Are you worried about your assets and properties when you’re gone, especially about the taxes that come together with it? When someone dies, all of their assets and properties could be subject to inheritance and estate taxes.
The estate tax will be determined based on where they live and how much their assets amount to. This tax will be transferred from the decedent to their beneficiaries. However, most estates are too small so you may not have to worry about paying estate taxes. If you need help regarding your estate plans, you should visit www.huberfox.com and others. They have lawyers that’ll help you understand the taxes that hold your properties and reduce them.
While estate taxes are relatively rare, it’d still be best to learn more about them to help prepare you for your future. Here, we will cover 3 things to know about estate taxes.
Know the Value of Your Estate
The computation of your estate taxes begins by determining the amount of gross estate. When assessing the value of your property, you’d need to check its fair market value. This is the amount where it could be willingly sold and bought. You can do this on the date of the decedent’s death or six months after it.
Here are the things that could be part of your estate:
- Your life insurance policy, including transferring it to another person three years after your death or other policy that you own, even if it’s under another person.
- Properties under joint tenancy.
- Properties under your complete control.
- The present value of survivorship benefits.
- Properties with life interests, even if it has been transferred to others.
- Properties under your revocable trust.
Here are the steps in computing the total value of your estate:
- Add all your assets.
- Subtract all your debts from the sum of your assets.
- If you have charities under your beneficiaries, subtract the amount donated from the sum of the assets.
Additionally, if you have a husband, wife, or partner, you may eliminate the assets you plan to give to your spouse. This will help them avoid estate tax until they pass away. If you have any questions, you may want to hire an estate accountant to help you compute the value of your estate accurately.
Reduce Your Estate Taxes
Fortunately, there are ways you can reduce your estate taxes. Here, we will detail several of them. There are additional ways to reduce your estate taxes. You may want to ask your estate planner regarding the following matters.
When you give a gift to others, you remove these items from your taxable estate without paying any tax. Not only that, but you also hand over the future appreciation to the recipient. That’s why it’s one of the best ways to reduce your estate tax value significantly.
However, there might be problems if you still have control over your gifts. For example, you give one of your properties a gift to your cousin, but you still have the right to use it. Therefore, the value could be diverted as one of your estates.
Anything you donate to a charity will be excluded from your estate tax. So, what you need to do is create a charitable lead trust (CLT). With this, you allow the charity institution to receive an annuity for a determined number of years.
Qualified Personal Residence Trust (QPRT)
With this, you can put your home in a trust, removing it on your taxable estate. Also, you can still use the house whenever you want, but only for a limited number of years. After that, the residential property can pass on to your beneficiary. But if you want to stay longer in the home, you’ll need to pay fair market value.
These are the ways you reduce your estate tax. Consult your estate planner or lawyer to determine which suits you the best.
Determine if Your State has Estate Taxes or Inheritance Taxes
Depending on where you live, you may pay state taxes, which could be in the form of estate taxes or an inheritance tax. These two are often interchangeable, but actually, there’s a difference between the two of them. The main difference lies in who’ll pay the tax.
In estate tax, the value will be deducted from the total amount of the decedent’s estate. On the other hand, the inheritance tax is the amount that the inheritor should pay.
Here is a list of the states with estate taxes. Please note that this list can change as states change their tax structure, requirements, and policies. An accountant should be able to give you more information. Alternatively, you may be able to find out if your state has estate taxes by looking at your state’s official website.
- District of Columbia
- New York
- Rhode Island
If you live in one of these states, you may need to consult your estate planner or attorney to do some extra planning.
Estate Taxes – Summary
Even with all the information presented above, taxation laws will remain complex and challenging to understand. Also, taxes may frequently change over time. So, it’d be best to do some of your homework to prepare for something inevitable in the future.
Also, since estate planning needs crucial information to process, it’d be best to hire an estate planning lawyer that’ll help you facilitate things carefully. You may use this guide and talk to your lawyer about the next steps you have to take.