Federal and state estate and inheritance taxes can use up a significant portion of your estate after your death. The good news is that with a skilled attorney and proper estate planning, you can find ways to lower these types of taxes and increase your financial inheritance.
Inheritance Taxes: The Basics
It is important to note that inheritance tax and inheritance tax are not the same thing, although both should be considered when planning an estate. The main difference is that inheritance tax is paid out of the deceased’s estate, while inheritance tax is paid out of the beneficiary’s pocket. There is a federal inheritance tax, but no federal inheritance tax. Depending on the value of your estate and which state you live in, it is possible that one, both, or neither of the two will play a role if someone dies.
After a person dies, federal inheritance taxes start at 18 and are 40 percent for estates worth $ 1 million or more over the inheritance tax exemption. Federal property taxes Applies only to individuals with an estate greater than $ 11.7 million (the current inheritance tax exemption) or $ 23.4 million for married couples in 2021. Assets that spouses inherit are not subject to federal estate tax. Colorado has no state estate or inheritance taxes, although other states do. Tax rates vary from state to state and are much lower than the federal exemption.
Strategies to Reduce Tax Liability
There are several strategies that can help reduce inheritance and inheritance tax liability. Rather than simply accepting that your estate could be taxed and that your beneficiaries may owe inheritance tax in some states, consider a more proactive approach using the following strategies.
Give
You have the option of giving away your assets while you are alive. This does not only apply to property, plant and equipment; You can give away other assets like stocks. For 2021, the annual gift tax exclusion is $ 15,000 for individuals, or if your gift stays within these limits, it won’t count towards your lifetime allowance. There is no limit to the number of people you can give gifts to within a year. You can give the full amount to as many people as you want.
Charitable donations
You can also reduce or avoid inheritance tax by transferring some of your assets to a charity through a trust. There are two types of charitable trusts: Charitable Lead Trusts (CLTs) and Charitable Rest Trusts (CRTs).
With a CLT, some of the assets in your trust are given to a tax-exempt charity. You can reduce the value of your estate and get extra tax relief by donating to charity. After your death or after a period of time, whatever is left of the trust goes to your beneficiaries.
Alternatively, you can use a CRT to transfer stocks or other valuable assets to an irrevocable trust. You can make money from this asset throughout your life. When you die, your investment income will be donated to charity. You have the advantage of avoiding capital gains tax and reducing your inheritance tax burden. You will also receive a tax deduction.
Establish a trust relationship
A trust enables you to transfer assets to beneficiaries after your death without going through probate. Unlike wills, trusts generally avoid government estate claims and their expenses. That way, your beneficiaries are not responsible for the additional costs of the probate court. A revocable trust enables you to store or outsource your assets to your trust during your lifetime as required. On the other hand, an irrevocable trust generally moves the assets out of your estate in favor of a beneficiary and therefore does not offer you the option to store or remove those assets before your death. The increase in the value of these assets is therefore not included in your estate value in the event of death. After death, the assets remain in the trust and are administered in accordance with the trust deed, including the possibility of distribution to the named beneficiaries of the trust.
Your estate plan
If you don’t already have an inheritance plan in place, now is the time to create one. Inheritance tax law changes regularly as the tax exemptions are increased or decreased or the applicable tax is changed. The current administration has proposed several significant changes to the inheritance tax laws. Start the process by hiring an estate planning attorney and taking an inventory of your tangible and intangible assets. Your lawyer can evaluate your assets and explain your options.
Every time something changes in your family, such as Such as divorce, the death of a spouse, or the birth of a new grandchild, review your estate plan. It is crucial that your estate is the way you want it, especially after these changes.
Because estate and tax laws and your desires can change, it is imperative to periodically review your estate plan. You want to make sure that you are making the most of your options to reduce inheritance and inheritance taxes.
Hire an estate planning attorney
Estate planning and tax laws are complex and constantly changing. Even so, you want to do whatever you can to make the transition easier for your family and your beneficiaries. It is recommended that you work with an experienced estate planning attorney to find the best options for your situation. You can make sure that you’ve covered all of your basics and that your estate plan is drawn up with current tax rules in mind. If you need to make changes to your estate plan, they can also help you make the changes legally acceptable.
Doug Griess and John Snow from Hackstaff & Snow, LLC, are leading Denver business lawyers with cross-industry expertise. Specializing in business law, litigation, intellectual property, tax and dispute resolution, John Snow and Doug Griess offer a deep understanding and knowledge of general company rules and regulations and are a trusted resource for business owners across Colorado.