Estate Taxes: 3 Questions to Ask

Estate Taxes: 3 Questions to Ask

What You Need to Know About Estate Taxes

Most of us tend to fear estate tax changes, as it impacts how much we are taxed when we distribute assets to our heirs. The current tax reform legislation, which began with the 2018 tax season, allows individuals to give away more of their estate to their heirs without paying large sums of estate taxes. Yet, after 2025, amounts are set to revert back to 2017 levels, adjusted for inflation. It’s important to note that even though you may not have to pay federal estate taxes now, you may still have to if you live in states such as Connecticut, New York, Maine, and Delaware.

So, if you’re looking to plan out your estate effectively and optimally, here are the three questions you must ask:

Do I Have Enough Assets to Make Planning for Estate Taxes Necessary?

Whether it’s a home you’ve paid off in part or in full, investments in your retirement funds, or even a token amount available in cash, when you plan to pass on your assets to your next of kin, estate taxes are going to try to find a way to bring some of your assets to Uncle Sam. That said, the federal estate tax generally applies when an individual’s assets exceed $11.58 million.

However, if your assets are below that, it does not mean estate tax planning isn’t necessary. For one, that’s just the federal estate tax. Many states have their own estate taxes with a much lower threshold. That’s why it is imperative, no matter the size of your estate, to plan your estate out smartly and intuitively, to minimize income tax obligations.

Can I gift a certain amount of my estate away while alive to reduce the estate tax burden?

Gifting funds to family members while you’re alive is a common strategy to minimize the estate tax burden, but it is not foolproof and has government limitations. Specifically, gift taxes exist to prevent this loophole, where they operate similarly to estate taxes.

The state of New Jersey does not have a gift tax. However, you may still owe a federal gift tax if the fund’s value exceeds $15,000 per year. An individual can give someone $15,000 worth of assets, cash, or property annually without worrying about gift tax. Yet, if you breach your lifetime gift and estate tax exemption threshold, you will have to report it and pay tax on the portion that goes above the exemption.

What can I do to minimize estate tax obligations?

For those with assets enough that the estate tax is a burdensome proposition, numerous strategies can be employed to ensure the maximum amount goes to your family members. In addition to gifting funds, you can set up various types of trusts subject to different rules. The types of trusts created can either go to a spouse to lessen the obligation, postpone estate taxes until the spouse passes away, or go directly to benefitting a charity. Each of these types of trusts can ensure the estate tax takes less of your assets, so more of it can go where you designate it.

Secure Your Future with Financial & Estate Planning

Planning out your estate is one of the most important things you can do for your family to make sure they’re protected and safe once you’re no longer there. At Tobin and Collins, our financial & estate planning services will review and develop a comprehensive estate plan suitable for your needs to help you make the right investment decisions. Contact us today!

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