Estate tax is a type of tax levied by the government on the total value of a person’s assets at the time of their death. This includes all cash, investments, stocks, real estate, and other possessions. Estate tax is calculated based on the value of the deceased’s assets at the time of their death, and is often called the “death tax” as the estate is “inherited” or transferred to the deceased’s heirs or beneficiaries.
In the United States, estate taxes are assessed by the federal government as well as by some state governments. The federal estate tax is based on an “exclusion amount” which is adjusted annually. As of 2021, the federal estate tax rate is 40%, with an exclusion amount of $11.7 million – meaning that the estate tax will only be considered on assets over $11.7 million.
Minimizing Your Estate Tax Liability
If you want to avoid having a large portion of your estate’s value being eroded by estate taxes, there are a few strategies you can use.
- Gift-giving: You can reduce your estate taxes by transferring assets to your heirs. Those assets will not be counted in your estate, but gifts over a certain amount may be subject to a gift tax. This is subject to other restrictions, so please check with a financial or legal advisor before taking this step.
- Establishing trusts: This strategy allows you to place assets into Trusts in order to protect them from estate taxes. By transferring assets to a Trust, you can designate beneficiaries who will be entitled to receive all or part of the assets upon your death.
- Estate planning: Estate planning can help you reduce your tax liability by designing a plan that distributes your assets in a way that allows you to maximize your tax benefits. With the help of an experienced financial professional, you can identify the right estate planning strategies for you.
- Life insurance: Life insurance can provide an additional advantage when it comes to estate taxes, as the death benefit received by the heirs is often tax-free. Additionally, the death benefit from any life insurance policy is not included in estate calculations.
Estate taxes can often add up to tens of thousands of dollars in taxes. Taking proactive steps now to reduce your tax liability can help ensure that your assets are passed to your heirs in the most cost-effective way.
Seek Professional Guidance to Better Understand Your Estate Tax Liability
Estate taxes can be particularly complex, so it is important to consult with a financial or legal professional when planning your estate. These professionals can provide valuable insight into how best to protect your assets from estate taxes and craft a plan to minimize your taxes.