How can you minimize the impact of death taxes on your estate?

| Nov 5, 2020 | Estate Planning |

If you have a sizable estate, you are likely worried about how death taxes could impact its value. Even if you are healthy and have a long life ahead of you, the prospect that these could shortchange your beneficiaries may keep you up at night. Yet, death taxes are often treated as more impactful than they are. By understanding how they work – and your options for mitigating their effects – you can work to protect your estate from serious losses.

Understanding death taxes

Death taxes is a popular term used to refer to both estate taxes and inheritance taxes. Both these taxes are a levy on the transfer of wealth, with estate taxes paid by the estate and inheritance taxes paid by its beneficiaries. While a federal estate tax exists, there is no federal inheritance tax. Twelve states do impose a separate estate tax from the federal levy. And six states impose an inheritance tax as well. Indiana, however, imposes neither.

Whether your estate will be subject to estate taxes depends on its total value. If its value exceeds $11.58 million, or $23.16 million if you are married, up to 40% of it could go toward taxes.

Minimizing the impact of death taxes

If your estate could lose value to death taxes, you have options for minimizing – if not eliminating – their impact. Many people facing death taxes will gift assets to their beneficiaries during their lifetime. You must be mindful, though, that you could end up paying taxes on these gifts. Yet, so long as you give away no more than $15,000 – or $30,000 for married couples – per recipient, you will avoid this burden.

If you are married and your estate’s value exceeds $23.16 million, you may want to set up an AB trust. After you or your spouse dies, your share of your estate, up to the estate tax exemption, will enter an irrevocable trust – the B trust. Whichever of you is still alive will continue to hold their assets, plus the remainder of the deceased’s share, in a revocable living trust – the A trust. Any estate taxes levied on the A trust will not be payable until after the living spouse passes away. The B trust will avoid taxation.

While death taxes may seem frightening, you have ways to reduce their impact on your estate. By understanding your options for doing so, you can determine what makes sense for your circumstances.