One of the most commonly overlooked aspects of estate planning is the impact of estate taxes. Most people with sizable assets understand how critical a last will and estate plan are. Failing to create them during your healthy, younger years could result in the government seizing your estate after you die.
Far fewer people consider the very real impact of estate taxes on their last will and the loved ones they are leaving behind. For those with large estates and a history of generosity toward those who will inherit from their estate, estate taxes could consume a sizable portion of the estate they leave when they pass.
What is an estate tax?
Some people call this particular form of tax a “death tax,” but that is a misnomer. The act of dying isn’t what incurs the tax. Instead, the passage of sizable assets to a private party is what is being taxed. The receipt of funds or valuable assets from an estate is a form of income. As such, the IRS has very clear rule as to the size of estates that aren’t exempt from taxes under the current law. The IRS requires the execution of a special form, which uses the current fair market value of items included in the estate as well as information about taxable gifts to family members made since 1977.
In 2017, the cutoff amount for the combined value of taxable gifts and the estate itself is $5,490,000. In general, most Americans don’t have to worry about the estate tax, as that amount far exceeds the total value of all their possessions. For those with estates and past gifts that exceed that cutoff, however, estate tax can reduce the inheritance of your loved ones and charitable causes by as much as 40 percent.
Why planning for taxes is critical
Many people are proactive about planning their estate in a way to avoid or minimize the probate process. Some may include provisions in their last will that remove any inheritance from those who would contest the will. Others prefer to let the probate process address any complications for their estate. Regardless of your stance on probate, planning for estate taxes is also important if you want to maximize the inheritance of your loved ones.
An experienced estate attorney can review past gifts and the value of your current estate to help you plan. Carefully documenting depreciation of certain assets is one of many ways your attorney can help you if your estate falls into the taxable brackets. The more assets you have, the more important it is to work with an experienced estate and probate attorney anyway. Don’t risk having your loved ones lose much of their inheritance to the federal government. Speak with an estate attorney about ways you can minimize the tax burden on your heirs today.