for taxes on your own estate to lessen the burden of the friends and family you leave behind. If you have questions, speak to an experienced estate planning attorney.
One of the main goals of our law practice is to help families like yours plan for the safe, successful transfer of wealth to the next generation. Call our office today to schedule a time for us to sit down and talk about your estate plan, where we can identify the best strategies for you and your family to ensure your legacy of love and financial security. Our office is located in Santa Ana, CA but we serve all of California including Irvine, Orange, Tustin, Newport Beach, and Anaheim.
Reference: Investopedia “Estate Taxes: How to Calculate Them”