Estate Taxes on an Inheritance

My Heirs Won't Pay Estate Taxes if My Estate is Less Than _____?

( – If you plan to leave a significant amount of assets to beneficiaries after you pass on, estate planning is something you’ll want to think about sooner rather than later. Speaking with a qualified professional can help ensure that you take all of the necessary financial steps to reduce or eliminate the amount that’s taxed after your death.

With the limits constantly adjusting due to inflation and tax laws, staying on top of estate matters, especially those related to your net worth, is essential.

How Have Estate Tax Limits Changed?
Over the years, estate tax limits have increased to match inflation. However, the incremental changes were mostly small between 2005 and 2017. The biggest jump came when the amount subject to tax increased from inheritances that exceed $5.49 million in 2017 to those that exceed $11.18 million in 2018.

This is a result of the Tax Cuts and Jobs Act of 2017, which aimed to simplify the tax filing process for individuals. The amount will continue to adjust for inflation each year, at least until the Act is set to expire in 2025. For example, in 2019, the limit rose again to the current level of $11.4 million.

What Types of Assets Are Considered Taxable?
Most assets at the time of a person’s death are considered taxable, including cash, property, bank accounts, investments, retirement plans, and personal items including jewelry and artwork.

Community property is split in half, making 50 percent of the property value taxable, as well. The exception to this is property and assets that pass to a spouse, as these are not taxable.

To calculate the total taxable estate, the IRS deducts liabilities including funeral costs and debts that were owed at the time of death. These debts include mortgages, promissory notes, loans, and any administration costs required to settle the estate.

Charitable contributions also count as a qualifying deduction. If the remaining amount exceeds the exclusion amount of $11.4 million in 2019, the amount over and above the exclusion is subject to the federal estate tax.

Who Pays the Estate Tax?
The estate tax is paid before any bequests are made to heirs, so those inheriting the assets will not have to pay an estate tax. They may, however, have to pay income taxes on any realized capital gains deriving from the assets or on any withdrawals from investments or retirement plans.

Is an Estate Subject to State Taxes?
Some states, such as Massachusetts, New York, Maine and Illinois to name a few, have a state estate tax that is paid before federal estate taxes are charged. The state limits tend to be lower than federal limits, so if you live in a state that has this tax, you may benefit from the help of an estate planner.

Since the limits have changed significantly over the last several years, a review of your plans may be in order, especially if it has been a while since you have last made arrangements. With the proper preparations, you can pass on your assets with little to no estate taxes.

~Here’s to Your Financial Health!

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