Most people are aware that estate taxes are owed on asset transference, but people tend to be foggy on the details until it’s too late to do anything about it.
Handling the affairs of a loved one’s estate can be stressful and difficult. However, to receive the full benefit of the gift a loved one leaves you, it’s critical to be prepared for the taxes that the gift will incur. This is the advice in Investopedia’s article, “Estate Taxes: How to Calculate Them.” The article explains the potential tax liability, upon transfer of an estate after death.
The high rate of the federal estate tax (40%) motivates most people to calculate their potential estate tax beforehand. It’s a good idea to figure the amount you might owe in estate tax before something happens, instead of dealing with the consequences afterward.
The estate tax is calculated on the federal and state level. There are now still several states that have their own estate tax: Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington, as well as the District of Columbia.
The federal estate tax starts when the fair market value of your assets hits $11.18 million per individual. Each state has its own minimum on when the estate tax kicks in, ranging from $675,000 to $1 million. As a result, you can be eligible to pay the state estate tax, the federal, or both. Because the estate tax is determined based on the current market value of your assets instead of what you paid for them, calculating that number is more complex.
There’s no need to include any property you intend to leave your spouse or an eligible charitable organization. Initially, you’ll need to calculate the value of the gross estate. Debt, administrative fees, and assets that will be left to charities or a surviving spouse will be deducted from the total market value of those assets.
Next, add any gifts, including gifts that fall above the gift tax exemption. The $11.18 million exemption includes gifts (it’s a way of keeping people from giving away their fortune before their death to avoid estate taxes).
If the loss of a loved one is imminent, preparing for the tax burden of estate transference ahead of time, can make the grieving process a little easier and can be a comforting distraction.
You can also prepare for taxes on your own estate to lessen the burden of the friends and family you leave behind. If you have questions, speak to our experienced estate planning attorneys.