By Mark Pierce, Esq.
Estate taxes are levied on property transferred upon death, but exemptions exist for estates valued under $11.4 million (2018). Gift taxes apply to property given during one's lifetime and have exclusions for certain situations. Understanding these taxes is crucial, given their complexity and potential impact on beneficiaries.
There are two truths in this world: death and taxes. But when they join up together that is some force to reckon with. Even when you die, you are taxed and often up to two years later, your estate can be in probate getting sorted out.
Taxes are an unavoidable aspect of life, from sales tax to income tax. Some of these taxes, however, are not as well-understood as others, such as gift and estate taxes. The federal government allows individuals to receive money and property both as gifts and as inheritances upon the death of a loved one. However, in order to receive that property, you must be willing to pay for the privilege.
According to the IRS, estate taxes are assessed on property that is transferred when someone passes away. When you die, the Gross Estate is computed by the executor of your will and includes all real estate, cash, assets, personal property, and other possessions that will be given to other individuals or entities.
Fortunately, however, estate taxes only apply to the wealthiest of Americans because a unified tax credit is given to estates that are valued at less than $11.4 million as of 2018. So if your estate is worth less than that, your beneficiaries don't have to worry about filing an estate tax return. This can relieve a significant burden for both beneficiaries and executors.
The inheritance tax is calculated separately for each child or spouse and each one is responsible for paying his share. However, the inheritance tax is so disliked because it puts the beneficiaries at a loss when trying to deal with the death of a loved one. Some say it is another cash grab by the government and would put the poor at a disadvantage.
There are several ways to get around the inheritance tax while you are still alive. Rather than letting your children or grandchildren be taxed after your death, give them a present of money beforehand.
Gift taxes are assessed on property that is given freely from one individual or another. For example, if your father decides he wants to give you his car because he doesn't need it anymore, you will still have to pay gift taxes on the receipt of the vehicle.
You should also know that gift taxes apply when selling property to another individual for less than what the property is worth. For instance, perhaps your father is willing to sell you his car for half of its value because you are family. In this case, gift taxes would apply because he isn't selling you the car for its fair market value.
There are several exclusions that apply for gift and estate taxes that you should know about. For estate taxes, charitable donations are usually excluded because the beneficiary is a non-profit organization. The same goes for mortgages and debt, as well as money or property that is transferred to a spouse upon the death of his or her husband.
For gift taxes, money is usually excluded when it is used to pay medical expenses for the recipient or tuition for school. You will likewise not be charged gift taxes if you are giving money or property to your spouse, and there is an annual exclusion limit that must be met before you will incur taxes.
For more information about gift and estate taxes, visit the IRS website or talk to your accountant. It is important that you understand these taxes and how they apply to your situation, as tax law can be complex and may change from year to year.
Estate planning strategies vary depending on individual circumstances. If you're prepared to initiate your estate planning process or require more information, we recommend speaking with an experienced estate planning attorney. They will guide you through the necessary steps