In the United States, the estates of deceased people must pay estate taxes on the value of everything they own at death. During your life, the value of assets you own, less any liabilities, is called your net worth. These assets include money, real estate, personal property, stocks and bonds, and more. Liabilities include money you owe, such as credit card debt, auto loans, and mortgages. After your death, your estate includes all of your assets and liabilities. The federal government then can assess taxes on your estate.
Not all estates actually owe estate taxes because there is an estate and gift tax exemption. In 2018, the estate and gift tax exemption increased to $11.18 million for individuals and $22.36 million for spouses until the end of 2025. If your estate’s value is less than the exemption you may not owe estate taxes.
If you made gifts to others during your lifetime, however, your estate and gift tax exemption is reduced by the value of the gifts. Gifts include transfers of money or property for which you do not receive anything in return. The person giving the gift (called the donor) pays gift taxes, not the person receiving the gift (called the donee.)
If your estate does owe taxes, the tax rate is an exorbitant 40%. Because of this high tax rate, estate planning attorneys work to reduce the value of your taxable estate so your surviving relatives do not suffer a financial burden. For instance, you might discuss with your attorney whether you should make larger lifetime gifts and pay the gift taxes now. Further, because assets may appreciate in value over time, you can pay the gift tax on the asset when it has a lower value. This strategy will not work for everyone, so you should discuss it with an estate planning attorney.
In addition, you might discuss with your attorney whether to remove life insurance proceeds from your estate. Life insurance proceeds are considered part of your estate for tax purposes and often will substantially increase its value. There are ways to remove the proceeds from eligibility for taxes, including forming a life insurance trust. Again, you should discuss this strategy with your attorney.
Some states impose estate taxes on your taxable estate or inheritance taxes on recipients of your estate’s assets. California does not have these taxes. Further, the federal government imposes special tax rates on non-U.S. residents and for generation-skipping transfers. If you own property in another state, if you are not a resident of the United States, or if you are transferring wealth to grandchildren, your estate planning will require an evaluation of those additional taxes. Not all attorneys and accountants have the background to properly factor in those issues when planning your estate.
Are you worried about large estate taxes? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience and her certification as a California estate planning and probate specialist by the California State Bar Board of Legal Specialization will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 325-8276.