Worried about estate taxes? Want to protect your estate from taxation after your death? Then, proper estate planning is critical. First, however, you may want to understand a few basics about estate taxes. Here's what you need to consider.
1. Estate Tax Affects Less Than One Percent of the Population
According to some estimates, the estate tax only affects between 0.14 and 0.20 percent of Americans. That's two or fewer people out of every thousand. Although the total number of affected people is small, it's still important to understand this tax, and if you think you might be affected, you need to plan accordingly.
2. The Threshold for Federal Estate Tax Is Over $5 Million
As of 2017, the threshold for federal estate tax is $5.49 million. If your estate is worth less than that amount, it won't be subject to estate tax. Note that this amount changes annually based on inflation, and of course, it's always subject to change based on various political rulings.
If your estate is worth more than the threshold, the tax doesn't apply to the entire value of the estate. Instead only the value of the estate over the threshold gets taxed. For example, if your estate is worth $6 million, only the $510,000 over the threshold gets taxed.
However, that amount is taxed at a rate of 40%. That can add up quickly, which is why it helps to plan ahead.
3. There Is a Spousal Exemption
Typically, if you die, all of your assets can pass to your spouse and avoid any estate tax. Additionally, the exemption or threshold discussed above also passes to your spouse. That amount gets added to your spouse's threshold when he or she dies.
In other words, if you die and the threshold is $5.49 million and then your spouse dies when the threshold is the same amount, the total threshold for the estate is $10.98 million. Again, only amounts over that threshold get taxed.
4. California Has No Estate or Inheritance Tax
In addition to the federal estate tax, some states levy their own estate or inheritance tax. Luckily, California does not have either of those taxes. If you have a sizeable estate in California, you only need to worry about the federal taxes.
5. You May Face inheritance Taxes If You Inherit Assets From Another State
Although you won't face these state taxes as a resident of California, they may come into play if you inherit assets from someone who lives in another state. There are fifteen states as well as the District of Columbia that levy estate taxes. As an heir, you don't really have to worry about those taxes. They are assessed on the estate before the assets are distributed.
However, six states including Nebraska, Iowa, Pennsylvania, Kentucky, Maryland and New Jersey all have inheritance taxes. These taxes are applied after you inherit the funds.
The rules vary from state to state, and you typically face different rates depending on the nature of your relationship with the deceased person. For example, if you inherit assets from your mother who lives in Kentucky, you don't have to pay any tax, but if you inherit more than $1,000 from your uncle in Kentucky, you have to pay between 4 and 16 percent in tax.
It's important to understand how different state rules may affect your inheritances. It's even more important to understand these rules if you decide to move to another state.
At the Law Offices of Steve C. Benton, we help our clients with estate planning, trusts, wills and probate issues. If you have questions or concerns, we would love to help you. Contact us today.