No one can escape death or taxes. But many people do not know that their estates will continue to pay taxes even after they die. So in an unusual affirmation of the old joke about death and taxes, your tax liability will probably outlive you. One of the goals of estate tax planning is to plan for these taxes and try to minimize them.
Regardless of your net worth, you have only so much to pass on to your family upon your death. By minimizing your taxes through estate tax planning, an estate planning lawyer can make sure your family, rather than the tax collector, gets as much of your estate as possible.
Every penny that goes to paying taxes after your death will come out of your family’s pocket. To discuss how an estate tax planning attorney can minimize your estate’s tax burden, contact Berkley Oliver for a free consultation.
Planning for Taxes Assessed on Your Estate
After you die, your estate will need to pay the same taxes you pay now. When your savings account earns interest after your death, your estate will have to pay U.S. and Kentucky income tax.
If the property tax assessment for your home comes due before the probate court completes its work, your executor will pay the property tax from your estate.
Since these taxes will happen regardless of your death, you cannot do much with your estate to minimize or avoid them.
But other taxes happen only when you die or when money is transferred before or at your death. You can plan for these taxes to try to reduce the tax burden on your estate and heirs. These “death” taxes include:
Estate Tax Planning
The estate tax is a federal tax on property that gets transferred upon your death. Your estate pays this tax based on a calculation similar to your income tax.
An accountant will first calculate your gross estate based on the total market value of all the assets you will transfer at death. This calculation will include everything of value, such as:
- Cash
- Bank accounts and retirement accounts
- Stocks, bonds, mutual funds, and other investments
- Real estate
- Insurance policies naming the estate as a beneficiary
- Trusts
- Annuities
- Ownership interests in businesses
The accountant can deduct certain expenses and debts from the amount. They can also reduce the value of certain assets, like farms and small businesses. The accountant must also add in any lifetime taxable gifts, discussed more in the next section.
The resulting number is your taxable estate. If the taxable estate exceeds that year’s threshold value (which may also be referred to as the estate tax credit), the estate must pay the federal estate tax.
In 2023, the threshold is $12.92 million. Thus, any estate with a taxable value over that amount must pay an estate tax to the IRS. If your estate is administered by Kentucky, the commonwealth will not charge a separate state estate tax.
If you risk falling into the taxable category, you and your estate tax planning lawyer can take steps to reduce your exposure to the estate tax.
Charitable donations, irrevocable trusts, and gifts below the lifetime taxable gift threshold can reduce your assets during your lifetime so your estate can avoid the tax upon your death. But you cannot wait to take advantage of these strategies — valuable estates may take many years to get below the estate tax threshold.
Gift Tax
The federal gift tax is simply a tax on property you give away during your lifetime. However, no tax is owed on gifts transferred until you reach the threshold set forth by law. Up to the threshold amount, you are able to take advantage of the gift tax credit. The amount of the gift tax credit is actually a unified tax credit with the federal estate tax. In simpler terms, gifts you give during your lifetime or any property you pass at death are not taxable until you reach the threshold amount of $12.92 million (in 2023). To determine if you reach the threshold, you must count both the lifetime gifts and those transfers made at your death.
As an exception to calculating lifetime gifts, the annual gift tax exclusion for 2023 is $17,000. You can give away as many gifts up to $17,000 as you want to without triggering the gift tax. But once you cross that number by giving away a gift to an individual worth at least $17,001, you trigger the gift tax and will need to file a gift tax return for that year.
The purpose of the gift tax is to prevent high-net-worth individuals from avoiding the estate tax by giving away portions of their estates before they die. Once you cross the annual gift tax exclusion amount, you begin to eat into your $12.92 million unified estate and gift tax credit.
To take a simple example, suppose that you gave away a gift worth $1,017,000 — exactly one million dollars over the $17,000 annual gift tax exclusion. When you die, your estate tax threshold will be $11.92 million instead of $12.92 million because your earlier gift decreased your unified gift and estate tax credit by $1 million.
The annual gift tax exclusion is one reason you need to start your estate tax planning early. If you can give away gifts only up to $17,000 per year without eroding your unified gift and estate tax credit, you may need years or even decades to reduce your estate until it is below the threshold.
Inheritance Tax
Kentucky charges a state inheritance tax. Your heirs must pay this tax when they receive money from your estate.
Kentucky law exempts certain relatives, such as spouses, children, grandchildren, and parents, from the inheritance tax. But other relatives must pay a tax on inheritances over $500 or $1,000, depending on how closely related they are.
Contact a Shelbyville Estate Tax Planning Attorney Today
Taxes can eat away at the value of your estate significantly. With a proper estate tax plan, you can reduce or even eliminate many of the tax burdens on your estate and your heirs. To discuss how you can plan for the taxes your estate may incur after your death, contact Berkley Oliver for a free consultation in Shelbyville, Kentucky.