When people say the only certainties in life are death and taxes, they aren't kidding. In fact, people can't even give their money away. This is the crux of a tax called the estate tax. What many people think is that when they die their estate simply gets passed down to their loved ones; however, poor planning can lead to the government actually taking close to the half of the value of an estate.
For people that don't want Uncle Sam taking their estate as part of the estate tax, it is important to understand some basics about this area of the law. Once you understand the basics, you can consult a legal professional about the specifics of your situation.
What is the Estate Tax?
The estate tax is also known as the death tax. For those who might be unaware, the estate tax is a tax on a person's estate that is applied when they die. The state tax applies a tax of 40 percent on every dollar over the value of around $5 million for an estate. It is important that people understand this 40 percent is only a federal tax. Some states have an additional estate tax that could be applied on top of the federal tax. Clearly, this tax can take a large bite out of someone's inheritance. This is why understanding how to avoid this tax is important.
What is Included in the Value of an Estate?
Almost every possession a person owns is included in the value of the estate. The largest items are typically a person's home (or homes), any investment portfolios, cars, and even a life insurance policy that is rewarded upon death. Furthermore, the estate tax is different from the final income tax. The final income tax is paid on the income that a person earns in the year of their death. This income is also included when the estate tax is calculated.
How can Someone Minimize the Damage of an Estate Tax?
There are several ways a person can minimize the damage that the estate tax might cause. First, people should think about cutting down the value of their estate before death. If someone is destined to receive some of the assets when the person dies, start giving it away before death. Remember that there is also a gift tax. Try to stay under the gift tax limit to avoid a similar tax being applied.
In addition, there are also trusts that people can take advantage of. There are trusts for life insurance policies, homes, and other assets that could actually remove these items from the estate tax calculation.
For more information on how to minimize the obligations imposed by the estate tax, it is important to contact a legal professional with experience dealing with estate planning. This type of planning is important and could lead to a significant amount of benefit for any loved ones receiving an inheritance.