Many people accumulate assets during their life with the hope of transferring their wealth to their heirs. People sometimes forget estate taxes during estate planning for heirs or favorite charities. Estate taxes can reduce the size of an estate or distributions in Indiana. Managing the estate’s tax obligations helps to maximize the estate’s value.
How do taxes impact estate planning?
While estate planning, there are several types of taxes, and some can be large. The federal estate taxes are up to 40% of the estate, which means an estate $1 million over the exception rate would owe $400,000 to the IRS. The federal estate tax doesn’t include any state tax liability, but every person has an estate or gift tax exemption. The exemption allows assets to transfer during a person’s life or after their death without paying estate or gift taxes. As of 2022, the federal estate tax exemption is $12.06 million.
What are the federal estate taxes?
Federal estate taxes include the transferable taxable estate after a person’s death. Any estate that’s over the federal exemption limit owes estate taxes. A spouse is immune under the unlimited marital deduction. A gift tax applies after money or assets are transferred to another without receiving anything in return. An estate over the federal exemption limit owes a gift tax, but spouses are immune. The exclusion amount is $16,000 per year or person. A married couple triggers the gift tax by giving $32,000 to one person.
What are state estate taxes?
On top of federal estate taxes, states can levy estate and gift taxes. Some states have beneficiaries pay an inheritance tax after a person dies. While the federal government doesn’t consider inheritance income, some states consider assets taxable. Depending on the state, the inheritance tax is 1% to 18%.
While estate planning, a person should be aware of their tax obligations. There are ways to reduce an estate tax burden. A person can remove taxable assets each year by giving them to heirs. People often give to a favorite charity as another way to reduce their tax obligations. An irrevocable trust allows a person to remove assets from their taxable estate.
