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Do You Know Enough About the Death Tax?

Do You Know Enough About the Death Tax?

No one really wants to think about his or her own death. But death is inevitable. And if you’re a high net worth individual then you really can’t afford to ignore the subject. That’s because if you’re not prepared when your time comes, your beneficiaries could be left with a big tax bill. In fact, many people don’t completely understand the estate tax, also known as the death tax. But what you don’t know CAN hurt you.

How Does the Estate Tax Work?

So what is the estate tax? First off, it is not an income tax, despite what many people believe. The estate tax is actually a transfer tax that only the wealthy have to worry about. In fact, if your estate is worth less than $11.4 million at the time of your death there is no estate tax. That threshold is scheduled to drop back down to $5 million in 2026.

So what does that mean? If your estate is valued at more than $11.4 million then you must pay tax on the amount over $11.4 million. The tax rate you pay on that money is generally between 18and 40 percent. There are also several other rules that you need to be aware of.

Estate Tax Rules

Large gifts count against you–giving your money away to the family is a nice gesture. But it does count against your exemption total. Let’s say for example that you decide to give your family members $8 million before you pass away. Your exemption total would then drop to $3.4 million instead of $11.4 million.

Everything you own counts–when it comes to the estate tax, every possession matters. Any assets in your name will count against your gross amount. That means business interests, stocks, bonds, real estate, and any other asset in your name are included in your total wealth. Even property you co-own with someone else counts.

Avoiding probate doesn’t mean tax-free–even if you avoid probate because you’ve named a beneficiary for a certain asset, like a retirement plan, that does not mean it can’t be counted as part of your assets. It will depend on the amount of control you had over the asset.

Count your deductions–make sure you count every deduction possible. That means any expenses attributed to your estate can be deducted, such as tax and legal fees. You can also deduct charitable donations made from your estate.

The marital deduction is a delayed tax bill–if you leave your estate to your spouse the good news is that it’s 100 percent tax-free(as long as he or she is a U.S. citizen). The bad news is that the tax bill will eventually come. In reality, when you leave a large estate to your spouse, you’re just delaying the tax bill until he or she dies at a later date.

Don’t forget about the state estate tax–lastly, most states do not have an estate tax, but some do. So make sure you know whether or not the state you live falls into this category. If you don’t, you could be in for a surprise.

The post Do You Know Enough About the Death Tax? first appeared on Advisors to the Ultra-Affluent – Groco.


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