Most people don’t really know that much about federal estate taxes, and the confusion has only increased in the last year since the Tax Cuts and Jobs Act went into place.
Here are some of the most important things you should know about how federal estate taxes work:
1. Very few estates are affected.
Unless you are among the very wealthy, your estate probably won’t be subjected to taxation. Roughly only 2 out of every thousand estates are affected. Affect households include those where the heirs from a single individual stand to collect somewhat more than 11 million.
2. You only pay taxes on part of the estate.
While the tax on someone’s estate is 40 percent, that’s only on the part of the estate that exceeds the exempt amount. That means only part of your estate will be subjected to taxation. Since there are way to reduce your estate before you die through annual gifts, you can often eliminate or greatly reduce the taxable portion through appropriate planning.
3. Capital gains are the focus of many taxed estates.
Estate tax was designed largely to capture capital gains that were not otherwise taxed during someone’s lifetime. While estate tax is higher than the rate of taxation on capital gains in theory, the amount of the allowed exemption often makes it lower in practice. A skilled tax lawyer can help determine the best way to handle the issue.
4. There are plenty of loopholes.
Even if your estate is well over the exempt amount, good estate planning that keeps tax issues in mind can keep your estate from paying much in the way of taxes.
There are plenty of legal, ethical ways to avoid unnecessary taxes. Irrevocable trusts, for example, can protect your wealth from creditors and taxation. Trusts involving grantor-retained annuities can also pass along wealth when the stock market is strong and a lot of the estate is tied up in those kinds of assets.