Here’s a complex area that people tend to ignore, until it’s too late to do anything about it. Better solution: speak with an estate planning attorney while changes can still be made.
Even if you are not one of the top wealthiest people in the world, you still may find yourself grappling with estate taxes. If you know that you will be the recipient of an estate, you may need to have a candid conversation about the taxes that may result, and how to minimize them, if possible, beforehand. There’s more to be learned about the potential tax liability when an estate is transferred from the article “Estate Taxes: How to Calculate Them” from Investopedia.
The high rate of the federal estate tax (40%) motivates most people to calculate their potential estate tax beforehand. It’s a good idea to figure the amount you might owe in estate tax before something happens, instead of dealing with the consequences afterwards.
Estate tax is calculated on the federal and state level. There are now still several states that have their own estate tax: Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington, as well as the District of Columbia.
The federal estate tax starts when the fair market value of your assets, hits $11.18 million per individual. Each state has its own minimum on when the estate tax kicks in, ranging from $675,000 to $1 million. As a result, you can be eligible to pay the state estate tax, the federal, or both. Because the estate tax is determined based on the current market value of your assets instead of what you paid for them, calculating that number is more complex.
There’s no need to include any property you intend to leave your spouse or an eligible charitable organization. Initially, you’ll need to calculate the value of the gross estate. Debt, administrative fees, and assets that will be left to charities or a surviving spouse will be deducted from the total market value of those assets.
Next, add any gifts, including gifts that fall above the gift tax exemption. The $11.18 million exemption includes gifts (it’s a way of keeping people from giving away their fortune before their death to avoid estate taxes).
If the loss of a loved one is imminent, preparing for the tax burden of estate transference ahead of time, can make the grieving process a little easier and can be a comforting distraction.
Don’t neglect to prepare for any taxes that may be incurred by your own estate. Think of it as a kindness you do for your loved ones, so they are not left with unexpected costs. An experienced estate planning attorney can help ensure that your estate tax planning is done correctly.
Reference: Investopedia “Estate Taxes: How to Calculate Them”