Estate taxes can quickly deduct thousands from the value of your estate, but the good news is that most people can avoid taxation completely. Estate taxes are not the same as probate expenses, and they aren’t the same as income taxes paid after death. These taxes are usually between 45 and 55 percent of the estate’s value over a certain amount.
It’s always a good idea to plan ahead for estate taxes, so you can avoid paying more than what you should. For most people, there is no risk of having to pay. Why? The estate’s value simply has to be too high.
Estate taxes and your estate’s value
As of 2018, $5.6 million of an estate’s value can be excluded from taxation. That gives you the opportunity to avoid paying the government anything at all, as long as your estate is below that value. To accomplish that, you can gift funds to others. For instance, you may annually donate $15,000 to each of three children, reducing your estate by $45,000. Or, if you have more costs to cut, you may choose to begin gifting them money and assets under the $15,000 limit yearly until you reach the point you where want your estate to be. You should plan ahead for this to avoid accidental taxation following death.
The exclusion and your taxes
The reality is that the majority of taxpayers will not reach the $5.6 million exclusion limit. Even if you do, the portion taxed is 40 percent of any amount over that limit, not the entire estate. That means that you may not lose as much as you think if you are close to the limit.
It’s still a good idea to plan for potential estate taxes, since federal guidelines can change at any time. If the limit is dropped or increases, you’ll want to adjust your plans for handling your estate. You don’t want to get caught off-guard.
It’s a wise choice to determine your estate’s value and to plan in advance to transfer assets to your heirs and beneficiaries. Even if your estate is worth millions, there are opportunities to limit the amount you’ll owe. With just a few changes to your plans and some foresight, you can protect the money and assets you’ve amassed and distribute them to your family and friends, not the government.
