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How should you plan to manage estate taxes?

One of your main goals in estate planning is to preserve as many of your personal assets as is possible to pass on to your beneficiaries. You can accomplish this by providing the means through which creditors receive payments upon your death and planning to avoid excess costs against your estate (such as keeping your estate out of probate). 

Yet you may think that there is one expense that no amount of planning can avoid: taxes. Yet that may not necessarily be the case. There are ways that you can limit (or potentially even avoid) an estate tax liability. 

Understanding your potential tax obligations

Indiana does not impose a local estate tax on its residents, meaning that the only potential tax liability you need to worry about in relation to your estate comes from the federal level. You might even be able to avoid federal taxes provided that the total taxable value of your estate comes in under the federal estate tax exemption threshold. According to the Internal Revenue Service, that amount for 2020 is $11.58 million. 

Taking advantage of estate tax portability

The value of your own estate may not make it subject to tax, but yours and your spouse’s combined estates could potentially exceed the threshold. Fortunately, the federal government offers the option of estate tax portability. This allows your spouse to claim the unused portion of your estate tax exemption and combine it with their own. 

With the right plan in place, you could effectively double your spouse’s estate tax exemption amount. You would need to leave the entirety of your estate to your spouse (which can pass tax-free due to the unlimited marital deduction). This preserves your entire estate tax exemption, which your ex-spouse can then claim by filing an estate tax return the same fiscal year you die electing portability.