There are two kinds of “death taxes.” First, there is the estate tax. An estate tax is a tax on the total value of your estate. This includes anything from cash to real estate to investments and everything in between. An estate tax is paid after you die and before your assets are distributed to your loved ones. Next, there is an inheritance tax. Inheritance tax is paid by those who are inheriting from your estate, which means your heirs pay this tax. Fortunately, Florida is one of the states that has neither a state-level inheritance tax nor an estate tax. There is, however, still a federal estate tax that you need to be aware of and how it can impact your estate as well as how you can minimize your estate tax liability.
The Impact of Estate Taxes and How to Minimize Them
As of January 1, 2023, the federal estate tax exemption amount sits at $12,920,000. What does this mean? It means that many Americans will not have to worry about incurring federal estate tax liability as their estates will fall well below the exemption amount. For those who may currently have estates near, at, or exceeding the current federal estate tax exemption, plans should be made to minimize the potential tax liability. This is true, especially considering that the exemption amount could always be decreased in the future.
Why plan for the federal estate tax? Well, the federal estate tax ranges from 18% all the way up to 40%. It is assessed on the current fair market value of the assets as opposed to the value of the assets at their time of purchase. What all of this means is that assets that fall above the federal exemption amount could be heavily taxed, especially when you consider those assets that have accrued value for the years after they were purchased.
So, how do you avoid the estate tax taking a chunk of your estate’s value from passing to your loved ones? There are a number of ways that you can minimize the potential impact of the federal estate tax. One popular way is to make lifetime gifts. Instead of waiting to give your loved ones their inheritance, you may want to consider making it a gift during your lifetime. The annual gift tax exclusion amount for 2023 is $17,000 per individual and $34,000 per married couple with a lifetime gift tax exclusion up to $12.92 million. This means you can gift a significant chunk of your wealth during your lifetime and remove it from the taxable estate thus minimizing or avoiding estate tax liability.
Alternatively, or additionally, you may also want to consider setting up an irrevocable trust that would remove assets from your estate and thus avoid estate tax liability. Some choose other types of trusts to accomplish this as well. For instance, charitable trusts including a charitable lead trust or a charitable remainder trust will set up a trust to benefit the charity of your choice and remove assets put in the trust from your taxable estate. Last, but not least, there is an option of creating a Qualified Personal Residence Trust.
Estate Planning Attorney
At Verras Law, we account for everything that could impact your estate plans and everything you have worked for over your lifetime, estate taxes included. Contact Verras Law today.