When somebody dies, their assets could be subject to what we call estate taxes and inheritance taxes. These are taxes that will take up to 40% from every dollar worth of assets exceeding a threshold set either federally or by the state they lived in.
This taxation can cause an estate’s tax to grow quite high. Most of us wouldn’t want this. Even though we might have passed on, our estate must still be handled by our loved ones and who would want to leave them with a large bill at such a vulnerable time?
For this reason, it’s typically a smart move to start looking for ways to reduce your estate tax while you’re still alive. You might find yourself having to make payments during your lifetime but those payments will come back to make your estate tax lighter once you pass. One of the best ways to reduce your estate is through gifting.
Will I Have to Worry About Estate Taxation?
Not everybody has to worry about estate taxation. In fact, the vast majority of individuals won’t find it to be an issue at all. This is because estate tax is only levied on those who have an estate worth nearly $12 million dollars. This number changes every year alongside inflation, so it will continue to grow.
If your estate is worth more than this then you will owe 40% of every dollar above the limit in estate taxes. However, if it is lower then you might not need to worry about it. We say might because each state can choose to set its own threshold for estate taxes and several have a lower threshold.
To check if you will have to worry about estate taxes you will need to follow a couple easy steps. First, calculate how much your estate is worth. This will let you know if you are above or below the federal threshold. Next, check what the estate taxation and inheritance tax exemptions for your state are. If you are below both thresholds then you won’t have to worry about estate or inheritance taxes.
How Can Gifting Help Reduce My Estate Taxes?
You are allowed to make tax-free gifts of up to $15,000 (per recipient) in any given year. If you are married then you and your spouse could give up to $30,000 to an individual and not have to worry about the taxes on the gift. It is also possible to give an unlimited amount for tuition or medical expenses so long as the gift goes directly to the school or the health care provider.
Gifts of this nature do not have to be cash. Let’s say you own a few properties and you want to give one worth $100,000 to your child. Obviously this number is above the tax-free threshold but you could give them an interest in the property worth $15,000 one year and then another interest worth the same the next year and every year until they completely own the property and no taxes had to be paid.
This is one way of reducing the overall value of your estate and you could use this to avoid passing the threshold for estate taxation. However, another powerful option is to make a gift that exceeds $15,000. When you do this there is a tax that you are supposed to pay.
Say that you want to gift your child that same property worth $100,000 but you don’t have the time to spread it out over multiple years to avoid the gift tax through the $15,000 yearly exemption. The $15,000 for that year will be taken out of it so that will leave a $85,000 gift that you owe tax on.
You could choose to pay this tax and be done with it. But doing so could be quite expensive and ultimately it isn’t the recommended route. Instead it is better to file a Form 709 with the IRS. In our lifetime we can give away $11.7 million, the same number we need to worry about estate taxation. If you file a Form 709 with the IRS then you can use your lifetime exemption to cover the gift tax. You won’t have to pay for this now but that exemption would no longer be usable after your death like it would’ve been if you hadn’t claimed it during your lifetime.
What are the Best Assets to Gift if I Want to Reduce My Estate Tax?
The absolute best assets to give away as a gift if you want to lower your estate tax are those which are appreciating in value. What this means is that if the asset will continue to grow in value over the years, such as homes, cars, stocks or even collectables like trading cards, then removing them from the estate will save more in taxes than the gift was worth when given.
Keeping low numbers for simplicity imagine you buy a rare car for $20. In ten years time, it’s worth twice as much as it was when you bought it. It will continue to grow in value. But you gift it away when it is worth $40. Then, when you pass away a decade later, it is now worth $60. As it grew in value throughout your life, it would represent a more valuable asset that increases your estate taxation. But by giving it away as a gift, you don’t have to worry about the appreciating value.
This is Confusing, Can’t I Just Get Some Help with My Estate?
Managing your estate is a tricky business. We’re just talking about estate taxes here but there are a thousand-and-one other issues that arise when it comes to taking care of your estate. If it makes your head spin then don’t worry. You aren’t alone, many people find managing their estates to be painful.
That’s why getting help with your estate can be so valuable. It takes the guesswork out of management. If you are working on planning your estate then Crow Estate Planning & Probate want to have your back. We have years of experience dealing in this tricky field and can help walk you through whatever issues you face. Give a call at (931) 202-3441 to get a hand with managing your estate.